Microfinance in Latin America and the Caribbean: Trends 2008-2013
Analysis of Morocco And South Africa
1. Morocco And South Africa: Poles
Apart Or Comparable Peers?
Primary Credit Analyst:
Patrick W Raleigh, London (44) 20-7176-7194; patrick.raleigh@standardandpoors.com
Secondary Contact:
Ravi Bhatia, London (44) 20-7176-7113; ravi.bhatia@standardandpoors.com
Table Of Contents
The economy: South Africa has twice the income level of Morocco but half
the growth rate
External flexibility: Both run current account deficits, but Morocco's is
narrowing
Monetary flexibility: South Africa has significantly greater strength
Fiscal assessment: Both countries are likely to run deficits for the next four
years
Institutional assessment: South Africa ranks higher in all World Bank
governance indicators but has higher inequality
Conclusion
Related Criteria and Research
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2. Morocco And South Africa: Poles Apart Or
Comparable Peers?
Located at opposite ends of Africa, Morocco and South Africa have several features in common that are relevant to
their sovereign credit ratings, as well as much that distinguishes them. To provide market participants with deeper
insights into how these two sovereigns compare, Standard & Poor's Ratings Services has analyzed them in the light of
each of our five key sovereign ratings factors: the economy, the external position, monetary flexibility, fiscal flexibility,
and institutional strength.
The primary basis for comparing the two sovereigns--beyond the fact that they are both part of the same continent--is
that both have long-term foreign currency ratings of 'BBB-', the only two African sovereigns we rate as
investment-grade other than Botswana (rated 'A-'). This was not always the case. We raised our foreign currency
long-term rating on Morocco to 'BBB-' from 'BB+' (speculative-grade) in 2010 on our expectation of a rising economic
growth trajectory. Meanwhile we twice downgraded South Africa by a notch, in October 2012 and June 2014, from
'BBB+'. This reflected our view that paralyzing strike action was slowing economic growth, and sizeable government
and current account deficits were likely to persist.
However, a key remaining difference between the two sovereigns, which we'll discuss in detail below, is that our local
currency long-term rating on South Africa is still two notches higher, at 'BBB+', whereas our local currency rating of
'BBB-' on Morocco enjoys no uplift relative to the foreign currency rating.
Overview
• Both African sovereigns have 'BBB-' foreign currency long-term ratings, but our local currency rating on South
Africa is two notches higher at 'BBB+', reflecting its significantly greater monetary flexibility.
• South Africa's income per capita is roughly double that of Morocco in U.S. dollar terms, but South Africa's
trend growth rate is roughly half as fast as Morocco's.
• South Africa has a generally stronger business environment and institutions than Morocco, but it also has
higher income inequality and poverty.
• Current account deficits, external financing requirements, and debt burdens are similar, although Morocco is
on a more positive trajectory.
• The respective government debt burdens are similar relative to GDP, and we expect both governments to
continue running deficits for at least the next four years, albeit on a consolidation path.
Table 1
Morocco and South Africa: Ratings Score Snapshots
Morocco South Africa
Institutional assessment Neutral Neutral
Economic assessment Weakness Neutral
External assessment Neutral Neutral
Fiscal assessment: flexibility and performance Neutral Weakness
Fiscal assessment: debt burden Neutral Neutral
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3. Table 1
Morocco and South Africa: Ratings Score Snapshots (cont.)
Monetary assessment Neutral Strength
Standard & Poor's analysis of sovereign creditworthiness rests on its assessment and scoring of five key rating factors: (i) institutional assessment;
(ii) economic assessment; (iii) external assessment; (iv) the average of fiscal flexibility and performance, and debt burden; and (v) monetary
assessment. We assess each factor on a continuum spanning from 1 (strongest) to 6 (weakest). Section V.B of Standard & Poor's "Sovereign Rating
Methodology," published on Dec. 23, 2014, summarizes how we combine the various factors to derive the sovereign foreign currency rating, while
section V.C details how we derive the scores. The ratings score snapshot summarizes whether we consider that the individual rating factors listed
in our methodology constitute a strength or a weakness to the sovereign credit profile, or whether we consider them to be neutral. The concepts
of "strength," "neutral," or "weakness" are absolute, rather than in relation to sovereigns in a given rating category. Therefore, highly rated
sovereigns will typically display more strengths, and lower-rated sovereigns more weaknesses. In accordance with Standard & Poor's sovereign
ratings methodology, a change in assessment of these factors does not in all cases lead to a change in the rating, nor is a change in the rating
necessarily predicated on changes in one or more of the assessments.
The economy: South Africa has twice the income level of Morocco but half the
growth rate
The two countries' economies differ significantly, albeit with a few important similarities. Income per capita in
Morocco is only slightly more than half that in South Africa, estimated at around $3,400 and $6,600, respectively, in
2014. Moreover, Morocco operates a pegged exchange rate regime with some signs of overvaluation of the dirham, so
the country's GDP per capita might be even lower in U.S. dollar terms if the dirham floated freely, as the South African
rand does.
However, Morocco can tell the more positive story on economic growth. We estimate Morocco's trend rate of growth
in real GDP per capita at an average of nearly 3% a year, double our estimate for South Africa of nearly 1.5%. This
difference may stem in part from the smaller base of Morocco's economy; lower-income economies typically grow
faster than more developed ones. But it is also a result of Morocco's successful emerging industries, which the
government's industrial policy promotes and which are attracting increasing amounts of private investment. By
contrast, South Africa has recently recorded sluggish growth rates owing to strikes in key industries and insufficient
power supply among other factors.
Table 2
Morocco and South Africa: An Economic Comparison
Morocco South Africa
GDP per capita (US$) 2014 (est.) 3,400 6,600
Ten-year weighted annual average real GDP growth rate, % (2014) 2.92 1.42
Gini coefficient (where 0 represents perfect income equality and 1 perfect inequality) 0.41 0.63
Doing Business ranking 71 43
Economic Freedom Index ranking 89 72
Adult literacy rate (%) 67 93
Poverty rate (%) 2.6 9.4
Human Development Index ranking 129 118
In terms of structure, services dominate both countries' economies, accounting for over half of Morocco's output and
two-thirds of South Africa's. Morocco depends more on agriculture than South Africa, at around 15% of total output
versus around 3%, respectively. Moreover, Morocco's drought-prone climate and lack of irrigation makes agricultural
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4. output more volatile than South Africa's, although a drought this year could harm South African crops.
Mining is important to both countries, although much more so to South Africa, which is a significant producer of
mineral commodities including coal, iron, gold, diamonds, and platinum, of which it is the biggest producer globally.
Morocco's only significant mineral product is phosphates.
Manufacturing is of roughly equal importance to both countries' economies, accounting for around 12%-15% of their
respective national incomes. However, South African manufacturing output has broadly stagnated in real terms over
the past few years, while Morocco has registered impressive growth in industries such as aeronautics and automobiles.
For example, since a large Renault-Nissan plant opened in Tangiers in 2012, Morocco has risen from being an
insignificant car producer to the continent's second-biggest--just behind South Africa in fact. That said, the recent
sharp depreciation of the South African rand may boost the country's manufacturing exports.
Business Environments Compared
Regarding the two countries' business environments, South Africa is ranked 43rd in the World Bank's latest Doing
Business survey, some way above Morocco at 71st. A U.S. think tank, the Heritage Institute, ranks the countries
somewhat closer together in its index of economic freedom. South Africa comes in at 72nd and Morocco at 89th
(both are in the "moderately free" category), but South Africa is still clearly ahead.
According to the World Bank's survey, Morocco's business environment is held back principally by weaknesses in
the judiciary. The country ranked 122nd globally for protecting minority investors, 113th for resolving insolvency,
and 81st for enforcing contracts, compared with rankings of 17th, 39th, and 46th, respectively, for South Africa.
Far-reaching reforms of Morocco's judiciary are in train, so some progress is likely on these measures. But
Morocco also lags far behind South Africa in terms of ease of access to credit, according to the Doing Business
survey.
The survey identifies difficulties in obtaining electricity as the biggest drawback to South Africa's business
environment. The country ranks 158th globally on this measure, compared to Morocco at 91st. Rolling power
cuts by South Africa's struggling national utility, Eskom, have increased in recent months, owing to long delays in
bringing new capacity on-line while demand has risen quickly. In our view, the lack of reliable electricity supply in
South Africa is a major handicap, and it contributes to our expectation of continued lackluster economic growth.
Morocco, meanwhile, has avoided significant power cuts and has invested heavily in diversifying its energy mix
to increase the contribution from renewable sources.
Another weakness of South Africa's business and investment environment is the country's troubled industrial
relations. Key sectors of South Africa's economy, particularly mining, suffer from periodic paralyzing strikes,
which can have a major economic impact. Protracted strikes in 2014 cost the South African economy dearly,
leading to real GDP growth of just 1.4%. That said, Morocco is embarking on controversial reforms to its pension
system, which unions may oppose through increased strikes.
Both economies struggle to create jobs, particularly for the young, although Morocco's unemployment rate of around
10% is far lower than South Africa's 24%. On a related note, inequality is starker in South Africa than in Morocco.
South Africa's Gini coefficient (where 0 represents perfect income equality and 1 perfect inequality) is one of the
highest in the world at 0.63, compared with 0.41 for Morocco, according to the United Nations Development Program
(UNDP). This is partly a legacy of South Africa's former apartheid regime, which deliberately excluded the black
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5. majority from full economic participation. But it is also an indictment of the lack of progress in reducing inequality
since the first democratic elections, in 1994. The rate of poverty--defined as the proportion of the population living on
less than $1.25 a day at purchasing power parity exchange rates--is also much higher in South Africa (9.4%) than
Morocco (2.6%), according to latest World Bank data.
The two countries' populations differ markedly in terms of educational attainment. According to the UNDP, Morocco's
adult literacy rate is only 67%, compared with 93% in South Africa. This stark difference is largely explained by the low
rate of female literacy in Morocco. According to the World Bank, just 58% of young Moroccan women can read,
compared with 89% of young men. However, the two countries' levels of overall human development are similar. The
UNDP ranks Morocco at 129th on its global human development index, compared with 118th for South Africa.
External flexibility: Both run current account deficits, but Morocco's is
narrowing
Regarding the two sovereigns' external positions, their current account deficits (CAD) are similar in size relative to
GDP. In 2015 we estimate Morocco's CAD at equivalent to 3.5% of GDP, compared with 4.7% in South Africa.
However, the respective trends of the two sovereigns' current account balances diverge.
South Africa recorded a modest CAD of just 1.5% of GDP in 2010. This has since widened to its current level largely
on the back of a worsening trade deficit as export performance has disappointed, partly owing to the strikes by miners.
Meanwhile, the import bill has risen quickly, particularly for commodities such as oil--at least until the recent sharp
drop in global oil prices. We expect South Africa's CAD to remain at 4.5%-5.0% of GDP for the next four years.
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6. Chart 1
By contrast, Morocco is on a path of consolidation, and we expect its deficit to narrow to less than 3% of GDP by
2018. In 2012 its deficit ballooned to a peak of nearly 10% of GDP amid record high prices for commodities,
particularly energy products, and the economic and financial crises in Europe, which is Morocco's principal trade
partner and source of investment and tourists (France and Spain in particular). According to the UN Conference on
Trade and Development, nearly two-thirds of Moroccan exports went to Europe in 2013, compared with less than a
fifth of South Africa's. The trade account led the deterioration in Morocco's overall CAD, whereas in South Africa's
case it was both trade and a large negative net income balance. However, as growth in Europe gradually picks up, so
too should the continent's demand for Moroccan goods and services.
Table 3
Morocco and South Africa External Comparison
Morocco South Africa
Current account / GDP (%; 2015) (3.5) (4.7)
Narrow net external debt / current account receipts (%; 2015) 41 31
Gross external financing requirement / CAR + usable reserves (%; 2015) 97 107
Both countries are significant net importers of oil products. In 2013, when oil prices averaged over $100 per barrel,
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7. around one-quarter of Morocco's imports and one-fifth of South Africa's were fuel products. Consequently, both
countries should benefit from the sharp drop in international oil prices since mid-2014. However, South Africa's trade
balance depends more than Morocco's on the export of other commodities, and prices for many of these have also
dropped recently (albeit not so dramatically as oil prices). Primary commodities made up one-third of Morocco's
exports in 2013, but half of South Africa's.
So, given Morocco's higher dependency on fuel imports and lower dependency on commodity exports, we think it will
enjoy a more positive overall change in its terms of trade over the next couple of years. This should help narrow the
country's trade deficit.
Regarding service exports, both countries have strong tourism offerings, and they attract nearly equal numbers of
tourists. According to World Tourism Organization data, 10 million visited Morocco in 2013, compared with 9.5
million to South Africa, making them the top two destinations in Africa by some distance. Another similarity in services
is the push of both countries' banks and insurers into other rapidly growing African countries. Moroccan financial
services providers have spread out chiefly in Francophone west Africa, while South Africa's have favored countries in
the south and east of the continent.
On our two key measures for assessing the external position of sovereigns, Morocco and South Africa are currently
similar. We estimate their respective stocks of external debt, net of liquid assets, at 37% and 35% of current account
receipts (CARs) in 2015. We estimate their respective gross external financing requirements at 95% and 106% of CARs
and usable reserves. However, we expect Morocco's position on these two measures to improve relative to South
Africa's, given the more positive outlook for Morocco's current account.
Monetary flexibility: South Africa has significantly greater strength
To fund its current account deficit, South Africa depends more heavily than Morocco on portfolio inflows, which
represented an estimated 2.1% and 0.2% of the two countries' respective GDP in 2014. These flows are typically more
flighty than foreign direct investment inflows, so we consider this dependence to be a risk for South Africa.
However, South Africa's ability to attract such flows stems from two of its major credit strengths: the depth and
sophistication of its capital markets, and the rand's status as a globally traded and floating currency. According to the
triennial survey of foreign exchange dealing by the Bank for International Settlements, the rand is involved in 1.1% of
global foreign-exchange contracts, a much greater share than that of the Moroccan dirham, which is not an actively
traded currency. The floating of the rand acts a useful shock absorber and stabilizer mechanism for South Africa's
economy in times of stress. It allows for an automatic adjustment in tough times that supports investor inflows into
rand-denominated assets and that makes exports more competitive, thereby boosting the current account.
By contrast, Morocco's pegged exchange regime allows for no such adjustment mechanism and comes at a cost of
needing international reserves to support the peg. That said, the dirham is pegged to a basket of currencies broadly
reflecting the relative importance of the country's trade partners (the euro now accounts for 60% of the basket
following the recent increase in the U.S. dollar's weighting to 40%). This arrangement helps keep inflation rates low
compared with South Africa and in line with European countries. But the dirham's peg limits the ability of the central
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8. bank, Bank Al-Maghrib (BAM), to conduct an independent monetary policy. The BAM has signaled its intention to
gradually liberalize the exchange rate regime, but we expect progress to be slow and for price stability to remain its
priority.
Chart 2
South Africa's capital market far outstrips Morocco's in size, liquidity, and sophistication. According to the World
Federation of Exchanges, the respective domestic equity market capitalization of companies listed on the
Johannesburg and Casablanca stock exchanges in March 2015 was $950 billion and $54 billion. The difference in the
respective values of bonds traded on the two exchanges in April 2015 was even starker: $125 billion versus $62
million. Indeed, the Casablanca bourse was demoted from MSCI's Emerging Market Index to the Frontier Market
Index in late 2013 owing to concerns about liquidity levels in the Moroccan bourse.
South Africa's comparative strength in its monetary flexibility is reflected in its local currency rating, which at 'BBB+' is
two notches above Morocco's (which we equalize with the foreign currency rating at 'BBB-').
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9. Fiscal assessment: Both countries are likely to run deficits for the next four
years
Both Morocco and South Africa have run general government deficits for at least the past five years, reflecting both
countries' significant development and welfare needs. This has led their general government debt burdens to rise to
48% of GDP and 44%, respectively, in 2015. Although Morocco's debt stock is larger relative to GDP than South
Africa's, its composition is more concessional, with a significantly higher share of sovereign debt borrowed from
official creditors at below-market interest rates and with long grace periods. This has led to a lower debt servicing
burden relative to government revenues for Morocco, estimated at 7.8% in 2015, compared with 10.5% for South
Africa. This is despite the fact that the yield on Moroccan Eurobonds is currently around 50 basis points higher than on
comparable South African debt.
Table 4
Morocco and South Africa Fiscal Assessment 2015
(%) Morocco South Africa
Annual change in general government debt/GDP 3.1 4.4
Net general government debt/GDP 48.3 43.5
Interest payments/general government revenue 7.8 10.5
That said, a much greater share of Morocco's debt is denominated in foreign currency than is the case for South Africa,
which enjoys easy access to financing in rands. This leaves Morocco more exposed to the risk that unfavorable
movements in exchange rates will increase its debt burden in local currency terms.
We expect both countries' governments to continue running deficits for at least the next four years, although we
expect both to stay on a path of gradual consolidation. This will see the two sovereigns' debt stocks rise slightly
relative to GDP. Similar to the sharp rise in Morocco's current account deficit in 2012, the general government deficit
also spiked in that year amid heavy current spending on energy price subsidies while oil prices were at high levels. The
Moroccan government has since scrapped its subsidies on most energy products, which has consequently eased its
current spending and overall deficits.
Institutional assessment: South Africa ranks higher in all World Bank
governance indicators but has higher inequality
We judge both sovereigns' institutional strength to be "neutral" for their credit ratings. That said, South Africa ranks
higher in all aspects of governance and institutional quality measured by the World Bank's World Governance
Indicators, with notable differences versus Morocco in the categories of people's voice and institutional accountability,
and political stability and absence of violence. The two countries are more closely ranked on rule of law and control of
corruption, an assessment underscored by Transparency International's Corruption Perceptions Index, which places
Morocco and South Africa at 80th and 67th, respectively.
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10. World Governance Indicators (percentile ranks*, 2013)
Morocco South Africa
Voice and accountability 28.0 65.4
Political stability and absence of violence 29.4 44.1
Government effectiveness 51.7 66.5
Regulatory quality 46.9 64.1
Rule of law 47.4 57.8
Control of corruption 46.4 54.5
*1 is the weakest and 100 the strongest.
South Africa is a young and active democracy, albeit with the African National Congress (ANC) as the dominant party.
The ANC has been in power since 1994, when it won the first free elections since the end of the apartheid regime.
Nonetheless, the ANC's hegemonic grip on South Africa's polity appears to be weakening as opposition parties have
gained ground in recent elections, indicating that pluralism is set to increase. However, the country's extremely high
levels of inequality, dysfunctional industrial relations, and inter-ethnic tensions--a legacy of apartheid--count negatively
in our institutional assessment.
We consider Morocco's political system to be a hybrid of monarchy and democracy. The popular king remains
powerful, exercising a strong influence on most policy areas and holding stakes in key economic sectors through the
royal holding company, the Société Nationale d'Investissement. Since the onset of regional unrest in 2011 related to
the Arab Spring, constitutional reforms have increased the powers of elected officials (although we consider that the
king remains the single most important figure in the polity). We think these reforms helped Morocco avoid the kind of
unrest seen in other North African countries.
The moderate Islamist Party of Justice and Development won the most seats in the 2011 election and has since been
the dominant party of government, although no party generally controls the political scene as the ANC does in South
Africa. In our view, Morocco suffers less from inter-ethnic tensions than South Africa, although the Berber (Amazigh)
minority has historically suffered discrimination. By contrast, we consider Morocco more vulnerable than South Africa
to Islamist terrorist attacks, although the Moroccan security services have been effective at dismantling terrorist cells.
We see little domestic risk to Morocco's institutions stemming from the separatist movement in Western Sahara, over
which Morocco claims sovereignty. However, the dispute has soured Morocco's relations with neighboring Algeria,
which has supported the separatists. In our view, geopolitical risks are low for South Africa, which is by far the
dominant power in its region.
Conclusion
Overall then, South Africa has higher income levels and more sophisticated financial markets than Morocco, but it is
slower growing and more unequal. Both countries have struggled to contain fiscal and current account deficits. This
has led their respective government and external debt stocks to rise to similar levels relative to GDP, although we
expect Morocco to consolidate its twin deficits faster. Finally, we view South Africa's institutions as stronger, although
the country has worse industrial relations than Morocco. The comparison illustrates well how we can rate two
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11. sovereigns at similar levels despite some notably different economic, financial and institutional fundamentals.
Related Criteria and Research
Related criteria
• Sovereign Rating Methodology, Dec. 23, 2014
• Methodology For Linking Short-Term And Long-Term Ratings For Corporate, Insurance, And Sovereign Issuers,
May 7, 2013
• Methodology: Criteria For Determining Transfer And Convertibility Assessments, May 18, 2009
Related research
• Ratings On Kingdom of Morocco Affirmed At 'BBB-/A-3'; Outlook Is Stable, April 17, 2015
• Ratings On South Africa Affirmed; Outlook Stable, Dec. 12, 2014
• Sovereign Defaults And Rating Transition Data, 2013 Update, Sept. 17, 2014
• South Africa Long-Term FC Rating Lowered To 'BBB-'; LC Rating Lowered To 'BBB+' On Ongoing Weak Growth;
Outlook Stable, June 13, 2014
• Kingdom of Morocco Long-Term Foreign Currency Rating Raised To 'BBB-' On Improving Economic Flexibility;
Outlook Stable, March 23, 2010
Under Standard & Poor's policies, only a Rating Committee can determine a Credit Rating Action (including a Credit
Rating change, affirmation or withdrawal, Rating Outlook change, or CreditWatch action). This commentary and its
subject matter have not been the subject of Rating Committee action and should not be interpreted as a change to, or
affirmation of, a Credit Rating or Rating Outlook.
Additional Contact:
SovereignEurope; SovereignEurope@standardandpoors.com
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