VZCZCXYZ0005
RR RUEHWEB

DE RUEHRB #0254/01 0791626
ZNR UUUUU ZZH
R 191626Z MAR 08
FM AMEMBASSY RABAT
TO RUEHC/SECSTATE WASHDC 8289
INFO RUEHAS/AMEMBASSY ALGIERS 4722
RUEHMD/AMEMBASSY MADRID 5934
RUEHFR/AMEMBASSY PARIS 4962
RUEHTU/AMEMBASSY TUNIS 9559
RUEHCL/AMCONSUL CASABLANCA 3972

UNCLAS RABAT 000254 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN MO
SUBJECT: MOROCCAN MARKETS RESIST INTERNATIONAL CREDIT 
CRISIS, FOR NOW 
 
¶1. (SBU) Summary: To date, Morocco has largely shrugged off 
the impact of the international credit crisis.  The 
Casablanca Stock Exchange remains the best performing 
exchange globally, up 16 percent since January 1.  There has 
been some spillover in Moroccan financial markets,  with an 
evaporation of  liquidity for some financing vehicles and an 
increase in the risk premium on Moroccan debt, but Treasury 
Director Zouhair Chorfi reassured markets this week that at 
only 20 percent of GDP, Morocco's debt is easily manageable. 
Economists argue that as a result of its "limited integation" 
into the world economy, Morocco will remain largely sheltered 
from any global slowdown.  The key risk most identify is the 
possibility that Morocco will experience its own housing 
slowdown and resulting credit crunch.  Standard and Poor's 
warned recently that the country's banking system is 
"becoming increasingly vulnerable to rapid and untested 
credit growth that is fueling asset prices."  End Summary. 
 
¶2. (SBU) What Crisis?: Ongoing turmoil in international 
capital markets has had only a limited effect in Morocco. 
The Moroccan Stock Exchange, a star performer over the last 
half decade, has continued its march forward and leading 
economists continue to predict that the economy will grow by 
above five percent this year.  Tarik El Malki, Director of 
Research at the Centre Marocain de Conjoncture, attributes 
Morocco's resilience to the country's "limited integration" 
into the global economy, which, he points out, is not an 
unalloyed blessing, since it is also testimony to the 
country's "lack of competitiveness." 
 
¶3. (SBU) Euro-centric:   For the credit crunch to 
significantly impact Morocco, Malki and other experts argue, 
it would first have to cause a serious slowdown in growth in 
the European Union.  Moroccan trade remains heavily 
concentrated on "old Europe," with only limited exports going 
to markets like the United States that face diminished 
growth.  Europe is also the source of significant foreign 
investment, the bulk of Morocco's tourists, and of most 
transfers from Moroccans resident abroad.  A slowdown in 
Europe would thus be a body blow to the Moroccan economy, but 
so long as European growth remains steady, analysts believe 
Morocco should be spared. 
 
¶4. (SBU) Trade Impact: The additional vulnerability stemming 
from Morocco's overall dependence on European markets results 
from the dirham's link to the Euro through its market basket 
peg.  Exporters continue to complain about the issue, most 
recently in a meeting in Casablanca last week to discuss the 
first two years of the U.S.-Morocco free trade agreement. 
The appreciating dirham they argue, has seriously damaged 
their competitiveness.  While it does cushion some of the 
increase in dollar-denominated commodity prices, they point 
out that with almost fifty percent of Moroccan imports coming 
from Europe, the benefit is limited. 
 
¶5. (SBU) National Markets: Lack of integration is also a 
factor in the Casablanca exchange's strong performance, even 
as its counterparts elsewhere have fallen.  Foreign investors 
are marginal players, and foreign portfolio investment has 
historically been modest.  It only reached a significant sum 
in 2004 when government Maroc Telecom shares were sold on the 
Casablanca and Paris exchanges.  Current IMF projections 
forsee between 60 and 85 million USD a year in portfolio 
investment through 2010.  Continuing capital account 
restrictions on the ability of Moroccans to invest abroad 
have also held up the market.  While these regulations were 
liberalized in 2007 for some financial insitutions, practical 
modalities to carry out the changes have not yet been 
introduced.  Few Moroccan institutions thus hold assets 
overseas.  Even those that have nominal permission to do so, 
like insurance companies, hold back, since the permission to 
invest must be renewed annually, and companies are reluctant 
to take long-term positions that could be cut off on short 
notice.  As a result, wealthy Moroccans have few investment 
alternatives, and so turn primarily to the exchange and to 
real estate. 
 
¶6. (SBU) Credit Impact: Where there has been an impact is on 
Moroccan credit markets, both domestically for Moroccan 
economic actors, and internationally for Morocco has a whole. 
 Chakib Erquizi, Director for Markets at Morocco's leading 
bank, Attijariwafa, highlighted two such instances in a press 
interview last month: the inability of BMCE Bank to find 
sufficient subscribers to issue a subordinated debt 
instrument to augment its capital, and the fact that the risk 
premium for Morocco has increased three fold.  Whereas the 
Treasury was able to sell 500 million in Eurobonds with a 
 
spread of 50-60 points in the summer of 2007, that rate has 
now reached 150 points.  Treasury Director Zouhair Chorfi 
moved to reassure markets this week, however, stressing that 
at only 20.3 percent of GDP, Morocco's external debt is 
manageable, particularly given that Morocco's external assets 
represent 160 percent of the debt total.  He stressed that he 
intends to maintain the current structure of external debt, 
which has shifted dramatically toward Euro-denominated 
instruments (now 77 percent of the total, up from 37 percent 
in 2000).  Dollar-denominated assets have declined from 47 to 
12 percent over the same period.  (Note: this shift when 
coupled with the Euro's appreciation has increased Morocco's 
debt burden marginally, but the country is largley insulated 
as a result of the dirham peg to a market basket of 
currencies, in which the Euro has a preponderant weight). 
 
¶7. (SBU) Key Risks: If the subprime crisis and the resulting 
credit crunch seem to have spared Morocco, some see in 
Morocco's own  housing boom the seeds of a potential crisis 
that could mimic what has occurred elsewhere.  In its recent 
evaluation of the banking sector, Standard and Poor's argued 
that while the sector has strengthened over the last five 
years, it is "increasingly vulnerable" as a result of the 
rapid expansion of its credit portfolio and the increases in 
asset prices that have resulted.  While S and P was careful 
to note that it did not forsee a major correction in asset 
prices, other observers have pointed to an emerging slowdown 
in Morocco's overheated housing market.  A recent review of 
the sector in Morocco's leading economic weekly, "La Vie 
Eco," suggested that Morocco's middle class, which represents 
50 percent of purchasers, is no longer able to find 
affordable property, as a result of rapid price increases. 
Experts noted that a significant reduction in loan 
applications has occurred in recent weeks, and at least one 
warned that "there is now a real risk of recession in large 
Moroccan cities." 
 
¶8. (SBU) Officials at the Bank al-Maghrib hotly contest 
Standard and Poor's assessment, however.  They contrast it 
with the positive rating the banking system received in the 
most recent Financial Sector Assessment Program report last 
November.  Morocco, banking supervision director Bouazza told 
us last week, was highly praised for the reforms it has 
enacted since 2002, and is seen by IMF and World Bank 
officials as the "benchmark" for the region. 
 
¶9. (SBU) Comment: Morocco has escaped lightly from 
international market turmoil, but has its own emerging risks 
as a result of rapid expansion of credit and inflationary 
pressures (septel).  For now, it seems likely to hold its 
own, particularly given continued strong inflows of foreign 
direct investment, largely from oil producing states and from 
Europe.  This risk avoidance may not be grounds for 
unmitigated celebration, however: in Malki's view, "it 
highlights the urgency of fundamental reforms to make Morocco 
more competitive globally so that it can improve its 
integration."  Certainly, as Malki's counterintuitive 
argument suggests, Morocco has avoided the current low, but 
it has also missed out on significant earlier growth 
opportunities.  End Comment. 
 
 
***************************************** 
Visit Embassy Rabat's Classified Website; 
http://www.state.sgov.gov/p/nea/rabat 
***************************************** 
 
Riley