Morocco: Assessment of the Impact of the Proposed Precautionary and Liquidity Line Arrangement on the Fund’s Finances and Liquidity Position
Author: International Monetary Fund. Middle East and Central Asia Dept.
Publication Date:
05 Aug 2014
eISBN:
9781498348140
Language:
English
Keywords:
ISCR; CR; successor PLL arrangement; IMF Deputy managing director; Morocco; government; public debt debt ratio; fund GRA commitment; peer group; projected debt service to the fund; exposure to Morocco; Debt service; Credit; International reserves
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EXECUTIVE SUMMARYMorocco’s economic track record was challenged in recent years by a series ofexogenous shocks, to which the authorities responded vigorously. Facing a difficultinternational environment, the authorities adopted, with the support of the Fund’sPrecautionary and Liquidity Line (PLL), a policy program aimed at restoring fiscal andexternal buffers while strengthening competitiveness and promoting higher and moreinclusive growth. The program remained broadly on track and the authorities did notdraw on the PLL.The outlook is improving but remains subject to significant downside risks. Growthwill slow in 2014, but it is expected to accelerate over the medium term owing tostructural reforms and improved global conditions. However, this outlook remainssubject to major external risks. A protracted period of slower growth in Europe, a surgein global financial market volatility linked to the exit from unconventional monetarypolicies in large advanced economies, and higher oil prices resulting from geopoliticaltensions could significantly degrade the balance of payments.The authorities are requesting a two-year successor PLL arrangement with a loweraccess (550 percent of quota) than the first arrangement. The current PLL hasprovided useful insurance against external risks while anchoring the authorities’ reformagenda and sending positive signals to markets. Given significant global risks, asuccessor arrangement, which the authorities intend to treat as precautionary, wouldcontinue to support their policies. The lower access reflects the strengthening of theeconomy in the past two years as well as a balance of risks lower than two years ago.Staff considers that Morocco continues to qualify for a PLL arrangement andrecommends the approval of the authorities’ request. The proposed arrangementcarries low risks to the Fund and would have minimal impact on the Fund’s liquiditywere the authorities to draw on the full amount available. The authorities’ policypackage provides reasonable prospects of exit at the end of this arrangement if externalcircumstances warrant.

Abstract

EXECUTIVE SUMMARYMorocco’s economic track record was challenged in recent years by a series ofexogenous shocks, to which the authorities responded vigorously. Facing a difficultinternational environment, the authorities adopted, with the support of the Fund’sPrecautionary and Liquidity Line (PLL), a policy program aimed at restoring fiscal andexternal buffers while strengthening competitiveness and promoting higher and moreinclusive growth. The program remained broadly on track and the authorities did notdraw on the PLL.The outlook is improving but remains subject to significant downside risks. Growthwill slow in 2014, but it is expected to accelerate over the medium term owing tostructural reforms and improved global conditions. However, this outlook remainssubject to major external risks. A protracted period of slower growth in Europe, a surgein global financial market volatility linked to the exit from unconventional monetarypolicies in large advanced economies, and higher oil prices resulting from geopoliticaltensions could significantly degrade the balance of payments.The authorities are requesting a two-year successor PLL arrangement with a loweraccess (550 percent of quota) than the first arrangement. The current PLL hasprovided useful insurance against external risks while anchoring the authorities’ reformagenda and sending positive signals to markets. Given significant global risks, asuccessor arrangement, which the authorities intend to treat as precautionary, wouldcontinue to support their policies. The lower access reflects the strengthening of theeconomy in the past two years as well as a balance of risks lower than two years ago.Staff considers that Morocco continues to qualify for a PLL arrangement andrecommends the approval of the authorities’ request. The proposed arrangementcarries low risks to the Fund and would have minimal impact on the Fund’s liquiditywere the authorities to draw on the full amount available. The authorities’ policypackage provides reasonable prospects of exit at the end of this arrangement if externalcircumstances warrant.

Introduction

1. This note assesses the impact of the proposed Precautionary Liquidity Line (PLL) arrangement for Morocco on the Fund’s finances and liquidity position, in accordance with the policy on exceptional access.1 The authorities wish to cancel the current arrangement upon approval of the proposed PLL. This arrangement would be the second under the PLL for Morocco, and would cover a 24-month period beginning July 28, 2014, with access in an amount up to SDR 3,235 million (550 percent of quota) available in one or more purchases. Of this access, an amount equivalent to SDR 2,491 million (500 percent of quota) would be available in the first year of the arrangement and the balance of SDR 294 million would be made available at the beginning of the second year, subject to the completion of the relevant six-monthly reviews.2 Morocco does not have an actual balance of payments need and intends to treat the arrangement as precautionary.

Past Use of Fund Resources

2. Morocco’s first PLL, which provided access of 700 percent of quota, was approved on August 3, 2012. (See Annex I for prior use of Fund resources). As originally envisaged at the time of approval, Morocco has not drawn on its PLL; it is scheduled to expire on August 2, 2014. Morocco made progress reducing its fiscal and current account deficits, and reserves have kept pace with the growth of risk-weighted liabilities. While the program remained broadly on track, a more challenging than expected external environment and weaknesses in public financial management led to a higher than programmed fiscal deficit in 2012. In the context of fiscal deficit reduction, prices on several subsidized petroleum products were increased and partially indexed to international prices, although the over-all cost of subsidies remained somewhat higher than originally programmed. The authorities continue to work towards a new Organic Budget Law to modernize and fully address revealed weaknesses in public financial management.

Risks and Impact on Fund Finances

3. Morocco’s total external debt has increased recently but remains manageable. Total external debt is estimated to increase over 6 percentage points of GDP since 2010 to almost 32 percent in 2014 (see Table 1, Figure 1 Panel A). Nearly all of this is public or publically guaranteed debt, which amounts to about 29 percent of GDP. The public and private sectors’ short-term debt on a residual maturity basis is small, limiting any roll-over risk. Under the baseline scenario, in which the PLL remains precautionary, public external debt is projected to peak at 30 percent and decline in the second half of the program and fall to 28 percent by 2019, consistent with a substantial improvement in the fiscal deficit by 2016. Relative to other precautionary programs, Morocco has relatively low external debt and a low external debt service burden reflecting the near absence of private external debt (Figure 1, panels A & C). Sustainability analyses show both external and public debt remaining manageable under a range of scenarios, including the adverse scenario, though the combined macro-fiscal shock reflects the highest and possibly destabilizing risk.

Table 1.

Morocco: External Debt Structure, 2008-2012 1/

article image
Source: Moroccan Authorities and IMF staff estimates.

End of year unless otherwise indicated.

Including residual maturity medium- and long-term debt.

Figure 1.
Figure 1.

Debt Ratios for Recent Precautionary Arrangements 1/

Citation: IMF Staff Country Reports 2014, 241; 10.5089/9781498348140.002.A002

Source: IMF Staff calculations.1/ Estimates as reported in each staff report on the request of the arrangement.

4. Morocco’s public debt ratios on the other hand are relatively high compared to other recent precautionary arrangements. Morocco’s total public external debt tops the peer group (Figure 1, panel B). Morocco’s total public sector debt, including domestic debt, has increased substantially and, although sustainable, continues to be among the highest of recent precautionary arrangements, reflecting an area of potential—though limited—risk to the program and Morocco’s capacity to repay the Fund (Figure 1, panel D). This points to the critical importance of the authorities’ fiscal program—which focus on fiscal consolidation (targeting a fiscal deficit of 3 percent of GDP in 2017), a reduction in subsidies and the public wage bill, pension reform, and strengthening the budgetary framework. This perspective is consistent with the Public Debt Sustainability Assessment in the staff report, which suggests that a two year delay in adjusting the primary fiscal balance would raise the public debt peak to near 70 percent of GDP, and combined with a GDP growth shock, the public debt peak would approach 74 percent and would remain above 70 percent through 2019.

5. The structure of Morocco’s medium-term capital flows suggest limited vulnerability to capital account shocks relative to other recent precautionary arrangements. Figure 2 suggests that Morocco’s integration into international capital markets is lower than comparators and that export earnings are not substantially concentrated. As shown in Table 2, short-term external debt is low in nominal terms and in percent of reserves relative to Morocco’s peer group (Figure 2, panel A). Panel B suggests that Morocco has little net inflows of hot money that are susceptible to fast reversals; in fact, non-residents often sell more Moroccan assets than they purchase, creating net negative or nearly zero combined portfolio and other liability flows over five years. Foreign direct investment inflows,3 which tend to be a relatively stable component of the capital account, relative to financing needs from the current account, and export concentration by trading partner place Morocco more or less in the middle of the comparators (Figure 2, panels C and D).

Figure 2.
Figure 2.

Morocco: Medium-Term BOP Ratios 1/

Citation: IMF Staff Country Reports 2014, 241; 10.5089/9781498348140.002.A002

Source: Staff calculations, IFS, WEO, and JEDH.1/ Five year averages ending the first full year immediately prior to the most recent program.
Table 2.

Probability of Drawing: External Flows, Shocks, and Reserve Adequacy

(billions of US dollars)

article image
Source: Staff calculations. International Financial Statistics and Staff Reports requesting respective arrangements.

Weighted as 30, 10, 5 and 5 percent (floating exchange rate systems) or 30, 15, 10, and 10 percent (other exchange rate systems) for short-term debt, other portfolio liabilities, broad money, and exports, respectively.

Twenty-fifth percentile of univariate kernal distribution for declines of exports, FDI, and short- and medium-term debt roll-over rates consistent with historical crises. See Review of the Flexible Credit Line and Precautionary Credit Line (11/1/2011).

Assumes 100% absorption of external financial short-fall by reserves without exchange rate adjustment.

6. Morocco has lower reserve coverage relative to other precautionary arrangements, though the scenarios that analyze external shocks suggest that it has only a moderate risk of needing to draw from the Fund. Table 2 illustrates nominal reserves and reserves as a share of risk weighted liabilities using the Fund’s framework for assessing reserve adequacy.4 The table also illustrates the impact on reserves of a shock to external flows based on the magnitude of historical shocks, using the methodology used to determine access.5

  • Morocco’s international reserves in relation to risk-weighted liabilities (RAM) at 92 percent falls far short of other members with exceptional access, precautionary arrangements.6

  • On the other hand, Morocco’s relatively low external flows suggest that Morocco’s external financing short-fall and proportionate decline in reserves (to 73 percent) in a stressed environment is low relative to other precautionary users (Figure 2, panel B also suggests that Morocco’s external flows are unlikely to be vulnerable to abrupt reversals).

  • For comparison, Macedonia, which drew on its PCL, had a more comfortable level of reserves at the start of its arrangement (103 percent), but its relatively high external flows pointed to a higher ex ante need to draw on Fund credit, as, in the illustrative shock scenario, international reserves fell to 23 percent of RAM.

7. If the full amount available under the proposed PLL arrangement were to be purchased:7

  • Access would be slightly below the median and significantly below the mean exposure of recent exceptional access cases, and far below the access of recent crisis resolution programs (Figure 3). Morocco’s outstanding use of GRA resources would reach SDR 2,941 million in the first year and SDR 3,235 million in the second year (Table 3).

  • Fund credit would represent a modest share of Morocco’s low external debt (Table 3). Assuming full purchases, total external debt is projected to rise to 37 percent of GDP, and public external debt would rise to 34 percent of GDP. At its peak, Morocco’s outstanding use of GRA resources would account for about 12 percent of public external debt and over 22 percent of gross international reserves.

  • External debt service would increase moderately over the medium-term but remain manageable under staff’s medium-term macroeconomic projections (Table 3). Morocco’s projected debt service to the Fund would peak in 2018 at a manageable level of SDR 1,549 million, equivalent to about 1.6 percent of GDP, almost 9 percent of gross international reserves, and under 5 percent of exports.

Figure 3.
Figure 3.

Fund Credit Outstanding around Peak Borrowing 1/

(In percent of quota)

Citation: IMF Staff Country Reports 2014, 241; 10.5089/9781498348140.002.A002

Source: IFS, Finance Department, and IMF staff estimates.1/ Peak borrowing ‘t’ is defined as the highest level of credit outstanding for a member. Repurchases are assumed to be on an obligations basis. For illustrative purposes, assumes Morocco makes full purchases of available commitment.2/ Median credit outstanding at peak is 700 percent of quota; average is 1,022 percent of quota.
Table 3.

Morocco: Capacity to Repay Indicators 1/

article image
Sources: Moroccan authorities, Finance Department, World Economic Outlook, and IMF staff estimates.

Assumes full drawings except where noted.

Assumes full purchase of available amount: SDR 2,941 mn at approval and SDR 294.1 one year later.

Includes GRA basic rate of charge, surcharges and service fees.

A commitment fee is charged on undisbursed balances and is refunded if purchases are made. The charges shown assume no purchases are made.

Includes charges due on GRA credit and payments on principal.

Staff projections for external debt, GDP, gross international reserves, and exports of goods and services, as used in the staff report that requests the proposed PLL.

Interest on and amortization of medium and long-term debt, including debt service on GRA credit.

8. The impact of the proposed PLL arrangement on the Fund’s liquidity and potential credit exposure would be low (Table 4). The Fund’s liquidity measured by the Forward Commitment Capacity (FCC) would decline slightly upon approval of the proposed—and expiration or cancellation of the current—arrangements (see Table 4, footnote 2). If fully drawn, exposure to Morocco would represent a small share of the Fund’s total credit outstanding and about a quarter of the Fund’s reserves. Due to the limited capacity of burden sharing due to the low interest rate environment and borrowing by the Fund, potential charges for Morocco would significantly exceed the Fund’s capacity to absorb charges in arrears.

Table 4.

PLL Arrangement for Morocco—Impact of GRA Finances

(In SDR millions, unless otherwise indicated)

article image
Sources: Finance Department and IMF staff estimates.

The FCC is defined as the Fund’s stock of usable resources less undrawn balances under existing arragements, plus projected repurchases during the coming 12 months, less repayments of borrowing due one year forward, less a prudential balance. The FCC does not include about US$461 billion in bilateral pledges from members to boost IMF resources. These resources will only be counted towards the FCC once: (i) individual bilateral agreements are effective and (ii) the associated resources are available for use by the IMF, in accordance with the borrowing guidelines and the terms of these agreements.

Current FCC minus new access plus access under the expiring program adjusted for the NAB financed portion of the expiring commitment (about SDR 3,088 million or 525 percent of quota) which is not available to finance new commitments under the currrent activation. This amount could be included in possible future NAB activations.

As of June 17, 2014, does not include proposed first purchase.

Burden-sharing capacity is calculated based on the floor for remuneration at 85 percent of the SDR interest rate. Residual burden-sharing capacity is equal to the total burden-sharing capacity minus the portion being utilized to offset deferred charges and takes into account the loss in capacity due to nonpayment of burden sharing adjustments by members in arrears.

Assessment

9. The risks to the Fund’s finances and liquidity position associated with a PLL for Morocco appear to be manageable. Morocco represents a moderate risk of drawing and should the arrangement be fully drawn, credit to Morocco would represent a small share of total GRA credit outstanding and would be exceeded by precautionary balances by a comfortable margin. Furthermore, reforms implemented during the first PLL have increased Morocco’s capacity to absorb shocks even as the external environment has improved over the past two years, consistent with reduced access. Risks from the Fund from exposure to Morocco appear to be limited but two closely linked areas of potential risk will require close monitoring.

  • Policy implementation risk. Policy slippage in the area of fiscal reforms needed to realize long-term stability, particularly with respect to rationalization of subsidies and transfers, would affect capacity to repay. As noted in paragraph 4, Morocco’s public debt is relatively high and at over 62 percent of GDP end-2013 and is over 8 percentage points higher than projected at the expiring program’s inception. The combined macro-fiscal shock in the DSA illustrates the downside risks to Morocco’s capacity to repay should fiscal and growth stimulating reforms fall short of expectations.

  • Exogenous risks. While conditions in Europe have stabilized somewhat relative to two years ago, downside risks remain and the euro area represents about 67 percent of Morocco’s exports. Further, geopolitical risks in the Middle East could trigger commodity price volatility and, with higher petroleum prices particularly, could have significant negative ramifications for Morocco’s current account deficit and fiscal balance, particularly if subsidy reform stalls. The tapering of unconventional monetary policy could have adverse effects on Morocco as a result of financial market volatility, the impact on trading partners’ growth, and the possible reduction in FDI.

10. The limited risks to the Fund are mitigated by several factors. Morocco’s relatively low reserve level is mitigated by low short-term external debt and balance of payments flows where the risk of sudden stop or reversals is limited. The authorities made important progress during the past program to stabilize the economy, particularly gaining fiscal policy space and increasing external buffers and making progress on structural reforms. At the same time, they are committed to furthering these reforms—focused on improving fiscal institutions, further lowering the fiscal deficit and subsidies, and addressing structural constraints to growth—under the proposed arrangement.

Annex I. Morocco’s Relations with the Fund

Prior to the recent PLL, Morocco made extensive use of Fund resources between the late 1970s and early 1990s, including SBA and EFF arrangements. Morocco made use of financing via the First Credit Tranche, Contingent Financing Facility, and the Oil Facility that resulted in credit outstanding of about SDR 232 million by end-1979. In 1980, the first of two EFFs was approved, followed by seven SBA arrangements between 1982 and 1993 (see Table 1). The largest commitment of these arrangements in terms of quota was the first EFF at 540 percent, of which only 30 percent was drawn. Peak nominal credit outstanding occurred in 1985 at about SDR 1,106 million or 380 percent of quota. Morocco has a history of meeting its obligations to the Fund in a timely basis; outstanding credit was fully repaid in 1997.

Annex Table. Morocco: IMF Financial Arrangements, 1980-2012

(In millions of SDRs)

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Source: Finance Department.

As of end-December.

1

See paragraph 5 of Decision No. 14064-(08/18), February 22, 2008, as amended, and The Acting Chair’s Summing Up- Review of Access Policy under the Credit Tranches and the Extended Fund Facility, and Access Policy in Capital Account Crises - Modifications to the Supplemental Reserve Facility and Follow-Up Issues Related to Exceptional Access Policy (3/5/03) http://www.imf.org/external/np/sec/pn/2003/pn0337.htm.

2

After the first six months of the arrangement, any purchases are subject to completion of six-monthly reviews under the PLL arrangement.

3

While Panel C of Figure 2 is designed to facilitate cross-country comparisons and focuses on FDI, relatively stable inflows of remittances at over 6 percent of GDP are an important source of external financing for Morocco.

4

Assessing Reserve Adequacy - Further Considerations (11/14/13) http://www.imf.org/external/np/pp/eng/2013/111313d.pdf.

5

Review of the Flexible Credit Line and Precautionary Credit Line (11/1/2011) http://www.imf.org/external/np/pp/eng/2011/110111.pdf. Also, see Box 2 and Table 9 of the current Staff Report requesting the PLL for Morocco.

6

However, due to the non-convertibility of the Dirham and limited capital controls, a lower ARA metric for reserves of 85% instead of 100% is considered relevant. See Morocco—Request for an Arrangement Under the Precautionary and Liquidity Line, Box 5 (7/28/2012) http://www.imf.org/external/pubs/ft/scr/2012/cr12239.pdf.

7

The figures on debt service used in this report are calculated assuming that 500% of quota is purchased upon approval of the arrangement, with an additional 50% of quota purchased a year later, and that all repurchases are made as scheduled.

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Cover IMF Staff Country Reports
Morocco: Request for an Arrangement Under the Precautionary and Liquidity Line and Cancellation of the Current Arrangement
Author: International Monetary Fund. Middle East and Central Asia Dept.
Volume/Issue:
Volume 2014: Issue 241
Publisher:
International Monetary Fund
ISBN:
9781498348140
ISSN:
1934-7685
Pages:
74
DOI:
https://doi.org/10.5089/9781498348140.002

Debt Ratios for Recent Precautionary Arrangements 1/

Morocco: Medium-Term BOP Ratios 1/

Fund Credit Outstanding around Peak Borrowing 1/

(In percent of quota)