Legacy of past debts lingers on

14 June 1996

MOROCCO needs vast amounts of money to support its economic reform programme and is looking to its friends and allies for support. France has been forthcoming and there are plans for the Caisse Francaise de Developpement (CFD) to take the lead in underwriting FF 1,500 million of government bonds. Paris has understood that Morocco needs more financial assistance than is currently available if it is to meet its financial targets and is rallying around.

The bond issue, to be arranged by Banque Paribas, goes to the heart of the matter that will not go away: Morocco's debts. By the end of 1994, total external debt stood at $22,512 million, according to the World Bank. It may now be higher still at about $25,000 million, imposing a major new burden on national finances. According to the World Bank, debt service rose to $2,737 million in 1994, with the debt service ratio up to 32.1 per cent. The one reassuring factor is that conditions do not yet resemble the debt crisis that brought Morocco to its knees in the mid-1980s.

The reforms which followed that debacle have produced a fully convertible currency and stable exchange rates. Confidence in the economy has grown accordingly. This was apparent in the response to the largest ever equity issue from North Africa: a global depository receipt (GDR) launched in April by Banque Marocaine du Commerce Exterieur (BMCE), which raised $52 million and was four times over-subscribed.

Morocco is now regarded as an emerging market by the investment community, but it remains vulnerable to influences beyond its direct control. In this agrarian society, bankers in Casablanca pay as much attention to the cloud patterns as the farmers in the field, so potent is the role of rainfall in determining the performance of the economy each year.

Today, Morocco finds itself in an uncomfortable situation. The strengthening of hard currency reserves and other positive indicators means that it is not eligible for more multilateral debt relief. The provision of guarantees and conventional lending by governments or multilateral institutions is the most that Rabat can expect to receive as it tries to cope with its debt stock.

A key issue in King Hassan's recent visit to France was a long-term debt relief package. CFD's underwriting of an international bond will provide instant balance of payments support. The government has been considering a Eurobond issue of about $200 million for two years. This has been persistently delayed.

State sector debts remain a major problem, and many local companies now avoid working for all but a handful of public enterprises. Overdue payments from public sector companies now exceed MD 10,000 million, forcing their creditors to turn to the banks for loans to finance their business while they wait to get paid. This is one reason why local banks' profits rose substantially in 1995, while the economy otherwise stagnated.

The need to reduce public debt is behind the decision to open Morocco to buildoperate-transfer (BOT) type projects, which are now attracting the attention of international banks, bilateral and multilateral agencies. The prospect of providing project finance is one factor which has persuaded Paribas to open a Casablanca office.

At least eight international banks are bidding to arrange financing for the first major BOT project: the Jorf Lasfar power plant (see page 8). The Jorf Lasfar financing may also involve export credits, from agencies including Italy's SACE and the Export-Import Bank of the US (Eximbank).

The US' Overseas Private Investment Corporation has already agreed to provide $200 million of political risk insurance.

The World Bank is another source of funding and guarantees for the new generation of independently financed projects. It is estimated that the World Bank could provide guarantees worth up to $300 million for Moroccan projects during the next two years. These include a partial risk guarantee of up to $50 million to back commercial bank funding for a 240-kilometre build-ownoperate-transfer (BOOT) gas pipeline, to take natural gas from the Europe-Maghreb pipeline.

World Bank Multilateral institutions are playing a role across a range of sectors. Joint lead manager for the GDR issue along with Nomura International was the World Bank's International Finance Corporation.

In a long audience with King Hassan in March, World Bank president James Wolfensohn reaffirmed support for the local private sector. Much was made in the local media of Hassan's request that the bank remained a leading adviser to the kingdom.

'While the king supports policies advocated by the bank, the bank will remain of central importance in the reform process,' a US-based analyst says. 'This was already signalled when the palace reportedly ordered the leak of World Bank reports showing how much more effort had to be put into the reform process.' Pointing to further areas of reform, Wolfensohn insisted on the need for reform of land tenure and the creation of a body of law to support business. He also called for more action to encourage investment, noting that capital inflows were only about $500 million in 1995 and would probably be lower in 1996. This means that your efforts to attract linvestment are insufficient,' Wolfensohn told the local media.

Initiatives like the Tangier offshore financial zone have so far disappointed, but local banks are positioning themselves to take on more investment in the fast-changing Casablanca market. Two local banks owned with major foreign shareholders.

Citibank and Banco Exterior de Espana (BEX), stayed out of an agreement to fix rates signed by members of the Groupement Professionel des Banques du Maroc (GPBM), which has enabled them to offer more competitive prime lending rates.

ABN Bank, local subsidiary of the Netherlands ABN AMRO, has boosted its profile and wants to expand its branch network across the kingdom.

Local banks could play a far bigger role on the bourse where they represented 38.7 per cent of total capitalisation - MD 21,400 million at the end of March. The bulk of their operations are short-term lending. In a study of the bourse's performance in 1995, local broker Upline Securities observed that the banks are relatively underexposed to local industrial risk and apparently immune to the downturn in the economy. While gross domestic product declined by 6.5 per cent in 1995, companies quoted on the bourse reported 64 per cent higher profits.

The biggest of these banks, Banque Commerciale du Maroc (BCM), reported MD 518 million profits in 1995. Another fast-growing group, Wafabank, reported a MD 200 million profit, 14 per cent up on 1994. This performance raised Wafabank's price earnings ratio to 10.4, the best in the banking sector. Even banks which have faced problems improved their performance in a difficult business climate. The local/ Spanish Uniban, for example, cut its losses in 1995 to MD 27.2 million last year from MD 45 million in the previous year.

However, banks cannot be totally insulated from the economy's wider problems.

Doubtful and bad debts to local banks rose by 4.3 per cent in the first quarter of 1996 to MD 8,400 million, according to GPBM data. This compared with a figure of MD 7,500 million at the end of 1994.

Whether it is exposed to local or foreign creditors, Morocco cannot easily shake off its legacy of debt.

A MEED Subscription...

Subscribe or upgrade your current MEED.com package to support your strategic planning with the MENA region’s best source of business information. Proceed to our online shop below to find out more about the features in each package.

Get Notifications