A SUPPLEMENT TO EUROMONEY/JUNE 1996
Challenging times
For the past decade Morocco has followed imf programmes carefully. Now the country is bracing itself for a sterner test presented by its association agreement with the European Union.
The benefits for Morocco of the agreement signed last autumn are not immediately obvious. It provides only small increases in quotas for a limited number of agricultural products. It changes little for manufacturing products, the vast majority of which already have free access to the European market.
“It’s more of a strategic thing, an anchor allowing us to adapt ourselves to international standards,” says Brahim Benjelloun Touimi, a director of Banque Marocaine du Commerce Exterior (bmce). “Europe is already Morocco’s number one trading partner [two-thirds of Morocco’s trade is with the eu], but the agreement will import stability into our economy.” A foreign banker adds: “What is important is that the link-up will necessitate further improvements in the quality of production and handling. At present the low cost of labour is too often offset by inefficiency.”
The agreement represents a big challenge to Moroccan industry which will soon have to compete with an influx of European products. The first tariff barriers to come down will be on equipment and raw materials. From the year 2000, tariffs on manufactured goods will fall by 10% per year for 10 years. If the Tunisian experience is anything to go by, 30% of businesses will have to restructure and 30% will fail. “Moroccan firms have to restructure,” says Amyn Alami, chairman of the Casablanca stock exchange. “Those that don’t will disappear.”
In recognition of this, the eu is expected to provide Morocco with funding of around Ecu1 billion ($1.2 billion) per year for the next five years. Half of this is likely to go towards upgrading private sector enterprises.
In the textiles and software sectors Moroccan firms are already competitive. Moroccan software engineers are among the best in the world, but earn little more than half their counterparts in Paris. “All of the software for atm machines that doesn’t come from the us comes from Morocco,” says Nadia Salah, editor of L’Economiste, a weekly business newspaper in Casablanca.
But in other sectors foreign investment is badly needed to promote competition. Parliament has been studying various ways to attract foreign investors. These include anti-monopoly legislation and guarantees for foreign investors. A new charter for investment came into effect in January. It includes wide-ranging fiscal incentives and administrative reforms to reduce the bureaucratic hassle for investors.
Although foreign investment reached almost $800 million in 1994, it fell back last year to $450 million due to poor macroeconomic indicators and increased competition from Eastern Europe and South East Asia. But this year inflows have already reached $300 million. Hassan Bernoussi, head of foreign investment at the ministry of finance, expects to receive three times the 1995 figure by the end of the year.
Several large privatizations will help Morocco achieve this target: total receipts now stand at just over dh8.9 billion ($1 billion) and Morocco’s privatization bonds, convertible into shares in privatization issues, have been hugely successful. The government is expected to issue a $200 million international privatization bond tranche within the next six months.
Foreign investment by us energy company cms, in a plant near El Jadida and a $120 million debt-for-equity swap agreed with the French government will also help. The South Korean conglomerate Daewoo was recently considering joint ventures that could result in investment of around $300 million.
Bernoussi is upbeat about the impact of the agreement with the eu on foreign investment. “Industrial companies in the us and Asia don’t have free access to the European market: companies in Morocco will.”
One sign of confidence in Morocco’s future is that Dutch bank abn Amro recently invested dh200 million ($22 million) to regain control of its Moroccan subsidiary and is about to construct a building in Casablanca at a cost of dh95 million. “We’re not talking about a trying-out period,” says the newly-installed managing director. “The eu association agreement is a clear signal that Morocco is intent on teaming up with the western world.”
To make the country more palatable to foreign investors and the eu, Morocco’s interior ministry began a campaign of assainissement – or clean hands – in January to tackle smuggling and root out corruption. It has already claimed several high-ranking officials, including an mp accused of importing beer past its sell-by date and the former head of customs, sentenced to two years in April for corruption. Some observers suggest that officials have been a little too heavy-handed in showing they mean business. Critics say the policy has stifled entrepreneurial activity. There has been little investment since January, according to central bank figures. “[The interior minister] Driss Basri is good at combatting terrorism,” says one local journalist. “But he’s not so good when it comes to economic crime.”
Despite the success of the structural adjustment programme, Morocco still has significant macroeconomic problems. These were brought into sharp focus by last year’s drought: gdp fell by 4.7%, making it the third year of recession since 1992. A World Bank report requested by King Hassan ii gave further cause for concern, generating local newspaper headlines for months after its publication in September. Economic growth, the report concluded, has been insufficient to match the increase in job seekers. Morocco’s population of 28 million has almost doubled since 1970, graduate unemployment is running as high as 30% and, even though 20% of government spending goes on education, over 50% of the population remains illiterate. The report also urged the government to streamline its decision-making process.
At the beginning of this year the King set up a think-tank to address issues raised by the World Bank report – notably the issue of reducing Morocco’s dependence on agriculture. Things are already looking up. The expected double-digit growth this year following a good harvest is well above the 7% level the World Bank identified as necessary to lower unemployment. Although challenges lie ahead for Morocco, privatization is back on track, foreign investment is rising and Morocco’s first ever global depositary receipt (for bmce) was issued this spring. The country appears to be moving in the right direction.
Privatization: raising money before sales
Morocco’s privatization programme has entered a new phase thanks to the successful launch of privatization bonds by which the government has raised funds in advance of state sell-offs. The government expects privatization receipts to top dh5 billion over the next 12 months. After six months’ wrangling, the will of the charismatic privatization minister, Abderrahmane Saaidi, prevailed over the finance ministry’s opposition to Morocco’s first privatization bond. Saaidi began by issuing dh1.78 billion-worth of privatization bonds in January.
The three-year bonds, issued in denominations of dh1,000 and guaranteed by the state, give holders the option to convert into shares in forthcoming privatizations on the stock exchange – at which time the yield is calculated at 8% – or to hold the bonds to maturity at a yield of 8.5%.
Bond holders have priority over cash purchasers in subsequent privatization issues and preferential rights to further bond issues. A second issue worth dh1 billion was sold in mid-May.
According to Saaidi, the inspiration for the privatization bonds came from the heavy oversubscription of previous Moroccan privatization issues. The minister has reason to be highly satisfied. Seventy-three per cent of privatization bonds sold in January were converted into shares in the $200 million Samir sale in March, which involved 30% of Morocco’s largest oil refinery at Mohammedia, just north of Casablanca. Bond holders received 100% of the shares they asked for and bought 87% of the Samir offering. There were 60,000 subscribers to the issue – compared with 4,000 investors for the country’s first privatization three years ago.
“The fact that so many of the bonds were converted into shares at the first opportunity indicated that they were not a debt instrument,” says Saaidi. “The finance ministry is satisfied now.”
Morocco has been reluctant to issue privatization bonds internationally until the new instrument has been proven a success. After encouragement from Nomura, Saaidi has said there will be an international tranche worth $200 million within six months, led by Nomura, Morgan Stanley and Paribas.
An African market grows up
Since Amyn Alami became head of the Casablanca Stock Exchange,
he has made plans to turn Africa’s second largest bourse into
a modern, computerised exchange
Morning trading sessions in Casablanca’s venerable but scruffy art deco bourse are quiet and ordered affairs compared with many open outcry stock markets. But times are changing fast following Big Bang style reforms which in 1993 turned the Casablanca Stock Exchange (cse) into a privately-run institution with independent brokers and a securities commission.
Leading the effort to promote cse as centre for capital investments, not just for Morocco, but for the Middle East at large, is cse’s new chairman, 33-year-old Amyn Alami, appointed in August 1995. A former employee of Rothschild in Paris and, since 1992, the founder and chief executive of Morocco’s first investment bank, Casablanca Finance Group (cfg), Alami wants to run the stock exchange along more professional lines and double the number of employees within the next three years. His first priority, he says, is to ensure the cse’s operating rules conform with international standards of quotation, transparency and settlement. “These are the fundamental requirements of foreign investors.”
Open outcry trading will be replaced with a computerized system within 18 months. This will offer market participants three ways of quoting – fixing, block trading and continuous quotation – and allow larger trading volumes to flow through the exchange.
Market capitalization has doubled in the past three years and is expected to rise again this year with proceeds from the privatization programme. Trading volume has risen spectacularly from dh1 billion ($114 million) in 1992 to dh23 billion in 1995. Privatization bonds – the first convertible instruments listed on the exchange – are drawing in retail investors.
Over the next six months, Alami expects to spend an additional dh80 million moving to a new building, hiring new staff and developing the new trading system. The next phase will be to encourage private issuers: since the reforms started, new listings have come only from companies in the privatization programme. “Our objective is to double the number of listed companies [currently 45] within five years,” says Alami. But he only wants companies which comply with the stock exchange’s requirements. Since the new management took over, 10 companies have been delisted for being illiquid or failing to comply with the bi-annual reporting requirements that came into effect two years ago.
The problem is not a lack of investors. Investment has been rising since Morocco’s privatization programme began. Nine open-ended mutual funds were established as part of the 1993 reforms which allow funds to be collected through the banking network.
Investors in the cse over the past decade have been handsomely rewarded. The index has risen by an annual average of 21.5% in dollar terms in the past 8 years. Although last year was slightly disappointing – thanks to profit-taking by foreign investors, say local brokers – this year the market is up 15%. This is largely due to the unexpected 38% rise in earnings of listed companies in 1995 over 1994, which has led foreign investors back to cse. The establishment of Africa funds earlier this year by gt Asset Management and ing Barings has further increased foreign portfolio investment, which now accounts for around 5% of the market. “This,” says Jalal Houti, a director of Upline Securities in Casablanca, “plus the fact that we’re expecting between 9% and 12% gdp growth this year is forcing the market up.”
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