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After recent downgrade, Fitch Ratings measures the effect of the pandemic on Morocco

After downgrading Morocco’s sovereign rating, Fitch measures in a new report the impact of the pandemic on the country’s key credit metrics. According to the agency, the Kingdom is witnessing a sharp GDP fall and weaker external finances.

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In October, Fitch Ratings downgraded Morocco’s Long-Term Foreign-Currency (LTFC) Issuer Default Rating (IDR) to ‘BB+’ from ‘BBB-’. The decision made the Kingdom the latest sovereign to lose investment-grade status.

However, unlike the ratings of several sovereigns that lost their investment grade status and continued to deteriorate, Morocco is expected to «avoid» it. According to a Fitch Ratings’ report released on Thursday, this «is reflected in the Stable Outlook on Morocco’s sovereign rating, which reflects low external and fiscal funding risks and the government's commitment to prudent policies balanced against persistent downside risks to key credit metrics from the pandemic shock».

The agency explains that the downgrade shows the severe impact left by the coronavirus pandemic on Morocco’s economy and public and external finances. It also expects the country to have a deep recession in 2020, followed by a mild recovery in 2021.

The pandemic shock in Morocco, according to Fitch Ratings

Fitch expects «large swathes of the economy to recover tentatively in 3Q20, but the outlook is clouded by an exceptional level of uncertainty surrounding the course of the health crisis and risks remain».

It further explains that the demand and supply shocks from the health crisis and confinement will lead to «significant deterioration in Morocco’s external finances, which were already weaker than ‘BBB’ rated peers».

«A slump in exports will prompt a doubling in the current account deficit (CAD) from already wide levels, although a contraction in import-intensive demand components and the oil price crash will provide some mitigating support».

The net external debt is expected to rise to ‘BB’ category median from a stronger initial position due to external borrowing, especially that done by the public sector, Fitch Ratings warned.

In other words, Fitch believes that the pandemic will cause a significant widening in the central government (CG) deficit to 7.9% of GDP in 2020 from 3.9% in 2019.

«The GG deficit, which also includes social security, local governments (LGs) and extra-budgetary units, will widen to of GDP in 2020 from 2.8% in 2019 under our estimates compared to forecast 2020 ‘BBB’ and ‘BB’ medians of 7.1% and 7.8%», respectively, it added.

However, the agency expects external liquidity risks to remain low, because of the support of official creditors, good level of international reserves and the absence of a significant exchange-rate.

Tourism and social issues

As for the tourism industry, Fitch Ratings indicates that it is yet to start recovering from the pandemic shock. «We project tourism to start recovering only in 2H21, but the outlook for the sector is clouded by the high level of uncertainty regarding the course of the pandemic», it added.

In addition to financial problems caused by the pandemic, the latter is expected to aggravate social issues in the country. According to the same report, these issues will mainly be triggered by a rise in unemployment.

«More than an additional 1 million citizens will be in a situation of poverty or vulnerability to poverty as a result of the pandemic, leading to a rise in the share of the population in a situation of precarity to 19.9% in 2020 from 17.1% in 2019», the report concluded.

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