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Last week’s Alterio report initiated Maghreb as well as SSA-focused analysis:
Our initial report on Mashrek Maghreb macro conditions comes at an increasingly sensitive time for the region’s economies as roughly one year following a seismic ‘Arab Spring’ lead shift within the culture’s broader civic paradigm the need for political and economic synergy remains as critical as ever to achieving lasting, viable stability and growth given a stark dichotomy between the need to address high unemployment, social inequality, tax reform and subsidies versus the need to maintain fiscal discipline as well as secure financing against a dim backdrop of ever-deteriorating EU demand (EU imports of Moroccan goods grew 7.8 percent in 2011, for instance, down from 19.8 percent growth in 2010), largely uncompetitive export baskets and food/fuel dominated (i.e. price taking) import ones. As we touch upon in this initial commentary, however, there exists within the region—and moreover the broader Middle East at large—a convoluted catch-22 whereby, as described in a recent research note (see citation) the “need for regional economic linkages across the Arab world” sits in direct contrast with “political incentives of Arab elites [that] are not fully aligned with opening regional markets” and by extension helps nurture a fragmented economic model which seems to particularly effect [in terms of total share of merchandise exports as % of GDP] resource-poor, labor abundant countries such as Morocco, Tunisia and Egypt.[i]
The resulting chill on private investment further exacerbates the aforementioned EU macro squeeze and places a greater premium on [and cost to] external financing. The latter element refers to an ongoing [region wide] balance of payments dilemma which will demand continued attention from investors in the coming year given trending declines since 2009 in respective capital accounts (admittedly most acute in Egypt where FDI fell by over 50 percent in 2011 to just over $USD2bn and portfolio flows saw a similarly marked collapse) and weakening trade balances intensified by subsidized, sticky domestic demand (most notably the oil import bill which at ~9 and 7 percent of GDP in Morocco and Tunisia, respectively, is uncomfortably high), a strong correlation to Eurozone growth (more than 88 and 80 percent of Moroccan and Tunisian exports, respectively, go to the EU) and in Egypt’s case a projected gradual depreciation of the EGP (though we do expect the CBE to exert a generally tightening monetary bias over the course of the year while also promoting repatriation of foreign assets and generally tightening liquidity in the domestic banking system to retain deposits) given a dangerously low import cover that has fallen from 6.2 months to 3.7 months since last summer and threatens to further chill capital flows given omnipresent domestic political uncertainty, highlighted most recently by the High Administrative Court’s declaration that the voting system used to elect a new parliament last winter was unconstitutional—a decision that in turn could derail not only a new constitution, but May’s planned elections and an ultimate transition from military-to-civilian rule by year’s end (not to mention potentially jeopardize roughly $4.2bn aggregate in aid requested from the IMF and World Bank)
To this end Egypt’s funding predicament gives us the most pause given the ramifications on the state’s cost of borrowing (evidenced by recent 3-year debt auction yield widening), even though [considering in part how important its export market is for a number of countries] the country scores comparatively higher per both our Contagion Score and Original Sin metrics and also saw a healthy rise in both remittances and Suez Canal receipts during the latest quarterly report which is reserve positive. In light of said ambiguity we plan to continue to monitor official donor’s medium-and long-term lending figures as a proxy to gauge any secular turnaround in creditor sentiment. We also remain cautious about equity valuations at current levels; despite a near 46 percent rebound in 2012, we fear the state’s crowding out of private sector borrowing and the ramifications on growth leave future cash flows vulnerable.
[i] “The economics of the Arab Spring”, OxCarre Research Paper 79, Department of Economics, Oxford University, December 2011.
With Europe’s woes undoubtedly solved (trifling quibbles aside) and sovereign integrity intact (R.I.P. CDS), Tunisia and Morocco–two frontier markets relatively and acutely tied to the EU’s ultimate fate (to wit, 75% of Tunisian exports are destined for the EU) in particular seem poised to benefit. For even if the realities of moribund or at least muted growth as well as an entrenched downwards trajectory in manufacturing PMI remain in Europe’s cards, the illusion of sovereign stability may now be adequately vivid such that external financing–namely remittances (per Barclays, the EU remains the main source of remittances to most non-oil exporters in MENA, specifically up to 85-90% in Tunisia and Morocco) and net FDI flows (deemed critical to boosting growth and exports)–won’t turn fickle. The situation looks especially precarious in Tunisia, where FDI fell more than 150% q/q following the spring uprising and is projected to fall from 1.4bn in 2010 to 0.3. That said, the country’s “so-far-smooth plan for its transition to full democracy” looks hitherto credible, while GCC flows (chiefly from both Saudi Arabia and Qatar) coupled with multilateral lending by international financial organizations such as the World Bank and the IMF (not to mention support from the Deauville Partnership which involves, in addition to the G8, the UAE, Saudi Arabia, Kuwait, Qatar, and Turkey) should, at least in the near-term, help support macro fundamentals by partially offsetting deepening current account balance deficits (5.2 and 5.6% of GDP in 2011 in Morocco and Tunisia, from 4.2 and 4.7 percent respectively last year) with fiscal balance support and thus provide an implied ceiling to both CDS and z-spread.
Morocco and Tunisia’s CDS history to date continues to reiterate the market’s notion that Maghreb’s geopolitical backdrop and macro fundamentals are more or less indistinguishable even though hitherto (a) one underwent a full fledged revolution and the other’s demonstrations look tame in comparison (for now?) and should lead to certain reforms; (b) sharp declines in both industrial production and tourist arrivals (6% of total domestic output) underscore a likely -0.5 y/y 2011 real GDP contraction (and the associated decreased direct and indirect tax receipts) in Tunisia (versus +4.1% in Morocco, where growth indicators, rather, including credit growth have remained intact throughout the year) as well as a widening of the former’s CA deficit (6.2% forecast from 4.8% in 2010), an uptick in inflation (4.8% forecast versus 4.4% last year and 2.8% projected for Morocco) and a downturn in reserves (whereas thus far sticky FDI flows, at 2.5% of GDP, should allow Morocco to grow theirs to roughly 1/4 of nominal GDP, versus ~15.9% for Tunisia).
That said both countries remain vulnerable to both EU oriented trade and investment ties (54% of exports and 86% of remittances, per Morocco, and a similar relationship for Tunisia though a higher export percentage) as well as to other exogenous shocks; Barclays noted for instance that the external financing needs of the region’s oil importers (i.e. Egypt, Lebanon, Syria, Tunisia, Morocco and Jordan) “will exceed USD165bn for 2011-13, and, over the same period, their fiscal financing needs amount to another USD145bn, without taking into account the implications of their post-transition reform agendas. In a recent report prepared for the G8 meeting, the IMF states much of this financing gap will need to come from external financial support by the international community because it expects private debt and capital markets to remain cautious towards countries in the region, increasing their risk premium and their cost of borrowing.” At least one commentator bemoans the phenomenon, arguing that too much aid perversely “will hobble the Arab spring”, while debt sustainability measures (i.e. public debt to GDP ratios) aren’t trending down like they are in, say, Lebanon. Yet as economist John Sfakianakis duly noted last week in reference to the GCC’s recent outreach “the economic benefits of accession favour the two prospective entrants” such that it may be fair to say that at least one main driver of inflation in Morocco could be tempered going forward (and not a moment’s too soon per global wheat prices). With all of this in mind interestingly Moroccan z-spreads on euro denominated, 2020 paper have widened versus Tunisia comparable credit since late January and have failed to correct despite CDS convergence over that same period; in highlighting the discrepancy and in accordance with the above analysts note Morocco’s “comparatively stable political situation and solid economic performance and external position contrasts with the growing uncertainties in Tunisia.”
Is the CDS spread between Tunisia and Morocco justified? Against the backdrop of debt downgrades from both S&P and Fitch, the cost of insuring five-year Tunisian sovereign paper against default rose to 190 bps earlier this week, some 30 bp clear of Morocco with whom it largely trades in step. While the country’s political situation admittedly looks precarious–analysts note that although the constitution decrees that a temporary president must work towards presidential elections within a period not exceeding 60 days, opposition leaders view said timeframe as inadequate and prefer a transitional government that would draft a new constitution in anticipation of democratic elections–Barclays notes, for instance, that although “a prolonged transition could negatively affect economic growth” given a weakening of the country’s current account (FDI down) and fiscal deficits (outlays to repair infrastructure, appease social and inflation-related tensions), the latter compares quite favorably to those of other MENA countries and to that of Morocco in particular (2.6 versus 4.5% of GDP in 2010), while public debt–at 47% of GDP–remains “one of the lowest levels in the region” and roughly in line with Morocco. Additionally, food inflation is much more rampant in Morocco than in Tunisia, having accelerated 6.7pp in the past three months; moreover, this trend will likely persist and should put further pressure on subsidy costs going forward, which increased more than 140% in the first nine months of 2010, per analysts.
A recently published IMF working paper (“Spillovers from Europe into Morocco and Tunisia”) examines “the effect of growth shocks in European countries on economic activity in Morocco and Tunisia” and concludes that while the recent credit crisis did not cause a recession in these two countries (the authors point to their “relatively insulated financial systems, exceptional agricultural production and strong domestic demand”), going forward both nevertheless “rely on Europe for a large share of their external receipts (exports, tourism receipts, workers’ remittances and FDI), and growth is likely to be significantly influenced by events in their main European partners.” Against the backdrop of a decline in real output across Europe of 4 percent in 2009, per headlines of late said events have revolved almost exclusively around various austerity measures.
Besides documenting the strong correlation over the previous decade between growth rates in Morocco and Tunisia and those of their key European partners, the paper shows specifically that:
“Transmission channels appear to be different between the two countries. In the case of Tunisia, growth shocks are mainly transmitted through exports and, to a much lesser extent, tourism. Exports, tourism receipts and remittances play equally important roles in Morocco. These results are confirmed by the evolution of export, tourism, and remittances in the wake of the recent slowdown in Europe. A similar exercise at the sectoral level indicates that the sectors related to services are the most responsive to EU’s GDP in Morocco, while in Tunisia the most responsive sectors are more export-oriented.”
The piece concludes that given that European imports–which represent the main source of external demand for Morocco and Tunisia—are projected to be “less than half compared to the pre-crisis period in 2010 and 2011,” the key to future robustness will hinge on “increasing competitiveness and [the] further diversification of trade flows.” That said, there is a question in regards to Tunisia at least as to how much domestic demand can grow given that, per one of the piece’s authors Mr. De Bock, “the government seems very committed to further consolidate [spending]” while on the private front non-performing loans remain stubbornly high, indicating that credit expansion may not be the answer. Yet per the IMF Article IV consultation piece with Tunisia from September, “the public debt ratio has fallen significantly over the past decade and is now slightly below the average for comparable emerging markets. In the event that downside risks materialize and cause a deterioration in economic activity and budget revenue, the staff saw scope for a small additional widening of the fiscal deficit of up to ½ percent of GDP in 2010.” Public debt levels in Morocco, on the other hand, look much higher.
Silk Invest pens an engaging piece highlighting the paradigm shift taking place in Morocco, which the investment manager projects “will result in medium term GDP growth of at least 5.5% annually.”
The kingdom has undertaken a number of strategic liberalizations and a revision of its legal framework that investors should now take notice of . . . combined with the modernization of its infrastructure and a new focus on upgrading the educational system.
Central to the country’s vision to become a strategic regional hub in terms of shipping and services is a continuing economic and social “convergence” with the European Union (EU), whereby “the country is benchmarking its ‘openness’ policy on EU regulations and norms.” Negotiations successfully concluded last month between the two parties over agri-food and fisheries, for example, provide evidence of this growing, friendly framework. Moreover, a la its Asian neighbors, Morocco is fervently spreading its influence into resource and demographic-rich sub-Saharan Africa, a sure way to ensure strong future cash flows. “Maroc Telecom and Attijariwafa bank are clear leaders in this trend,” Silk notes. Finally, per Youssef Lahlou, a portfolio manager with Silk Invest’s Casablanca-based office, the country’s real estate sector, “with a shortage of 1.5 million housing units, especially in the low-income and the mid-range segments,” could be prime for a bounce back. “Companies operating in this sector (especially Addoha and Alliance) are set to reap the fruits of the accelerating demand,” Silk writes. One specific facet of this increasing business relates to low cost housing; thanks to economies of scale in production, coupled with government subsidies and tax breaks, developers can make handsome profits. That said, warned Fouad Ammor, a Rabat-based economist, much of the housing may still remain outside of the price range of its would-be inhabitants.
Per an IMF analysis from late last month, Morocco’s economic outlook will improve in 2010, while still “remain[ing] dependent on external developments” such as potential Euro-zone growth–Morocco’s principal trading partner. The country’s GDP, which was rising at about a 5% clip pre-crisis, should grow by roughly 4% next year on the back of internal demand, and specifically in agriculture, the largest component of the domestic workforce. Moreover, exports should be boosted by the phosphate rock mining and processing industry, which accounts for almost one-third of the nation’s exports and whose YOY exports dived by over one-half over the first half of 2009. On that front, earlier this week, Bohdan Danylyshyn, head of the Ukrainian Economy Ministry, suggested a partnership of sorts between the two, stating that his country was “interested in geological exploration, the modernization of equipment for phosphate deposit development, and importing phosphates from Morocco,” while also noting that “Ukrainian companies would like to participate in the reconstruction of various types of industrial facilities on the territory of Morocco.”
Morocco is the third-biggest phosphate producer in the world after China and the U.S., with 28 million tons of output a year. It is the largest phosphate exporter, with a 31.6% market share. And although production is controlled by a state-owned OCP–which earlier this year announced that it expected to increase its phosphate output to 45-55 million tons by 2020 on the back of its planned investment–the industry’s growth for Morocco may in practice translate over to other domestic industries, where demand is driven by domestic wealth measures such as property and construction that are themselves a function of the health of domestic exports. The demand for cement is expected to grow going forward on the back of a young demographic, state-backed social housing projects and a resumption in commercial real estate projects.
According to Silk Invest, much of the reason that “institutional investors started coming back [late last week] into the [Casablanca All Share Index] after a few weeks spent on the sidelines” was due to the announcement recently made by Central Bank governor Abdellatif Jouahri, who reiterated that the country’s banking sector hasd not been affected by the financial crisis given the sector’s limited exposure to foreign markets, and moreover that the banking system’s “resilience” is a “result of an ongoing reforms process.” Moroccan credit growth increased 23% in 2008, and 17% this year to May.
Four banks lead the fray in Morocco: domestic players Attijariwafa Bank and BMCE (Banque Marocaine du Commerce Exterieur) Bank, as well as BMCI and Crédit du Maroc (subsidiaries of France’s BNP Group and Crédit Agricole, respectively). Only the first two, however, are discussed as having continent-wide aspirations; the two are actively opening branches in European capitals, as well developing a regional presence in sub-Saharan Africa, particularly in west Africa.
Banque Attijari de Tunisie, or the Attijari Bank, the Tunisian branch of Morocco’s Attijariwafa Bank (NYSE:ATW)–Morocco’s leading banking and financial services group and the seventh-largest bank in Africa in terms of total assets–surpassed the Banque Internationale Arabe de Tunisie in 2008 to become the country’s second most profitable bank behind Bank of Tunisia. Among other impressive figures, Attijari saw growth in interest margin (+30.6%), the margin on commissions (+11.9%) and income on its securities portfolio (+20.4%). Additionally, the institution’s turnover reached 220.30 million dinars, a 21.7% increase, while gross operating income was up 44.5% to 60 million dinars. Deposits, meanwhile, increased by 24.1% to a rate greater than loans disbursed (1.96 billion dinars, 15.2%). And the total balance sheet of the bank increased by 19.9% to 2.83 billion dinars. Moncef Chaffar, Chairman of the bank’s board, credits “strong commercial aggression” in the form of innovative products as the catalyst behind the firm’s recent rise; its 52wk change is up nearly 45%, making it the market’s strongest performing Tunisian bank during that period.
JGW
Frontier Markets 