VZCZCXYZ0007
RR RUEHWEB

DE RUEHRB #0284/01 0961451
ZNR UUUUU ZZH
R 061451Z APR 09
FM AMEMBASSY RABAT
TO RUEHC/SECSTATE WASHDC 9917
INFO RUCNMGH/MAGHREB COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC

UNCLAS RABAT 000284 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ETRD EFIN ECON MO
SUBJECT: WIDENING BALANCE OF PAYMENTS DEFICIT SPARKS CONCERN 
 
REF: A. 08 RABAT 893 
     ¶B. 08 RABAT 853 
     ¶C. 08 RABAT 254 
     ¶D. 09 RABAT 190 
     ¶E. 09 RABAT 276 
 
¶1. (U) Summary: Last year's sudden swing into the red of 
Morocco's balance of payments has sparked increasing concern 
that the country's international position remains its key 
vulnerability in confronting the world economic downturn. 
After years of surplus and a narrow deficit (0.1 percent of 
GDP) in 2007, the current account deficit grew to 4.8 percent 
of GDP in 2008, as declining remittances, investment flows, 
and tourism revenues could not counterbalance the country's 
structural commercial deficit.  Analysts are divided on what 
the future holds, with some holding out hope that declining 
commodity prices will improve the situation, but Morocco's 
weakening international position has led to intensification 
of efforts to remedy the woes that beset the country's export 
sector (Ref B).  End Summary. 
 
-------------------------- 
CURRENT ACCOUNT IN THE RED 
-------------------------- 
 
¶2. (U) In their recent public comments, Moroccan public 
officials have underlined the strong position from which 
Morocco confronts the international financial crisis.  They 
concede, however, that the one chink in its armor is its 
burgeoning balance of payments deficit, which reached 4.8 
percent in 2008.  The country has enjoyed a surplus or near 
balance since 2001, but in fact the positive figures 
concealed increasing weakness in the country's trade balance, 
as imports repeatedly outstripped exports and ultimately left 
the country with an export/import coverage ratio of less than 
50 percent.  "It was easy to overlook the problem," National 
Export Council Noureddine Omary told us in a recent meeting, 
"when tourism income, remittances, and investment took up the 
slack."  Now, however, those elements are also under pressure 
as a result of the international conjuncture, and Morocco 
faces the prospect of balance of payments deficits into the 
future, unless its export offer can be made more competitive. 
 
 
¶3. (SBU) The recent release by the Moroccan Treasury of 
balance of payments statistics for 2008 highlights the 
increasing imbalance in Morocco's economic interaction with 
the world, an issue that has prompted much discussion and 
soul searching regarding the country's efforts to liberalize 
its trading relations with the EU, U.S., and others (Ref E 
reports on a recent analysis of the impact of the free trade 
push, commissioned by Morocco's influential General 
Confederation of Moroccan Enterprises (CGEM)).  While 
Moroccan exports and imports grew by a similar percentage in 
2008 (24.3 percent and 23.9 percent respectively), imports 
did so from a much larger base, rising by USD 8 billion, more 
than double the USD 3.9 billion increase in exports.  More 
worrisome for Morocco, virtually the entire increase in 
exports came from phosphates and phosphate derivatives. 
Other exports were essentially flat, increasing only 1.2 
percent. 
 
----------------------------------------- 
OTHER SECTORS NO LONGER TAKE UP THE SLACK 
----------------------------------------- 
 
¶4. (SBU) Morocco has long had a structural trade deficit, so 
the shortfall is not surprising.  What sparks concern now is 
not just that imports continue to outpace exports by a 
significant margin, but that the flows that have historically 
counterbalanced it are all under threat from the 
international economic downturn.  In recent years, the trade 
deficit has been covered by remittances and services 
(primarily tourism) income.  Both have waned as the crisis 
has hit home in Europe, the source of 90 percent of Morocco's 
tourists and the home of 90 percent of its expatriates. 
Tourism receipts fell 3.5 percent to USD 7.3 billion in 2008, 
while remittances from Moroccans abroad fell 2.4 percent to 
USD 6.9 billion.  The overall balance of payments deficit 
thus increased to 4.8 percent of GDP.  Foreign investment 
also tumbled by 23.3 percent to USD 4.1 billion, still above 
the average for the last five years, but not sufficient to 
permit Morocco to maintain its foreign reserves, which 
slipped by USD 826 million to USD 23.4 billion, the 
equivalent of only 6.2 months of imports.  In his public 
presentation of Morocco's economic situation in mid-March, as 
in a meeting with us earlier this month, Treasury Director 
Chorfi noted that while overall he alternates between "quiet 
confidence" and "preoccupation" about Morocco's situation, it 
is Morocco's international position that he believes 
constitutes the country's principal vulnerability. 
 
¶5. (SBU) A number of our contacts are quick to nuance this 
concern, however.  As a contact in the financial community 
reminded us last fall, unlike those countries in Eastern 
Europe and elsewhere that were reliant on international 
financing, Morocco has largely financed itself.  Foreign 
direct investment expanded dramatically in recent years, but 
in a sense was the icing on the cake, and was not critical to 
financing either the central government or the country's 
balance of payments.  Others argue too that the way in which 
terms of trade are evolving as a result of the crisis will 
work in Morocco's favor.  Karim El Aynaoui, the Bank 
Al-Maghrib's Director of Studies, downplayed concern about 
the balance of payments at a conference last month, pointing 
out that more than a third of the increase in imports in 2008 
stemmed from soaring global energy and food prices.  He 
conceded that both imports and exports will decline as a 
result of the crisis, but argued that the "base effect" will 
work in Morocco's favor, precisely because imports are so 
large.  If both exports and imports decline 10 percent as a 
result of the crisis, as he anticipates, the country's trade 
deficit will decline by a similar percentage. 
 
----------------- 
EXPORT WEAKNESSES 
----------------- 
 
¶6. (SBU) Skeptics, however, point to the fact that Moroccan 
exports may be even more vulnerable than imports to the 
changing terms of trade.  They note that phosphate exports 
grew in value last year by 130 percent or USD 3.7 billion, on 
the base of a declining absolute volume.  Given that 
phosphate prices have fallen sharply this year, they warn 
that the decline in exports may actually outstrip that of 
imports, and not improve the trade balance.  Others note too 
that the headline export figure for Morocco is misleading, in 
that much of the total consists of goods that were imported 
for final processing.  The portion of Moroccan exports that 
actually reflects value added in Morocco, Nezha Lahrichi, 
head of the Moroccan Export Insurance Company (SMAEX) 
recently suggested, is only 30 percent of the official USD 
19.9 billion figure. 
 
¶7. (SBU) Recently released statistics from the Office of 
Exchanges for the first two months of 2009 are mixed, but 
hint that the more pessimistic vision may ultimately be 
closer to the mark.  The export decline outpaced the decline 
in imports (31.8 to 15.6 percent).  The base effect left the 
trade deficit virtually unchanged from last year, but the 
import/export coverage ratio slipped dramatically from 49.7 
to 40.2 percent.  For the two months, tourist receipts and 
remittances continued their slide, declining 14.2 and 16.1 
percent respectively.  Investment income was off 48.3 percent 
in January, but made up that shortfall in February, totaling 
USD 840 million for the two months, up 16.1 percent over 
¶2008.  (Note: Notwithstanding this positive news, a number of 
high profile projects are under threat, and the GOM base case 
scenario assumes a significant drop in investment for the 
year.  End note.) 
 
¶8. (SBU) The mixed picture has focused attention in the 
Government of Morocco not just on the conjunctural effects of 
the current international slowdown, but on the overall 
failure of the government's export strategy.  Morocco's new 
"Maroc Export" strategy addresses the trade promotion side of 
the equation, but as observers from Noureddine Omary of the 
CNCE to Roving Ambassador and former Trade Minister Hassan 
Abouyoub point out, the larger problem is Morocco's failure 
to accompany the free trade push with strategies to develop 
either promising export-oriented sectors or "national 
champions" that could lead the outward push.  Abouyoub argues 
that free trade agreements "cannot provide miraculous 
remedies to underlying dysfunctionalities in the economy," 
and that the benefit Morocco gained from its earlier 
structural reforms before 1995 is now largely eroded.  As a 
result, the economy is largely dependent on internal demand 
and investment, with the external sector dragging down GDP 
rather than contributing to it. 
 
¶9. (SBU) Comment: If the diagnosis is clear, appropriate 
remedies remain elusive.  Refs B and D reported on the 
Moroccan government's initial steps to address shortcomings 
in its export promotion efforts, but experts concede that 
while this is a part of the solution, it is far from the most 
important one.  Marrying promotion to appropriate sectoral 
reforms and incentives is even more critical.  The Government 
of Morocco is only now tackling this challenge with the 
second phase of the Emergence Program, an initiative for 
industrial development aimed at supporting and increasing the 
global competitiveness of key export sectors, including 
automobile and aeronautics, offshoring, and textiles.  End 
Comment. 
 
 
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Jackson