Country Report Morocco 2014

2014IHS. 2014 IHS.. No portion of this report may be reproduced, reused, or otherwise distributed in any form without prior written consent, with the exception of any internal client distribution as may bepermitted in the license agreement between client and IHS. Content reproduced or redistributed with IHS permission must display IHS legal notices and attributions of authorship. The informationcontained herein is from sources considered reliable but its accuracy and completeness are not warranted, nor are the opinions and analyses which are based upon it, and to the extent permitted bylaw, IHS shall not be liable for any errors or omissions or any loss,damage or expense incurred by reliance on information or any statement contained herein.

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Country Reports - Morocco

26 Nov 2014 IHS Economics and Country Risk

Our take

Key pointsThe Islamist Justice and Development Party (Parti de la Justice et du Dveloppement: PJD) faces resistance within the ruling coalition.More balanced growth is expected, but agriculture's technical slowdown will weigh heavily on the headline rate.Headwinds will persist, but should gradually ease.Morocco will continue to make headway towards reducing the fiscal deficit.

AnalysisSix-Factor Country Risk - Morocco

Risk Score Description

Political 2.75 MEDIUM

Economic 2.75 MEDIUM

Legal 2.50 MEDIUM

Tax 2.50 MEDIUM

Operational 2.50 MEDIUM

Security 2.75 MEDIUM

Overall 2.65 MEDIUM

12-Month Rating Trend Stable Trend

Note: 1 = minimum risk, 5 = maximum risk. Ratings form part of enhanced Country Analysis & Forecast suite of services.

Sovereign Risk Ratings - Morocco

Medium-Term 40(BBB-) Supportive Credit Fundamentals

Sovereign Risk Outlook Stable

Note: 0 = minimum risk, 100 = maximum risk. Ratings form part of enhanced Economic and Sovereign Risk services.

The Islamist Justice and Development Party (Parti de la Justice et du Dveloppement: PJD) faces resistance within the ruling coalition. PrimeMinister Abdelilah Benkirane's scope of action is constrained by the realities of the coalition government in Morocco. The cabinet includes powerful pro-palacefigures resistant to meaningful socio-political change. The reshuffle in October 2013 in which the Istiqlal Party (Parti de l'Istiqlal: PI) replaced the National Rallyof Independents (Rassemblement National des Indpendants: RNI) party has done little to change this situation. Accordingly, although the PJD remains largelypopular, Benkirane will struggle to push meaningful socio-political reforms through a resistant bureaucracy, leaving the government increasingly exposed topublic and trade union discontent over rising taxes and diminishing subsidies.

More balanced growth expected, but agriculture's technical slowdown will weigh heavily on the headline rate. After GDP growth of 4.4% in 2013,largely driven by expansion of Morocco's agriculture sector, growth will decline to less than 3% this year, despite better growth from several non-agriculturesectors. Fiscal consolidation efforts will continue to impact on government consumption, but firm private consumption growth supported by non-agriculturegrowth and improving external balances will provide support to the headline rate. Unemployment above 9% will continue to affect consumer sentiment;however, with services sectors expanding, and construction sector activity gradually recovering, IHS expects the jobless rate to edge lower in 2014.

Headwinds will persist, but should gradually ease. Household sentiment remains poor in Morocco, but IHS expects improvements this year, supported bymodest recoveries in the Eurozone. We expect the Eurozone economies to record annual growth in 2014 after two successive years of decrease. Although therecoveries will remain sluggish, the trend will support Morocco's growing export-oriented industries and result in greater remittance flows, having a positiveimpact on the kingdom's household sentiment and private consumption, which accounts for nearly 60% of GDP.

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Morocco will continue to make headway towards reducing the fiscal deficit. Reining in the fiscal deficit remains a considerable near-term challenge forMoroccan policymakers after the spending hike amid the 2011 Arab Spring. Last year, thanks to a larger tax take, restrained public investment spending, andsteps to cut back the subsidy bill, fiscal performance improved on both the spending and revenue sides. Further deficit reduction, albeit more moderate, is likelythis year after authorities announced an end of gasoline and fuel oil subsidies and plans to start cutting diesel subsidies.

Forecast summaryGrowth prospects are brighter in 2015, as the nonagriculture sectors continue to recover. Economic growth will slow to less than 3% in 2014, down from4.4% in 2013. Lower rainfall levels and a technical drag following a bumper harvest in 2013 will cause the agriculture sector to weigh heavily on headlinegrowth, given its sizable role in total output. At the same time, nonagriculture-sector growth will firm and support an improving employment picture, particularlyin 2015. The recovery in the nonagriculture sectors is progressing, but more slowly than previously expected. Preliminary first-quarter figures weredowngraded, and second-quarter growth was just 2.3% year on year, although nonagriculture growth accelerated, thanks to better manufacturing and mining.Although the road to faster growth may still be long, relatively improved global macroeconomic conditions and recent structural reforms should begin to benefitMoroccos economic performance in the next 12 months. Consumer price inflation remains very low, which supports consumers purchasing power.Remittances from Europe have slowly started to recover, while tourism revenues are also growing, albeit very modestly. Yet, domestic unemployment remainshigh, which is likely having an overriding adverse affect on household consumption habits by limiting disposable income and dampening sentiment.

The job market remains fragile, but should improve in 2015. The unemployment rate ticked up during the third quarter to 9.6%, with joblessness remaininghigh among urban youth. Better growth in 2015 will help improve business sentiment and hiring, resulting in a gradual downward trend in the unemploymentrate. However, as Eurozone growth remains weak, it will restrain Morocco from achieving even higher growth and slashing unemployment. Morocco's highgrowth during the 2000swhich successfully brought unemployment to less than 10%was supported in large part by its expanding externally orientedsectors, such as tourism, and greater business interest from the Eurozone.

Following fuel subsidy reform, fiscal accounts will continue to mend. Morocco's fiscal deficit narrowed to 5.5% of GDP in 2013, down from a gap of morethan 7% of GDP in 2012. Reining in the deficit remains a considerable near-term challenge for Moroccan policymakers after spending was hiked amid the 2011Arab Spring. Further deficit reduction, albeit more modest, is likely in 2014 after authorities implemented fuel subsidy reform early in the year. However, asizable part of the subsidy bill is accounted for by food and butane gas (cooking gas) subsidies, neither of which is likely to be touched by reform, as they aremore politically sensitive, having an impact on a greater number of Moroccans. The authorities are aiming to reduce the fiscal deficit to 4.9% in 2014 and 4.3%in 2015.

Changes since last forecastNovember forecast versus October forecast

Current

account

balance

UP A softer global oil price outlook (see assumptions section), combined with ongoing improvements in Moroccos structural trade

balance, suggests the kingdoms current-account deficit will decline more than previously expected in 2015.

CPI

inflation

DOWN Incorporating the new lower IHS Energy price forecast, Moroccos projected inflation trend has been lowered through the near term.

Assuming average crop yields, lower global oil prices lead to less upward price pressure on domestic prices, as producers face

lower costs. Our previous forecast projected average annual inflation at 2.1% in 2015; however, this figure has been reduced to

1.7%.

Selected data and charts: Data (forecasts)Political summary

Legislative elections (Lower

chamber)

Next contest: 2016 November; Last contest: 25 November 2011 (House of Representatives); 28 September 2012

(one-third of House of Councillors).

King of Morocco: Mohammed Vi (since 23 July 1999)

Crown Prince of Morocco: Moulay Hassan (since 8 May 2003)

Prime Minister: Abdelilah Benkirane (since 3 January 2012)

Source: IHS and CIRCA People in Power

Key Macro-Economic Indicators

2010 2011 2012 2013 2014 2015 2016 2017 2018

Real GDP (% change) 3.6 5.0 2.7 4.4 2.5 4.6 4.8 5.2 4.8


Nominal GDP (US$ bil.) 90.8 99.2 95.9 103.8 106.7 104.9 114.5 129.3 141.0

Nominal GDP Per Capita (US$) 2,869 3,095 2,949 3,146 3,187 3,090 3,331 3,717 4,008

Consumer Price Index (% change) 1.0 0.9 1.3 1.9 0.4 1.7 2.1 2.5 2.7

Exchange Rate (LCU/US$, end of period) 8.36 8.58 8.43 8.15 8.95 9.13 8.72 8.57 8.45

Historical data from selected national and international data sources. All forecasts provided by IHS Global Insight. Table updated on the 15th ofSource:each month from monthly forecast update bank (GIIF). Written analysis may include references to data made available after the release of the GIIF bank.

Country risk - overall statement

OverallEntrenched parochial interests will continue to hinder Morocco's Islamist-led government's efforts to introduce rapid legal and administrative reforms, and tohold true to its commitment to crack down on endemic corruption. Instead, improvements to the generally favourable investment environment are likely toprogress slowly but steadily over the next year. These will be supported by international agreements, including the EU-Morocco Association Agreement andMorocco's FTA with the United States. Presently, weak external demand out of Europe is weighing heavily on Morocco's economy through lower touristreceipts and remittances inflows, in addition to dampening goods exports. In addition, elevated oil prices, albeit cooling compared to record highs in 201112,are also straining the kingdom's accounts (external and fiscal) as domestic energy demands rise and subsidies remain overly generous and inefficient. Ingeneral, however, Morocco's economic prospects are favourable compared to regional competitors thanks to prudent economic policies, good relations withtrading partners, and an open economy. Politically, the risk environment is expected to remain stable under the leadership of King Mohammed VI, who remainsrelatively popular and has forged ahead with gradual socio-economic improvements as well as constitutional reforms designed to mollify pro-democracyprotestors. Despite effective and proactive security forces, there remains a moderate threat of attack by militant Islamists, particularly against governmentbuildings and tourist sites in Morocco's commercial capital of Casablanca. Youth unemployment remains a significant problem, creating fertile ground for therecruitment of young Moroccans by militant Islamist movements fighting in Syria and the Sahel. The protracted territorial dispute between Morocco and theAlgerian-backed Polisario Front over control of the phosphate-rich territory of Western Sahara is highly unlikely to be resolved anytime soon. The Polisariorejects Moroccan offers of autonomy, reiterating calls for a referendum on the status of the territory. This contributes to an increased risk of civil unrest in theterritory should offshore oil-drilling commence as planned in 2014.

Economic: Country risk statementMorocco is a conservatively managed economy, where prudent macroeconomic policies and structural reforms over the past decade have promoted healthygrowth and fostered one of the most open economies in the region. Despite a firm commitment to economic reforms, much remains to be done to improve thebusiness climate and expand private-sector participation. Diversifying the economy away from the volatile agricultural sector should continue, mainly throughpromotion of services and export-oriented industrial activities, while more institutional and financial reforms are also needed. Morocco's Economic Risk Ratingwas last downgraded during third-quarter 2012 from 2.50 to 2.75, based on weaker near-term growth prospects that played out in slower non-agriculture sectorgrowth in 2013. Nevertheless, thanks to a bumper agricultural harvest, growth picked up to 4.4% last year. Growth is expected to moderate as agriculturesector growth normalizes, while non-agriculture sectors recover in line with gradual improvements in external demand as Eurozone growth tilts to a positivetrend in 2014. Stiff headwinds will continue to buffet the economy, not least from broadly pessimistic domestic households, which dampens privateconsumption growth. Labor markets remain weak as key employment sectors, such as construction, slumped in 2013, resulting in a rise in the annualunemployment rate to 9.2%during the fourth quarter the rate reached 9.5%. The real concern remains urban youth unemployment, which continued to rise in2013; for the 2534 age group the unemployment rate reached 19.8%. Mainly the result of lost construction sector jobs, the total number of unemployedMoroccans in 2013 increased more than 4% to 1.08 million, or an additional 43,000 jobless. Nearly all (81%) of the unemployed reside in urban areas, whichexplains the comparatively higher urban unemployment rate of 14.0%. Ongoing fiscal consolidation efforts, including the impact of recent tax and subsidyreform, have the potential to adversely affect economic growth as the state pulls back after boosting spending during the Arab Spring. The economysprospects remain highly vulnerable to the performance of the large agriculture sectoralso the countrys largest employment sectorwhich periodically suffersfrom drought, resulting in depressed economic growth.

Short-term outlook

Key points

Growth prospects are brighter in 2015, as the nonagriculture sectors continue to recover.The job market remains fragile, but should improve in 2015.Following fuel subsidy reform, fiscal accounts will continue to mend.

Analysis


Analysis

Growth prospects are brighter in 2015, as the nonagriculture sectors continue to recover. Economic growth will slow to less than 3% in 2014, down from4.4% in 2013. Lower rainfall levels and a technical drag following a bumper harvest in 2013 will cause the agriculture sector to weigh heavily on headlinegrowth, given its sizable role in total output. At the same time, nonagriculture-sector growth will firm and support an improving employment picture, particularlyin 2015. The recovery in the nonagriculture sectors is progressing, but more slowly than previously expected. Preliminary first-quarter figures weredowngraded, and second-quarter growth was just 2.3% year on year, although nonagriculture growth accelerated, thanks to better manufacturing and mining.Although the road to faster growth may still be long, relatively improved global macroeconomic conditions and recent structural reforms should begin to benefitMoroccos economic performance in the next 12 months. Consumer price inflation remains very low, which supports consumers purchasing power.Remittances from Europe have slowly started to recover, while tourism revenues are also growing, albeit very modestly. Yet, domestic unemployment remainshigh, which is likely having an overriding adverse affect on household consumption habits by limiting disposable income and dampening sentiment.

The job market remains fragile, but should improve in 2015. The unemployment rate ticked up during the third quarter to 9.6%, with joblessness remaininghigh among urban youth. Better growth in 2015 will help improve business sentiment and hiring, resulting in a gradual downward trend in the unemploymentrate. However, as Eurozone growth remains weak, it will restrain Morocco from achieving even higher growth and slashing unemployment. Morocco's highgrowth during the 2000swhich successfully brought unemployment to less than 10%was supported in large part by its expanding externally orientedsectors, such as tourism, and greater business interest from the Eurozone.

Following fuel subsidy reform, fiscal accounts will continue to mend. Morocco's fiscal deficit narrowed to 5.5% of GDP in 2013, down from a gap of morethan 7% of GDP in 2012. Reining in the deficit remains a considerable near-term challenge for Moroccan policymakers after spending was hiked amid the 2011Arab Spring. Further deficit reduction, albeit more modest, is likely in 2014 after authorities implemented fuel subsidy reform early in the year. However, asizable part of the subsidy bill is accounted for by food and butane gas (cooking gas) subsidies, neither of which is likely to be touched by reform, as they aremore politically sensitive, having an impact on a greater number of Moroccans. The authorities are aiming to reduce the fiscal deficit to 4.9% in 2014 and 4.3%in 2015.

Assumptions

World real GDP growth is projected to rise only modestly, from 2.6% in 2013 to 2.7% in 2014, before picking up to 3.2% in 2015 and 3.5% in 2016. TheEurozone is projected to eke out growth of 0.8% in 2014, after two years in recession, before modestly firming to 1.4% in 2015.The IHS Energy forecast of crude oil prices has been revised downward through 2018. The average price of Dated Brent is now projected to drop from$101 in 2014 to $88 per barrel in 2015 and $86 in 2016, with a tightening supply/demand balance allowing for a recovery to $95 in 2017 and $102 in2018.There is no major political setback in the near term. Turmoil in other MENA-region countries does not significantly spill over into Morocco, where thepopularity of King Mohammed VI and the political and socioeconomic reforms he has implemented in his more-than-a-decade in power help limit thesize and scope of protests around the country.No major terrorist attack occurs in Morocco in the short term; a large-scale terrorist attack would have an outsized adverse effect on the tourism sector.In addition, Western Sahara remains under Moroccan sovereignty, and there is no major outbreak of violence.

Changes since last forecastNovember forecast versus October forecast

Current

account

balance

UP A softer global oil price outlook (see assumptions section), combined with ongoing improvements in Moroccos structural trade

balance, suggests the kingdoms current-account deficit will decline more than previously expected in 2015.

CPI

inflation

DOWN Incorporating the new lower IHS Energy price forecast, Moroccos projected inflation trend has been lowered through the near term.

Assuming average crop yields, lower global oil prices lead to less upward price pressure on domestic prices, as producers face

lower costs. Our previous forecast projected average annual inflation at 2.1% in 2015; however, this figure has been reduced to

1.7%.

Alternative scenarios

A spike in global oil prices would raise Morocco's energy imports and significantly deteriorate the balance of payments. The sovereigns credit ratingwould come under pressure if elevated prices were prolongedroughly one-quarter of Moroccos import bill is energy imports.Stronger-than-expected growth in the Eurozone in 2014contrary to our current forecast of modest 0.8% growthwould support an improving externalposition and boost growth above our baseline forecast given linkages to the continent.A deep recession in the Eurozone in the short termsuch a scenario would lead not only to significant decreases in Moroccan merchandise exports toEurope, but also to a sharp drop in European tourists to Morocco and a steep reduction in FDI.Religious extremism, labor unrest, or a war in Western Sahara would undermine macroeconomic reforms, leading to capital flight, devaluation pressureon the dirham, as well as higher inflation.


A sharp appreciation of the euro against the US dollar could deter Moroccan companies from targeting the US market, despite the free-trade agreementbetween the United States and Morocco. Morocco's currency, the dirham, is fixed to a euro-US dollar basket; however, the euro bears a much heavierweight than the dollar.

Data

Key Macro-Economic Indicators

2010 2011 2012 2013 2014 2015 2016 2017 2018

Real GDP (% change) 3.6 5.0 2.7 4.4 2.5 4.6 4.8 5.2 4.8




Policy Interest Rate (%) 3.25 3.25 3.00 3.00 2.75 2.75 3.25 3.25 3.25

Fiscal Balance (% of GDP) -4.7 -6.7 -7.4 -5.5 -4.9 -4.6 -4.0 -3.5 -3.2

Population (mil.) 31.64 32.06 32.52 33.01 33.49 33.96 34.39 34.79 35.18

Unemployment Rate (%) 9.1 8.8 9.0 9.2 9.5 9.1 8.8 8.6 8.4

Current Account Balance (% of GDP) -4.5 -8.0 -10.0 -7.5 -6.2 -5.2 -4.2 -4.8 -4.7

BOP Exports of Goods US$bn 17.8 21.6 21.4 22.0 23.7 22.7 24.0 25.6 27.2

BOP Imports of Goods US$bn 32.7 40.9 41.4 42.3 42.9 40.0 42.0 45.6 48.5



Medium- and long-term outlook

Key points

Headline growth will rely on expanding services sectors and the development of a knowledge-based economy.Reducing the domestic economy's reliance on the volatile agriculture sector will limit downside risk.Structural reforms will boost growth rates and promote more inclusive development.Long-term growth will require peace, as well as the continuation of broad-based structural reforms.


Analysis

Headline growth will rely on expanding services sectors and the development of a knowledge-based economy. Moroccos real GDP is expected toexpand on average by 4.7% per year over the medium term (201519) and 2.9% over the long term (202044). Underpinning headline growth in Morocco willbe strengthening services sector growth as well as expanding exports. After slower growth in recent years, we expect the tourism industry to bounce back andmake important contributions to economic growth over the medium and long termespecially as Eurozone growth tilts back to a stable upward path.Meanwhile, exports are expected to expand robustly, supported by the free-trade agreement (FTA) with the United States. The US-Morocco FTA should leadto stronger foreign direct investment (FDI) in the country over the long term, which will further benefit growth and economic diversification in the kingdom.Moreover, growth in labor intensive manufacturing sectors, including electronics, automotives, and aviation, is expected as foreign firms look to capitalize onMorocco's large supply of relatively inexpensive labor as well as its close proximity to Europe.

Reducing the domestic economy's reliance on the volatile agriculture sector will limit downside risk. By contrast to the nonagriculture sectors, theeffect of agriculture on real GDP is more difficult to assess, as expansion in this sector currently depends a great deal on rainfall levels from year to year. Withpoor management of available water resources, the government continues to struggle to compensate for lower growth during drought years when crop yieldsare weak. The authorities hope to lessen the dependence of the economy on agriculture in the medium term through promotion of other sectors. This trend isalready underway, as the services sector surpassed agriculture as the kingdoms largest employment sector in 2012. It is agriculture, however, that willultimately remain the economic linchpin sector over the medium term, accounting for 1520% of total output in a given year. Moreover, more than 4.5 millionMoroccans, of the roughly 12 million strong national workforce, make a living in the sector, while it accounts for approximately 30% of total exports. Becausethe agriculture sector is vulnerable to drought, its contribution to GDP can fluctuate dramatically, making its performance the looming downside risk to theforecast.

Structural reforms will boost growth rates and promote more inclusive development. Macroeconomic reforms, greater economic integration with theEuropean Union, in addition to political stability are all necessary to support healthy growth through the forecast horizon, which, , will help reduceinter aliaMoroccos dependency on agriculture, bring down stubborn unemployment, and move the economy up the value chain. We expect the government willcontinue to implement trade liberalization and will accelerate the implementation of structural reforms, including privatizations, in a bid to attract foreigninvestment into the country to help diversify the economy. Sound macroeconomic policies and restructuring could make Morocco more attractive to privateinvestors and would help improve overall productivity. Morocco is already one of the most attractive investment markets in Africa and it will aim to maintain thisdistinction in the long term. Higher investment and economic productivity will shift growth into a higher gear, but progress in reducing unemployment andpoverty will nevertheless be slow moving, requiring labor market reforms and sufficient time to take effect.

Long-term growth will require peace, as well as the continuation of broad-based structural reforms. The Western Sahara issue is a contributing factorto Morocco's strained relations with its neighbor, Algeria. Morocco accuses Algeria of sheltering and backing the Polisario, a rebel movement fighting forindependence of Western Sahara, a vast desert region in southern Morocco. The risk of military conflict between Morocco and the Polisario is small, but willrapidly increase if all diplomatic venues for a peaceful resolution of the Saharan conflict become exhausted. Such an armed confrontation would have anegative effect on long-term macroeconomic stability in Morocco by substantially reducing the flow of foreign investments in the country and leading to massivecapital flight. On the other hand, the continued implementation of broad-based economic reforms will lead to sustained expansion in the economy. In the longterm, these reforms will help cushion the Moroccan economy from the volatility of the agriculture sector. Meanwhile, the industrial sector will benefit from closerties between Morocco and Europe (Morocco has an advanced-status relationship with the European Union) as well as strong relations with the United States.We expect the proportion of services in GDP to rise steadily overtime, as Morocco remains an important tourist destination over the forecast horizon. Thecountry will also see a strong expansion in financial services while the city of Casablanca attempts to position itself as a regional financial hub.

Growth

GDP

Key points

GDP growth will accelerate as drag from agriculture diminishes in the near term.Growth is becoming more balanced as the nonagriculture sectors recover.Modestly better growth in the Eurozone will begin to benefit the kingdom.

Analysis

GDP growth will accelerate as drag from agriculture diminishes in the near term. After driving growth higher last year, the agricultural sectorMoroccoslargest in terms of outputwill become a considerable drag on growth in 2014. The sector expanded nearly 20% in real terms in 2013, bouncing back from a2012 drought. Overall GDP growth accelerated to 4.4% thanks to agricultures strong rebound, more than offsetting weakness in nonagricultural sectors suchas mining and construction. Mining (dominated by the phosphate industry) and construction posted contractions through the first nine months of the year;however, construction began to recover during the fourth quarter (only to slow again in the first quarter of this year). Comparatively stronger growth in thewholesale and retail trade and services sectors has helped to offset lower annual growth on the industrial side of the economy.

Growth is becoming more balanced as the nonagriculture sectors recover and benefit from gradually firming external demand, less political uncertainty,and rising business sentiment. While Moroccos headline growth will fail to impress in 2014, IHS expects a gradual recovery of nonagriculture sectors to feedinto firming private consumption. As Eurozone growth begins to recover, Moroccos key nonagriculture sectorsincluding manufacturing, tourism, and


constructionwill benefit from rising investor sentiment and firming external demand. Our current baseline projects growth slowing to 2.5% in 2014. Moroccanconsumers remain downbeat, the latest consumer survey showed that sentiment remains lowlikely influenced heavily by elevated unemployment. So long asMoroccan households keep a tight hold on their spending, the growth of large sectorssuch as wholesale and retail trade and serviceswill remain paltry byhistorical standards.

Modestly better growth in the Eurozone will begin to benefit the kingdom. Manufacturing and construction sectors are likely to gradually recover fromslumps in parallel with the Eurozone's gradual economic recovery, supporting more positive investor sentiment in the kingdom. Moreover, the tourism sectorhas begun to show signs of life, a solidly positive sign for Morocco's employment outlook, given the services sector has been the largest job-creating sector inrecent years. Despite ongoing household pessimism stemming from a weaker harvest and the governments fiscal consolidation efforts, private consumptionshould firm as unemployment declines and external demand improves in 2015. Beyond merchandise trade, the Eurozone economies are a crucial source oftourist receipts and remittances flows, both of which underpin the consumption habits of many Moroccan households. Modestly improved economicperformance in the Eurozone should benefit Morocco going forward. Assuming an average harvest, we project growth to rebound to between 4.5% and 5.0% in2015.

Data

Economic Growth Indicators

2011 2012 2013 2014 2015 2016 2017 2018

Real GDP (% change) 5.0 2.7 4.4 2.5 4.6 4.8 5.2 4.8

Real Consumer Spending (% change) 7.4 3.7 3.7 3.0 4.0 5.7 5.9 5.8

Real Government Consumption (% change) 4.6 7.9 3.7 3.0 2.8 3.4 3.2 3.2

Real Fixed Capital Formation (% change) 2.5 1.6 0.2 0.7 2.4 3.2 3.6 4.0

Real Exports of Goods and Services (% change) 2.1 2.6 2.4 5.9 4.1 4.4 5.3 5.7

Real Imports of Goods and Services (% change) 5.0 1.7 -1.5 3.0 3.8 4.1 4.3 4.5

Nominal GDP (US$ bil.) 99.2 95.9 103.8 106.7 104.9 114.5 129.3 141.0

Nominal GDP Per Capita (US$) 3,095 2,949 3,146 3,187 3,090 3,331 3,717 4,008


Consumer demand

Key points


Consumer demand is expected to gradually firm in the near term.Eurozone recovery and a strengthening tourism sector will benefit Moroccan consumers.

Analysis

Consumer demand is expected to gradually firm in the near term. Despite households remaining generally downbeat, with unemployment staying high andremittances flows stagnating, private consumption was supported by the agriculture sectors healthy performance and some measure of pent-up demand in2013. Expanding agriculture activity promotes rising rural wages, and since the sector accounts for some 40% of employment, the rebound kept consumptiongrowth afloat at 3.7%. Yet, private consumption growth has been relatively unimpressive in recent years, largely because weakness in other key employmentsectors (such as construction) is dampening consumer sentiment. While government measures, including increased public-sector wages and higher minimumwages, will continue to support household consumption, persistent high youth unemployment, particularly among new graduates, will at the same time be alimiting factor.

Eurozone recovery and a strengthening tourism sector will benefit Moroccan consumers. Economic growth prospects in the Eurozone are slowlyimproving, with the currency bloc expected to post annual growth in 2014 for the first time since 2011. As Eurozone growth firms, Moroccan tourism receiptsand remittance inflows are expected to recover after stagnating during the past two years. Remittances, which amount to about USD7 billion every year (about7% of GDP), effectively underpin household consumption. As such, when remittances growth stagnates, aggregate household income in Morocco is similarlyconstrained. Remittances are a key financial resource for Moroccans, and it can be expected that household consumption will be less than it otherwise wouldbe, until remittances growth recovers significantly. The latest data show remittances growing at only about 1% through October compared with the same periodin 2013.

Capital investment

Key points

Investment growth has been weak in recent years, but should begin to improve as broad economic activity accelerates in the near term.Looking forward, the construction sector is expected to benefit from greater infrastructure work.

Analysis

Investment growth has been weak in recent years, but should begin to improve as broad economic activity accelerates in the near term. Investmentgrowthmeasured as real fixed investmentslowed considerably in 2013. As investment stutters, spending plans aimed at ameliorating social tensionscaused by the lack of affordable housing and low living standards for many urban Moroccans are likely to fall by the wayside. More positively, the governmentsinvestment spending has rebounded in 2014 after deep cuts were made to reduce the deficit. Higher investment spending by the government should havepositive effects for the wider investment climate by raising investor sentiment. Moreover, IHS projects a gradual acceleration going forward as broad economicactivity, namely in nonagriculture sectors, rejuvenates.

Looking forward, the construction sector is expected to benefit from greater infrastructure work, the launching of new social housing projects, and newprojects designed to increase the capacity of the tourism sector. Nevertheless, the government's efforts to lead investment projects, particularly largeinfrastructure projects, may be constrained in coming years by fiscal considerations. At the same time, government should implement investment promotionmeasures, while sound macroeconomic policies and structural reforms that improve the kingdom's business environment will make Morocco more attractive toforeign and private investors. Investment in the development of more productive industries, such as automotives, aerospace, and electronics will most acutelyboost productivity by leveraging the country's supply of labor and moving the country up the value chain. Moreover, the free-trade agreement (FTA) with theUnited States is expected to lead to increased investment in Morocco over the medium-term.

Labor markets

Key points

Several key employment sectors slowly emerge from slumps, keeping unemployment elevated.Youth unemployment remains a key challenge.

Analysis

Several key employment sectors slowly emerge from slumps, keeping unemployment elevated. The employment situation is an issue that continues tobring Moroccans to the streets. On 1 May 2014, thousands demonstrated in the streets on International Workers Day. Among the marchers were many younggraduates demanding jobs in the public sector. Ahead of the demonstrations, the government approved a 10% hike in the private-sector minimum wage toease tensions. Labor unions called the increase insufficient, while employers' groups said the hikes would erode Morocco's cost competitiveness. With tepidconsumer price inflation, the hike will support consumers' purchasing power. IHS expects the labor market to gradually mend into 2015, in line with strongernonagriculture-sector growth.


Youth unemployment remains a key challenge. Of the roughly one million unemployed Moroccans, the majority (over 80%) reside in urban areas. In otherwords, four out of five unemployed are urban residents, and two out of three are youths, aged 1529. Unemployment among educated youth is a particularconcern, as it remains higher than the non-degree-holding youth unemployment rate. This is largely a structural problem, as new graduates (first-time jobseekers) make up the bulk of the unemployed and generally have higher job expectations, which the labor market does not currently satisfy. There remains apersistent skills-employment mismatch between the private sectors employment needs and the skills of new graduates. The kingdom's vulnerability to theagriculture sector, which employs around 40% of the country's nearly 12-million-strong labor force, will need to be addressed to stabilize cyclical employmentpatterns.

Inflation

Key points

Inflation is expected to remain muted in the near term, particularly as global oil prices have moved lower.

Analysis

Inflation is expected to remain muted in the near term, particularly as global oil prices have moved lower. Although Morocco took an unexpected stepin January 2014 to end gasoline and fuel oil subsidies and start cutting diesel subsidies this year, the key subsidies affecting most Moroccansfoodstuffs andcooking gaswill remain in place, as they are much more politically sensitive. This has limited the price pressure generated by this move. For most of 2014,deflationary food prices have offset higher inflation in nonfood categories, such as transportation and housing costs. Weaker domestic demand on the back ofelevated unemployment is surely playing a role by dampening demand-driven inflation. Recently released figures showed headline annual inflation was just0.6% in October. Given our forecast for a growth rebound, inflation is expected to accelerate to a level more acceptable to the central bank, averaging anannual rate of 1.7% in 2015. However, softer global oil prices in the two-year outlook certainly add downside risk to this forecast.

Data

Inflation Indicators

2011 2012 2013 2014 2015 2016 2017 2018

Consumer Price Index (% change) 0.9 1.3 1.9 0.4 1.7 2.1 2.5 2.7

Wholesale-Producer Price Index (% change) 14.8 4.8 -2.5 -3.2 -4.8 -3.2 0.0 -1.5


Exchange rates

Key points


The dirham faces modest downward pressure through 2015, stemming from expected euro weakness.Greater exchange rate flexibility is on the horizon, according to Moroccan officials.

Analysis

The dirham faces modest downward pressure through 2015, stemming from expected euro weakness. IHS expects the euro to depreciate against theUS dollar because of lower interest rates and comparatively weaker economic performance of the Eurozone. The euro will struggle through 2015, depreciatingfrom its current value to a low of USD1.18 in the third quarter of 2015. It will begin to recover thereafter, in line with firming recoveries. The Moroccan dirhamwill broadly match these exchange-rate movements given that it is heavily weighted toward the euro. The dirham will depreciate to about MAD8.95/USD1.0 byyear-end 2014, although the average rate will essentially flat owing to the euros strength earlier in the year. Because of the economic linkages betweenMorocco and the European Union and prospects for greater integration as Morocco is positioned as an export hub to the EU, we expect the dirham to followeven more closely the evolution of the euro. Although this will translate into appreciation of the currency vis--vis the US dollar over the medium term, webelieve that strong investment and remittance inflows will make the resulting trade deficits sustainable.

Greater exchange rate flexibility is on the horizon, according to Moroccan officials. We expect the exchange-rate regime to remain a tight managed floatin the near term, with a future goal of increased flexibility, which will allow Morocco to better adapt to changes in the global economy and improvecompetitiveness, in addition to providing better protection of international reserves. In late 2013, Moroccos central bank governor, Abdellatif Jouahri, toldreporters that the countrys exchange-rate system would become gradually more flexible over the next three years. Specifically, he said the widening of thecurrency bands would be a first step. Morocco pegs the dirham to a basket of currencies mirroring its trade and financial relations with the European Union andthe United States. The euro bears a much heavier weight (80%) than the US dollar, reflecting the importance of Moroccos trade linkages with the Eurozoneeconomies.

Data

Exchange Rate Indicators

2011 2012 2013 2014 2015 2016 2017 2018

Exchange Rate (LCU/US$, end of period) 8.58 8.43 8.15 8.95 9.13 8.72 8.57 8.45

Exchange Rate (LCU/US$, period avg) 8.09 8.63 8.41 8.40 9.14 8.91 8.58 8.49

Exchange Rate (LCU/Euro, end of period) 11.10 11.13 11.24 11.01 10.95 11.08 11.23 11.20

Exchange Rate (LCU/Euro, period avg) 11.25 11.09 11.16 11.15 10.95 11.02 11.11 11.20


Policy


Monetary policy

Key points

Monetary policy will remain accommodative.The central bank is nursing the country through a relatively soft patch.

Analysis

Monetary policy will remain accommodative. IHS expects the monetary authority to continue to implement prudent policies, maintaining a focus oncontaining inflation while providing adequate liquidity to banks (liquidity has been strained by the governments large deficits in recent years, in combinationwith expanding external deficits drawing down hard currencies). Given downside risks to domestic economic growth, however, the central bank will keepmonetary policy relatively loose, and opted to cut its main policy rate by 25 basis points to 2.75% during the latest quarterly meeting in late September 2014.The bank previously cut its policy rate by 25 basis points to 3.00% in early 2012, but more recently had favored lowering the reserve ratio as a monetary policytool. The rate-cut decision was made in light of numerous signals indicating that inflationary pressures were muted and that growth, particularly innonagriculture sectors, was weak. Morocco's rate cut follows policy loosening from the European Central Bank (ECB). Given the kingdom's economic linkagesto the Eurozone and the dirham's heavy weighting towards the euro, the banks policy action was not entirely unexpected. Given our forecast for a growthrebound in 2015 and that inflation is expected to rise, IHS expects no further policy action in the near term. We expect this rate to be maintained through 2015and into 2016, when higher growth and a higher global interest rate environment will lead the central bank to begin raising rates.

Data

Monetary Policy Indicators

2011 2012 2013 2014 2015 2016 2017 2018

Policy Interest Rate (%, end of period) 3.25 3.00 3.00 2.75 2.75 3.25 3.25 3.25

Short-term Interest Rate (%, end of period) 3.76 3.83 3.91 3.83 3.64 3.71 3.96 3.96

Long-term Interest Rate (%, end of period) 4.34 4.71 5.69 5.21 5.14 5.29 5.53 5.61


Fiscal policy

Key points

The fiscal deficit has begun narrowing and is likely to continue improving.The deficit will remain high but trend downward gradually.


Analysis

The fiscal deficit has begun narrowing and is likely to continue improving. Progress toward reducing Morocco's fiscal deficits will continue in 2015,although gains will likely start becoming harder to achieve, as more restrained spending or cuts to politically sensitive subsidies (such as cooking gas) might benecessary for bigger reductions. Further debt financing will be necessary. Finance minister Mohamed Boussaid told Reuters recently that external borrowingcould amount to USD2.8 billion in 2015 to cover the fiscal shortfall. Because Morocco has taken steps towards fiscal sustainability and has strong relations withthe International Monetary Fund, the international debt markets will likely continue to look favorably on the kingdom. IHS currently projects Morocco's deficit in2015 at 4.6% of GDP, down from 4.9% in 2014. A softer oil price outlook will certainly support a lower deficit, but not as much as it once did, now that Moroccohas eliminated most fuel subsidies.

The deficit will remain high but trend downward gradually. Figures showed that the fiscal deficit amounted to USD2.9 billion during the first half of 2014, areduction from the USD4.5-billion deficit record during the same period last year. The improvement was largely a byproduct of fuel subsidy reform. However, alarge part of the subsidy billfood and butane gas (cooking gas)will remain in place, keeping the subsidy bill fairly sizable at 34% of GDPa markedimprovement from recent years, when subsidies cost the state upward of 7% of GDP. Despite the moderately smaller fiscal shortfall in the first half, Moroccostill tapped international debt markets for EUR1 billion in June 2014, fetching strong demand from international investors hungry for favorable emerging-marketyields. By our projections, Morocco's total public-debt load will peak at just over 70% of GDP in the near term, before stabilizing and gradually moving lower inthe coming years. Importantly, only about 25% of this debt is foreign debt.

Data

External sector

Key points

Morocco's external deficits will continue to narrow in the near term.European demand will slowly return and support the external balances.

Analysis

Morocco's external deficits will continue to narrow in the near term. Moroccos external deficits will continue to mend going forward, but the sizable gapswill still remain onerous for some time. The 2014 trade deficit has declined through October, as exports increased 8%, compared to import growth of just 1%.While budding export industries, such as automotive and aviation cabling, support export growth, low global prices for rock phosphate continue to hinderphosphate exportsMoroccos primary commodity export. In 2013, prices for the rock declined tumbled as production rises from competitor markets resultedin excess global supply; however, prices broadly stabilized in 2014. Autos exports are expected to continue growing through the near-term as domesticproduction expands and Eurozone demand slowly recovers. Moreover, demand for fertilizers derived from phosphates should gradually improve as globalgrowth firms. Indeed, Morocco is banking on greater demand for the rock over the medium term as authorities plan to nearly double phosphate production by2017, at an estimated cost of USD15 billion. The kingdom sits atop 70% of global reserves and is the worlds top exporter of the mineral.

European demand will slowly return and support the external balances. Morocco's proximity to Europe and its strong ties to the continent have benefittedthe kingdom in many ways, not least through increased foreign direct investment (FDI). Greenfield investments have been made by European companieslooking to set up export bases in Morocco and take advantage of the country's relatively less expensive labor pool. On the other hand, during the last severalyears, particularly in 2012 as the Euro crisis re-ignited, Morocco's reliance on the Eurozone has proved a heavy weight on the economy. From the Moroccanconsumers' standpoint, the Eurozone's high unemployment rates have resulted in stagnating remittances flows back to Morocco. These flows, which amount toabout USD7 billion every year, underpin household consumption in Morocco, making them critical for the economy as a whole. Morocco is fortunate thatremittances have finally started to gradually recover. Looking forward, as the Eurozone shifts to a modest positive growth path in 2015, these above trends willbegin to reverse.

Data


Trade and External Accounts Indicators

2011 2012 2013 2014 2015 2016 2017 2018

Exports of Goods (US$ bil.) 21.6 21.4 22.0 23.7 22.7 24.0 25.6 27.2

Imports of Goods (US$ bil.) 40.9 41.4 42.3 42.9 40.0 42.0 45.6 48.5

Trade Balance (US$ bil.) -19.3 -20.0 -20.2 -19.1 -17.3 -18.0 -20.0 -21.3

Trade Balance (% of GDP) -19.4 -20.8 -19.5 -17.9 -16.5 -15.7 -15.5 -15.1

Current Account Balance (US$ bil.) -8.0 -9.6 -7.7 -6.6 -5.5 -4.9 -6.2 -6.7

Current Account Balance (% of GDP) -8.0 -10.0 -7.5 -6.2 -5.2 -4.2 -4.8 -4.7


Key indicators and forecasts

Data (forecasts)


Detailed Macro-Economic Indicators

2010 2011 2012 2013 2014 2015 2016 2017 2018

Real GDP (% change) 3.6 5.0 2.7 4.4 2.5 4.6 4.8 5.2 4.8



Nominal GDP Per Capita (PPP$) 6,443 6,815 7,024 7,332 7,526 7,910 8,336 8,829 9,322

Real Consumer Spending (% change) 2.2 7.4 3.7 3.7 3.0 4.0 5.7 5.9 5.8

Real Fixed Capital Formation (% change) -0.7 2.5 1.6 0.2 0.7 2.4 3.2 3.6 4.0

Real Government Consumption (% change) -0.9 4.6 7.9 3.7 3.0 2.8 3.4 3.2 3.2

Real Imports of Goods and Services (% change) 3.6 5.0 1.7 -1.5 3.0 3.8 4.1 4.3 4.5

Real Exports of Goods and Services (% change) 16.6 2.1 2.6 2.4 5.9 4.1 4.4 5.3 5.7

Industrial Production Index (% change) 1.8 2.3 1.4 1.0 0.5 2.2 3.0 4.9 4.2


Wholesale-Producer Price Index (% change) 6.4 14.8 4.8 -2.5 -3.2 -4.8 -3.2 0.0 -1.5

Policy Interest Rate (%) 3.25 3.25 3.00 3.00 2.75 2.75 3.25 3.25 3.25

Short-term Interest Rate (%) 3.69 3.76 3.83 3.91 3.83 3.64 3.71 3.96 3.96

Long-term Interest Rate (%) 4.40 4.34 4.71 5.69 5.21 5.14 5.29 5.53 5.61

Fiscal Balance (% of GDP) -4.7 -6.7 -7.4 -5.5 -4.9 -4.6 -4.0 -3.5 -3.2

Population (mil.) 31.64 32.06 32.52 33.01 33.49 33.96 34.39 34.79 35.18

Population (% change) 1.2 1.3 1.4 1.5 1.5 1.4 1.3 1.2 1.1

Unemployment Rate (%) 9.1 8.8 9.0 9.2 9.5 9.1 8.8 8.6 8.4

Current Account Balance (US$ bil.) -4.1 -8.0 -9.6 -7.7 -6.6 -5.5 -4.9 -6.2 -6.7

Current Account Balance (% of GDP) -4.5 -8.0 -10.0 -7.5 -6.2 -5.2 -4.2 -4.8 -4.7

Trade Balance (US$ bil.) -15.0 -19.3 -20.0 -20.2 -19.1 -17.3 -18.0 -20.0 -21.3

Trade Balance (% of GDP) -16.5 -19.4 -20.8 -19.5 -17.9 -16.5 -15.7 -15.5 -15.1

BOP Exports of Goods US$bn 17.8 21.6 21.4 22.0 23.7 22.7 24.0 25.6 27.2

BOP Imports of Goods US$bn 32.7 40.9 41.4 42.3 42.9 40.0 42.0 45.6 48.5


Exchange Rate (LCU/Yen, end of period) 0.10 0.11 0.10 0.08 0.08 0.08 0.07 0.07 0.07

Exchange Rate (LCU/Euro, end of period) 11.17 11.10 11.13 11.24 11.01 10.95 11.08 11.23 11.20


Debt Indicators

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Foreign Exchange Earnings (US$ bil.) 32.6 36.7 42.8 41.7 42.1 45.8 47.6 50.2 52.9 56.5

Portfolio Investment, Net (US$ bil.) 0.0 0.1 0.6 -0.2 -0.1 -0.1 -0.1 -0.2 -0.2 -0.2

Portfolio Investment, Net (% of GDP) 0.0 0.1 0.6 -0.2 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1


Foreign Direct Investment, Net (US$ bil.) 1.5 1.0 2.4 2.5 3.2 3.4 3.6 3.9 4.1 4.2

Foreign Direct Investment, Net (% of GDP) 1.6 1.1 2.4 2.6 3.0 3.1 3.1 3.1 3.0 2.8

Foreign Exchange Reserves, Excl. Gold (US$ bil.) 22.8 22.6 19.5 16.4 18.4 20.5 21.4 21.7 22.2 19.5

Import Cover (Months) 7.3 6.8 4.7 4.0 4.4 4.6 4.8 4.6 4.4 3.6

Total External Debt (US$ bil.) 25.3 27.0 29.6 33.2 40.5 45.3 47.8 49.8 52.0 53.2

Total External Debt (% of GDP) 27.8 29.8 29.8 34.6 39.0 40.9 41.1 39.2 37.6 35.5

Total External Debt (% of forex earnings) 77.4 73.6 69.1 79.7 96.2 99.1 100.4 99.2 98.3 94.1

Short Term External Debt (US$ bil.) 2.2 1.8 3.0 3.4 4.0 4.4 4.6 4.7 4.8 4.8

Short Term External Debt (% of total external debt) 8.6 6.7 10.2 10.1 9.9 9.7 9.5 9.4 9.2 9.0

Short Term External Debt (% of international reserves) 9.6 8.0 15.5 20.6 21.9 21.5 21.4 21.4 21.5 24.5

Total External Debt Service (US$ bil.) 3.4 3.3 3.2 4.3 4.8 4.7 4.7 4.7 4.8 4.6

Interest Payment Arrears (US$ bil.) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

External Liquidity Gap (% of forex earnings) 22.4 16.9 28.1 37.0 33.4 31.3 28.8 29.0 28.9 26.8

Historical data from selected national and international data sources. All forecasts provided by IHS Global Insight. Table updated live from quarterlySource:Sovereign Risk forecast bank (SRS).

Key facts and demographicsArea: 446,550 km2 (172, 400 sq miles)

Language: Arabic & Amazigh Berber (official), French

Religion: Islam

Time Zone: GMT

Population: 32,270,000 (2011 World Bank)

Neighbours: Algeria, Spain (Ceuta and Melilla enclaves), Western Sahara (under Moroccan occupation to Mauritanian frontier)

Capital City: Rabat

Primary Port: Casablanca

Primary Airport: Casablanca Mohammed V International

Currency: Moroccan dirham (MAD)

External trade

OverviewAlthough small, Morocco's trade with the other countries of the Arab Maghreb Union is growing (it rose from just over USD1 billion in 2004 to about USD2billion in 2008). Moreover, trade exchanges between Morocco and the United States have more than doubled since the entry into force of the free-tradeagreement (FTA) between the two countries in January 2006, making the United States the third-largest supplier of Morocco by 2011. A substantial deficit onthe trading account is balanced by service earnings and repatriated income. Despite continued trade deficits, the currency was found by the InternationalMonetary Fund not to be misaligned. Merchandise exports are focused on agricultural and processed food products, around a third of exports. Other key exportgroups include simple manufactures and semi-processed goods, notably clothes and footwear. Principal import groups are structured around capital andtransport equipment (around one-fifth of the total), oil and fuel products, chemicals, metals, and agricultural products, notably cereals.

DataMorocco: Major Trading Partners, 2013

EXPORTS IMPORTS


Country Billions of USD Percent Share Country Billions of USD Percent Share

France 4.5 20.9 Spain 6.3 14.0

Spain 4.3 19.9 France 5.7 12.7

Brazil 1.2 5.8 China 3.2 7.1

United States 0.9 4.0 United States 3.1 6.9

Italy 0.8 3.8 Saudi Arabia 2.9 6.5

India 0.8 3.6 Italy 2.4 5.3

Belgium 0.6 2.9 Germany 2.1 4.7

United Kingdom 0.6 2.8 Russia 2.0 4.5

Netherlands 0.6 2.7 Turkey 1.3 3.0

Germany 0.6 2.7 Algeria 1.2 2.7

Source: IMF, Direction of Trade

Morocco: Major Trading Partners, 2000

EXPORTS IMPORTS

Country Billions of USD Percent Share Country Billions of USD Percent Share

France 2.5 33.5 France 2.8 24.0

Spain 1.0 13.0 Spain 1.1 9.9

United Kingdom 0.7 9.6 United Kingdom 0.7 6.2

Italy 0.5 7.1 United States 0.6 5.6

Germany 0.4 5.0 Saudi Arabia 0.6 5.0

India 0.3 4.2 Germany 0.6 4.9

Japan 0.3 3.8 Italy 0.5 4.7

United States 0.3 3.4 Iraq 0.5 4.1

Netherlands 0.1 1.7 Iran 0.4 3.1

Brazil 0.1 0.9 China 0.3 2.3

Source: IMF, Direction of Trade

Economic development

OverviewThe period of government reform programmes, which dates from the early 1980s, has been critical in attaining macroeconomic stability. Since theearly 1980s, the government has pursued an economic program toward these objectives with the support of the International Monetary Fund (IMF), the WorldBank, and the Paris Club of creditors. Into the 1990s, the authorities achieved a low-inflation economy, with sustainable external and internal balances. Themacroeconomic stability achieved by the authorities has helped the economy develop a number of strengthsnotably in tourism, some in industry, phosphateproduction, fishing, and foreign remittances.

Nevertheless, a number of weaknesses have pinned GDP growth back, however, most notably the dependency of the economy on agriculturaloutput. The cyclical dependency on agriculture sees GDP growth fluctuate significantly according to climatic conditions. Around 40% of the population makesits living working in the agriculture sector. As a result, GDP growth has failed to keep pace sufficiently with population growth so that incomes per head barelygrew over the 1990s, while the level of unemployment grew. Official estimates put the unemployment rate at 8.9% in 2011, a modest improvement from 9.1%in both 2009 and 2010. To have a real influence on the country's material well-being and to bring down unemployment, GDP growth needs to achieve around67% per year on a consistent basis. Drought years have severely affected headline GDP in the past.


In 1983, Morocco adopted a structural reform policy, easing away from state domination of the economy. The strategy was aimed at economicdiversification and encouraging foreign investment. The sale of state assets began in earnest in 1992. Subsequently, the state has divested itself of a numberof its interests. Accompanying privatisation initiatives from the 1980s onward has been a raft of reforms undertaken in line with IMF agreements, includinglowering import tariffs, banking-sector reform, tax reform, and a liberalisation of currency controls. The current account is fully liberalized, with a partialliberalisation of the capital account allowing foreign investors to repatriate profits in foreign currencies.

The government has acknowledged that the key reform required in recent years is to address deterioration in the country's fiscal balance. Thegovernment agreed with the IMF in 2003 to an economic program designed to reduce public-sector wage costs. A number of strategies are in play to help easethe potential currency pressures that could be derived from the country's trade deficit. The government is seeking to develop free-trade relationships with keypartners, particularly in Europe. The reaching of an Association Agreement with the European Union (EU), which came into force in March 2000, is aimed atthe establishment of a free-trade zone between Morocco and the EU. By 2012, the EU-Morocco free trade area for industrial products had come into effect andprogressive liberalisation of agriculture trade was underway. In 2003, negotiations were opened on a free-trade agreement (FTA) with the United States,providing a second push for trade liberalization. The US-Morocco FTA took effect 1 July 2005. Meanwhile, the authorities have been keen in recent years toencourage privatisation and have been active in seeking to reduce long-term state liabilities, particularly in pensions.

Labor marketsThe unemployment rate has been trending down in recent years. Morocco's total population stood at around 32 million people in 2010, growing at about1% annually. Of the population, 28% were below the age of 15 and only 5% were over 65 years of age. The population is fairly evenly distributed between ruraland urban areas, although increasingly the rural population is migrating to urban centers. It is also evenly distributed in terms of gender, with a male-femaleratio of 1. Average life expectancy is 70 years. The unemployment rate has, on average, been trending down from a peak of 22.9% in 1995 to 8.9% in 2011.The bulk of new jobs created are in the services sector.

Morocco's labour force has increased to around 12 million. Unskilled labour is readily available given the high numbers of unemployed, and wages aregenerally low. To be sure, low wages and increasingly few job opportunities have seen large numbers of high-skilled workers, graduates and professionalsleave to work abroad, mainly to Spain and France. The Moroccan government is under increasing pressure to take the relevant measures to create jobs andsatisfy the workforce at home, particularly now given the social unrest currently gripping the region.

A new labour code was adopted in 2003. The economy still faces many structural problems, but the adoption of the new labour code in July 2003 was a stepforward. The new labour code was designed to regulate labour relations, ensure social peace, and attract domestic and foreign investment by increasingemployment flexibility and reducing red tape. It described workers and unions' rights and provided for collective negotiations over terms and conditions. It isalso introduced a reconciliation procedure for labour conflicts at national, regional, and local levels. Finally, it reduced the number of work hours from 48 to 44per week, increased maternity leave from 12 to 14 weeks, and established the trial period at three months for managers, one-and-a-half months for mid-levelemployees, and 15 days for workers.

Monetary systemThe central bank (Bank al-Maghrib) adjusts, on a daily basis, the rate of exchange of the dirham with respect to a basket of 20 foreign currencies. The weightof the US dollar within that basket saw the dirham appreciate against the euro during the dollar's strong run over the late 1990s, decreasing the competitiveposition of exports. The basket was rebalanced in 2002 to take greater account of the euro, leading to an effective 5% depreciation in the trade-weighted valueof the currency. The further weakening of the dollar over 2002 and into 2003 worked to the advantage of the Moroccan economy, with principle export marketslying in Europe. Monetary policy used to be executed by the Ministry of Finance and the Bank al-Maghrib. In 2005, the central bank was given greaterautonomy in the conduct of monetary policy. As of February 1993, the Moroccan dirham was made convertible for all current transactions and for some capitaltransactions, notably, capital repatriation by foreign investors. Foreign exchange is routinely available through commercial banks for such transactions. Theboard of the central bank meets quarterly to set the key benchmark rate, as well as make decisions regarding the required reserve ratio.

Financial systemThe system is supervised by the central bank (Bank al-Maghrib), the sole authority to which banks are responsible. The government introduced a series ofreforms into the sector in the early 1990s, which saw it transform into one of the most modern and efficient banking systems in North Africa. Around 15 banksexist within the country, with only 2 banks remaining in the public sector: the BMCE, the country's export bank, and the Credit Populaire, which specialises inproviding financing to small and medium-sized businesses. French, Italian, Dutch, and German banks all participate within the banking system. The keychallenge for the authorities is to address two specialist state-owned banks, exempt from a number of legislative measures implemented elsewhere. Mostcommercial banks appear to have the necessary capital and structures to appear robust. The Casablanca Stock Exchange is the single stock exchange in thecountry; the exchange is small, but relatively lively, with full electronic trading. Market capitalization, which stood at USD13.5 billion in 2004, rose to more thanUSD50 billion in 2012.

Natural resourcesAgricultural land in Morocco is constrained by its proximity to water, with drought having a serious effect on agricultural production.

Fishing potential in the kingdom is considerable, both in the Atlantic and Mediterranean, with the authorities having sold licenses to overseas operators.


Morocco has the world's largest reserves of phosphate rock, around three-fourths of total known reserves. Phosphates are overwhelmingly the largest singlemined product in the country, although there are small deposits of other minerals.

Morocco is dependent on imports for the vast majority of its oil needs. It is hoped that explorations near the Algerian border may yield oil fields that will becomeeconomically efficient, but currently the kingdom relies on imports to cover about 90% of its oil requirements. There are small oil and coal deposits.

Tourist attractions are numerous, including the cities of Marrakesh and Casablanca, together with areas of outstanding natural beauty, notably the high AtlasMountains. The Arab Spring uprisings adversely affected tourist volume and by mid-2012, it had only sluggishly started to recover.

Key sectorsAgriculture: An estimated 40% of the workforce is employed in agriculture, and the sector accounts for approximately 30% of total exports. Agriculture isvulnerable to drought, and its contribution to GDP can vary dramatically. Agricultural development has been hampered by the prevalence of small-sizedholdings, low mechanization, insufficient investment, and restrictions on access to European Union (EU) markets. These restrictions should ease as thecountry makes progress as part of its Association Agreement with the EU. Long-term development plans have been drawn up by the government, includingirrigation projects and incentives for farmers, including debt write-offs for small farms. The sector is likely to face additional challenges as a result of US marketpenetration following the conclusion of a US-Moroccan free-trade agreement.

Tourism: This sector accounts for around 8% of GDP and is one of the largest foreign-exchange earners. Travel costs to the country were significantlyreduced in 1995, following cuts in prices by the national airline, Royal Air Maroc. The country is becoming an increasingly competitive destination for Europeantravel, with policing of brazen solicitors and salesmen hassling tourists stepped up in a bid to attract greater numbers of tourists. The government is currentlycommitted to large-scale investment in the tourism sector. It has targeted a boost in tourist visitor numbers to 10.0 million, from 2.5 million in 2001.

Phosphates and mining: Additional foreign currency revenues come from phosphate mining, which is controlled by state-owned Office Cherifien desPhosphates. Morocco is the world's third-largest producer of phosphates and is estimated to hold nearly 75% of the world's known phosphate reserves. Largequantities of fertilizers and phosphoric acid are produced. The government is keen to expand mining and processing operations, particularly throughjoint-venture projects with European and Asian companies. Investors in the phosphate industry would particularly welcome a resolution of the issue of WesternSahara's sovereignty, preferably in Morocco's favor, enabling investment to proceed without the threat of renewed security risks.

Fishing: New fishing ports are planned as part of the government's aim to increase the sector's contribution to GDP. Major investment is also expected tomodernise the existing fleet of fishing boats, upgrade ports, and add value to fishing resources through handling and processing services. The recentagreement between the EU and Morocco took effect 1 June 2006 and will last four years. It covered 119 vessels, mostly from France, Spain, and Portugal,although it also included a 60,000-tonne quota for industrial pelagic fishing for several northern European fleets. The annual financial contribution is set atEUR36.1 million, making this agreement the most valuable of all EU fishing agreements.

Oil and gas: Morocco is traditionally a net importer of oil (90% is imported), with the exception of 200 barrels per day currently produced in the EssaouiraBasin. The hydrocarbons law was reformed in December 1999, offering new incentives to potential investors. These include a 10-year tax break to offshoreproduction companies and the reduction of state-held stakes in oil concessions to a maximum 25%.

Key sectors dataMorocco: Top-10 Sectors Ranked by Value Added

2013 Level 2014 Percent Change Percent Share of GDP

(Bil. US$) (Real terms) (Nominal terms)

1. Agriculture 15.6 1.8 15.5

2. Public Admin. & Defense 9.2 5.7 9.1

3. Construction 6.0 1.6 5.9

4. Retail trade - total 5.5 2.6 5.4

5. Real estate 5.0 3.1 4.9

6. Health and social services 4.4 5.0 4.4

7. Wholesale trade 4.4 3.2 4.4

8. Business services 4.3 3.4 4.3

9. Banking & related financial 3.8 4.4 3.8

10. Education 3.2 4.7 3.2

Top-10 Total 61.4 60.9


Source: World Industry Service, IHS Global Insight, Inc.

Updated: 16 Oct 2014

HighlightsEntrenched parochial interests will continue to hinder Morocco's Islamist-led government's efforts to introduce rapid legal and administrative reforms, and tohold true to its commitment to crack down on endemic corruption. Instead, improvements to the generally favourable investment environment are likely toprogress slowly but steadily over the next year. These will be supported by international agreements, including the EU-Morocco Association Agreement andMorocco's FTA with the United States. Presently, weak external demand out of Europe is weighing heavily on Morocco's economy through lower touristreceipts and remittances inflows, in addition to dampening goods exports. In addition, elevated oil prices, albeit cooling compared to record highs in 201112,are also straining the kingdom's accounts (external and fiscal) as domestic energy demands rise and subsidies remain overly generous and inefficient. Ingeneral, however, Morocco's economic prospects are favourable compared to regional competitors thanks to prudent economic policies, good relations withtrading partners, and an open economy. Politically, the risk environment is expected to remain stable under the leadership of King Mohammed VI, who remainsrelatively popular and has forged ahead with gradual socio-economic improvements as well as constitutional reforms designed to mollify pro-democracyprotestors. Despite effective and proactive security forces, there remains a moderate threat of attack by militant Islamists, particularly against governmentbuildings and tourist sites in Morocco's commercial capital of Casablanca. Youth unemployment remains a significant problem, creating fertile ground for therecruitment of young Moroccans by militant Islamist movements fighting in Syria and the Sahel. The protracted territorial dispute between Morocco and theAlgerian-backed Polisario Front over control of the phosphate-rich territory of Western Sahara is highly unlikely to be resolved anytime soon. The Polisariorejects Moroccan offers of autonomy, reiterating calls for a referendum on the status of the territory. This contributes to an increased risk of civil unrest in theterritory should offshore oil-drilling commence as planned in 2014.

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Country Report Morocco 2014

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