Fitch: Morocco's Revised Budget Reflects Severe Hit From Pandemic

Morocco’s (BBB-/Negative) recent supplementary budget for 2020 foresees the largest fiscal deficit and GDP contraction in decades, Fitch Ratings says. This is broadly in line with our expectation of a severe hit to the country’s economy and public finances from the coronavirus pandemic-related shock, which is reflected in the Negative Outlook on its sovereign ratings.

The revised budged foresees a deterioration of the 2020 central government (CG) deficit to 7.5% of GDP, its largest level in at least three decades, and nearly double both the initial budget target of 3.8% (excluding privatisation receipts) and the 3.9% deficit recorded in 2019. The significant downward revision to the forecast budget balance reflects a combination of a 18.6% (around 4% of GDP) fall in tax revenues compared with initial projections, a moderate 5% (2% of GDP) increase in CG spending as well as a 5% contraction in GDP. This forecast takes into consideration large external and domestic grants covering two-thirds of the government’s MAD33 billion (3% of GDP) special pandemic fund and limiting the budget cost of combating the pandemic.

We view the government’s revised fiscal projections and underlying economic assumptions as broadly realistic and expect the authorities to strive to prevent further deterioration of the fiscal balance, in line with their long-standing adherence to prudent policies. However, the recent emergence of new infection clusters in industrial zones in Morocco highlights the uncertainty surrounding the duration and magnitude of the pandemic and associated disruptions to economic activity. Three-quarters of the special pandemic fund’s balance has already been spent or pledged, pointing to the risk of further pressure on public finances should the pandemic cause further disruptions. The authorities estimate that each day of lockdown reduced GDP by around 0.1% and tax revenues by around 0.05% of GDP. Morocco has significantly eased domestic containment measures since 25 June.

The revised budget contains no major tax measures but aims to provide economic relief while limiting the rise in spending. The authorities estimate that around 1.5% of GDP in spending will be geared towards supporting the economic recovery and have enhanced the mechanism for state guarantees on bank loans to SMEs, under which 1.7% of GDP in loans has been extended so far. The revised budget also increases the government’s investment spending by 22% (2.5% of GDP). Higher spending on health and other goods and services is offset through savings on payroll and other recurrent expenditure as well as through lower spending on butane gas subsidies as international prices are now projected to be 17% below the initial budget assumptions.

The government has also allocated MAD16 billion (1.5% of GDP) to support state-owned enterprises (SOEs). Around MAD6 billion has been earmarked to shoring up the national airline, Royal Air Maroc (RAM), including MAD2.5 billion in loan guarantees. Support to RAM will be conditional on the implementation of a comprehensive restructuring plan, including a 30% reduction in capacity and headcount, according to media reports. Total SOE debt is comparatively high, at around 25% of GDP, of which around 14% of GDP is guaranteed by the sovereign, raising contingent liability risks in a volatile economic environment.

We estimate the CG’s gross borrowing requirements at MAD146 billion (13.4% of GDP) and expect the government’s funding plan to be equally split between domestic and external sources. Increased borrowing will lead CG debt to rise to 72% of GDP in 2020 from 65% in 2019. General government debt will be lower, at 58% of GDP, reflecting sovereign debt holdings by public funds, but still higher than the forecast ‘BBB’ category median of 52%.

We revised the Outlook on Morocco’s ratings to Negative from Stable in April, reflecting increased downside risks to the sovereign’s credit profile from the severe impact of pandemic on the economy and public and external finances.

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