VZCZCXRO3984
RR RUEHLMC
DE RUEHRB #0712/01 1131639
ZNR UUUUU ZZH
R 231639Z APR 07
FM AMEMBASSY RABAT
TO RUEHC/SECSTATE WASHDC 6390
INFO RUEHAS/AMEMBASSY ALGIERS 4391
RUEHTU/AMEMBASSY TUNIS 9263
RUEHCL/AMCONSUL CASABLANCA 2953
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHLMC/MILLENNIUM CHALLENGE CORPORATION WASHINGTON DC

UNCLAS SECTION 01 OF 02 RABAT 000712 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON MA
SUBJECT: MOROCCO REACHES INVESTMENT GRADE 
 
 
This message is sensitive but unclassified.  Please handle 
accordingly. 
 
¶1.  (SBU) Summary: Fitch Ratings' April 19 decision to raise 
Morocco to investment grade has been welcomed by Moroccan 
government and media as a vote of confidence in the country's 
ongoing economic reforms.  Fitch noted Moroccan progress 
across the range of "economic, political and social areas," 
pointing in particular to the country's current account 
surplus, progress in reducing its budget deficit, and 
structural transition to a more balanced economy.  Risks 
remain-- Fitch highlighted an overall Moroccan debt burden 
that is above the median for its peer group, continued 
vulnerability to both climactic and oil price shocks, and 
persistent poverty.  Nonetheless, the ratings agency predicts 
not only that external debt and liquidity ratios to improve 
in 2007 and 2008, but that current reform momentum will be 
sustained beyond this year's elections.  A similar vote of 
confidence was registered earlier in April in Washington, 
where World Bank officials praised Morocco's progress, 
following a meeting with Finance Minister Oualalou.  End 
Summary. 
 
¶2. (U) On April 19, Fitch became the first of the three major 
ratings agencies to accord Morocco a rating that is at 
investment grade, albeit at the low end of the scale. 
Morocco was assigned a foreign currency IDR of BBB-, and a 
local currency IDR of BBB, both with stable outlooks.  The 
country also gained a short-term foreign currency rating of 
F3 and a country ceiling of BBB.  (Standard and Poor's and 
Moody's have also recently upgraded Morocco, but their 
ratings remain just short of investment grade.) 
 
 
¶3. (U) Especially important for Morocco was the agency's 
endorsement of Morocco's recent reform trajectory.  Fitch 
noted progress across the political, economic, and social 
spectra, arguing that this had "translated into continuing 
improvements in living standards and the external position, 
notwithstanding persistent fiscal deficits."  Noting that the 
Moroccan current account has been in surplus since 2001 
(largely due to growing tourism revenue and transfers from 
Moroccans resident abroad-- so-called MREs) and that Morocco 
made progress in 2006 in reducing its budget deficit (to 1.7 
percent of GDP), Fitch predicted that receipts from tourism, 
light manufactured products, and FDI will continue to grow at 
a fast pace, allowing continued improvement in Morocco's 
external position in coming years.  Significantly, it 
predicted that this reform momentum will be sustained through 
the coming electoral cycle. 
 
¶4. (U) While conceding that with 40 percent of its population 
engaged in agriculture and without significant energy 
resources, Morocco is vulnerable to both climactic and oil 
price shocks, Fitch argued that Morocco has entered a 
"transition phase."  Significant investments aimed at 
enhancing its comparative advantages in tourism, 
"offshoring," and similar sectors, it argued, will limit 
these vulnerabilities.  Fitch did concede that beyond a high 
debt burden, Morocco does continue to have difficulty in 
translating its economic reforms into reduced poverty and 
unemployment.  Nonetheless it saluted its effort to de-couple 
the state from the economy, to reduce administrative barriers 
to entrepreneurship, and to restructure the banking system 
and modernize its financial markets.  It identified a key 
Moroccan advantage as stemming directly from MRE transfers, 
which boost domestic bank deposits and allow a "deep domestic 
debt market" with an average maturity of almost seven years. 
 
¶5. (U) Fitch noted progress in public sector reform that 
enabled the budget deficit to be brought below 2 percent of 
GDP in 2006, despite a narrow tax base and continued 
subsidies for energy and other primary goods.  It predicted 
the deficit will rise slightly this year, before falling in 
coming years.  Despite a debt to GDP ratio above the median 
for its peers (the reason Moody's did not raise Morocco to 
investment grade), Fitch noted that "the external situation 
is far stronger," resulting in the Morocco's "unusual" 
position as a "BBB" country that is both a public and overall 
net external creditor. 
 
¶6. (U) Fitch's endorsement of Morocco followed by a week 
similar compliments from the World Bank.  In a meeting on the 
margins of the annual World Bank/IMF meetings, Finance 
Minister Oualalou reviewed Morocco's recent progress with 
bank leaders.  They saluted Morocco's work to advance "good 
 
RABAT 00000712  002 OF 002 
 
 
governance" and stressed the bank's readiness to assist 
Morocco's efforts in that area. 
 
¶7. (SBU) Comment: Fitch's analysis tracks largely with our 
own assessment of Morocco's progress, though we would place 
greater emphasis on the work that remains to be done in 
reducing administrative barriers to business and in spurring 
judicial and legal reform.  A recent Finance Ministry study 
(subject of septel) also calls into question how much of a 
contribution exports will make to Morocco's economic growth 
in future, arguing that since 1995 their competitivity has 
continued to slip, notwithstanding numerous sectoral 
initiatives to assist them.  Finance Ministry contacts have 
expressed pleasure with the upgrade, while arguing that it 
should have occurred much sooner, given the positive tone of 
rating agency reports on Morocco.  End Comment. 
****************************************** 
Visit Embassy Rabat's Classified Website; 
http://www.state.sgov.gov/p/nea/rabat 
****************************************** 
 
RILEY