Tuesday, March 19, 2019

Morocco holds rate but lowers inflation forecast again

     Morocco's central bank left its monetary policy rate at 2.25 percent but again lowered its outlook for economic growth and inflation amidst a continued slowdown in the global economy and an uncertain outlook due to trade, geopolitical tensions and Brexit.
     The Bank of Morocco, or Bank Al-Maghrib (BAM), has kept its rate at the current level since March 2016.
      Morocco's inflation rate averaged 1.9 percent in 2018, up from 0.7 percent in 2017, but BAM expects headline inflation to average 0.6 percent this year before rebounding to 1.1 percent in 2020, driven by an expected rise in core inflation to 0.8 percent in 2019 and 1.4 percent in 2020 on an expected rise in domestic demand.
     In January Morocco's consumer prices fell 0.5 percent year-on-year, the first case of deflation since July 2017, due to lower prices of food and non-alcoholic beverages, and transport.
     Since June last year BAM has continuously lowered its inflation forecasts and in December it forecast 2.0 percent inflation for 2018, 1.0 percent for 2019 and 1.2 percent for 2020.
     Morocco's economy slowed more than expected last year, with gross domestic product in the third quarter up by 3.0 percent, down from 3.9 percent a year earlier, and BAM projected average 2018 growth of 3.1 percent, down from 4.1 percent in 2017.
     In December last year BAM forecast average 3.3 percent growth for 2018, down from June's forecast of 3.6 percent and September's forecast of 3.5 percent.
     The slowdown in growth was mainly centered on the agricultural sector, with valued added slowing to growth of 4.3 percent from 15.4 percent in 2017, while non-agricultural activities grew 2.9 percent from 2.7 percent.
      Overall growth this year was forecast at 2.7 percent and then 3.9 percent in 2020, down from December's forecast of 3.1 percent growth in 2019 but the forecast for 2020 is higher than the previous forecast of 3.6 percent.
     Morocco's exports of goods improved last year but imports were marked by higher energy prices and capital goods' purchases, expanding the current account deficit to 5.2 percent of GDP from 3.6 percent in 2017.
     This year the deficit is seen narrowing to 4.1 percent and then 3.4 percent in 2020 due to an expected decline in energy imports and a slowdown in capital goods' purchases.
      Foreign Direct Investment inflows reached the equivalent of 4.1 percent of GDP in 2018 and are expected to drop to 3.4 percent in 2019 and in 2020.
      Helped by Gulf states' grants of 2 billion dirhams in 2019 and 1.8 billion in 2020, along with expected international borrowings by Morocco's Treasury, net international reserves are seen rising to 239 billion dirhams in 2019 from 231 billion in 2018 before falling to 236 billion in 2020, the equivalent of just over 5 months of imports.
      The real effective exchange rate of the dirham is expected to appreciate by 0.7 percent this year but then depreciate by 0.5 percent in 2020, BAM said.
      In December the International Monetary Fund board approved a precautionary, 2-year, US$2.97 billion line of credit for Morocco - similar to three previous arrangements - to provide Morocco with insurance against external risks and support the government's plans to reduce fiscal and external vulnerabilities and promote higher and more inclusive economic growth.

     The Bank of Morocco issued the following statement:

"1. The Board of Bank Al-Maghrib held its first quarterly meeting of the year on Tuesday, March 19.

2. At this meeting, it analyzed recent economic developments as well as the macroeconomic forecasts prepared by the Bank for the next eight quarters.

3. Based on these assessments, particularly those of medium-term inflation, growth and external accounts prospects, the Board considered that the current level of the key rate at 2.25 percent remains appropriate and decided to keep it unchanged.

4. The Board noted that inflation ended up the year at an average of 1.9 percent, mainly driven by the rise in volatile food prices. Based on Bank Al-Maghrib forecasts, it is expected to slow down to 0.6 percent in 2019 before rebounding to 1.1 percent in 2020, driven by the expected rise of core inflation. The latter, after its projected drop by 0.8 percent in 2019, would reach 1.4 percent in 2020, in conjunction with the expected improvement of domestic demand.

5. Internationally, the slowdown of the global economy continues and its outlook remains surrounded by high uncertainties, mainly related to trade and geopolitical tensions as well as Brexit terms. In the United States, supported mainly by the expansionary fiscal stance, growth is set to reach 2.9 percent in 2018, but would fall to 2.1 percent in 2019 and 1.6 percent in 2020. In the euro area, it is expected to continue its slowdown, from 1.8 percent to 1.3 percent in 2019 before picking up to 1.7 percent in 2020. Labor market conditions would remain favorable, with low and falling unemployment rates in the United States and the Euro Area respectively. In the main emerging economies, growth would overall post a drop in 2019 before accelerating slightly in 2020. In China in particular, growth stood at 6.6 percent in 2018, its lowest rate in three decades and is expected to further drop to 6.1 percent in 2019 and 6.2 percent in 2020. In India, following a 7.5 percent rise in 2018, growth would remain buoyant, driven by domestic demand and the expected fall in energy prices, to stand at 7.2 percent in 2019 and 7.5 percent in 2020.

. On the commodity market, after rebounding by 30.7 percent in 2018 to reach $71.1/bl on average, Brent oil prices fell to $61.7/bl over the first two months of 2019. It is expected to stand at $63.2/bl over the whole of the year and to further decrease to $61.7/bl in 2020. Prices for phosphates and derivatives in 2018 increased by 21.8 percent to $393.4/mt for DAP and by 22.4 percent to $346.7/mt for TSP, while prices of rock phosphate declined by 2 percent to $87.9/mt. Over the medium term, upward pressures on prices would be contained, in view of the expected increase in production capacities, namely in Morocco and Saudi Arabia.

7. The easing in oil prices drove inflation downward in the main advanced economies. In the euro area, after ending up the year 2018 on an average of 1.7 percent, it is set to weaken to 1.3 percent in 2019 and to stand at 1.5 percent in 2020. In the United States, it reached 2.4 percent in 2018, and is projected to stand at 1.7 percent this year and close to the FED target in 2020.

8. As regards monetary policy decisions, the ECB kept, during its meeting of March 7, its key interest rates unchanged, while indicating that it still expects them to remain at their present levels at least through the end of 2019, and in any case for as long as necessary. It also announced its decision to launch a new series of quarterly targeted longer-term refinancing operations, starting in September 2019 and ending in March 2021, in order to help preserve favorable bank lending conditions and the smooth transmission of monetary policy. In turn, the FED decided at the end of its meeting on January 30 to keep unchanged the target range of the federal funds rates at 2.25 to 2.5 percent, announcing that it will be patient regarding future adjustments to this band.

9. Nationally, the latest data published by the HCP indicate a slowdown in GDP in the third quarter of 2018 at 3 percent as against 3.9 percent in the same period a year earlier. Taking into account the available infra-annual indicators, growth for the whole of 2018 would stand, according to Bank Al-Maghrib projections, at 3.1 percent as against 4.1 percent in 2017, with a deceleration in agricultural value added from 15.4 percent to 4.3 percent and a slight increase in the pace of nonagricultural activities from 2.7 percent to 2.9 percent. The latter would continue to improve, albeit slowly, as their value added is set to increase by 3.4 percent in 2019 and by 3.8 percent in 2020. For the agricultural sector, based on the available climate data on March 10, the Bank projects a cereal production of around 60 million quintals and a decline in agricultural value added by 3.8 percent. The latter would increase by 6 percent in 2020, assuming a crop year of around 80 million quintals. Overall, national growth is expected to remain limited to 2.7 percent in 2019 before accelerating to 3.9 percent in 2020.

10. In the labor market, the situation relatively improved in 2018 in terms of job-creation, with the generation of 112 thousand new jobs, 65 thousand of which in the services sector. Taking into account the net entry of 64 thousand job-seekers, the activity rate continued its downward trend, falling from 46.7 percent to 46.2 percent. Under these circumstances, the unemployment rate dropped from 10.2 percent to 9.8 percent at the national level and from 14.7 percent to 14.2 percent in urban areas, where it remained, nonetheless, very high among youth aged 15-24 years, at 43.2 percent.

11. With regard to external accounts, the provisional data of 2018 show a notable performance of exports of goods across all sectors, including phosphate and derivatives, automotive, construction as well as agricultural products and agri-food. At the same time, imports were marked by the rise in the energy bill and in capital goods’ purchases. Concerning the other main items of the current account, and after posting important increases in 2017, travel receipts rose 1.5 percent to 73.2 billion dirhams while remittances of Moroccan expatriates dropped 1.7 percent to 64.8 billion dirhams. Taking also account of an inflow of 2.8 billion dirhams as GCC grant, after 9.5 billion a year earlier, the current account deficit worsened from 3.6 percent of GDP in 2017 to 5.2 percent in 2018. It would ease to 4.1 percent in 2019 and 3.4 percent in 2020, particularly owing to an expected decline in energy imports and a slowdown in capital goods’ purchases. This trend also implies an entry of GCC grants of 2 billion dirhams in 2019 and 1.8 billion in 2020. In terms of financial transactions, FDI inflows reached the equivalent of 4.1 percent of GDP in 2018 and are expected to drop to 3.4 percent of GDP in 2019 and in 2020. Under these conditions and taking into account the expected borrowings of the Treasury from international markets, net international reserves would rise from 231 billion dirhams in 2018 to 239 billion in 2019 before dropping to 236 billion in 2020, continuing, thus, to cover slightly over 5 months of imports of goods and services.

12. With regard to monetary conditions, after remaining stable in 2018, the real effective exchange rate is expected to appreciate by 0.7 percent in 2019, the inflation gap between Morocco and its main partners and competitors should only partially offset the anticipated nominal appreciation of the dirham. In 2020, with the expected dissipation of the latter, it should depreciate by 0.5 percent. As to lending rates, they continued their decline, dropping to an average of 5.06 percent during the fourth quarter of 2018, with in particular quarterly declines of 28 basis points in loans to businesses and 11 basis points in personal loans. Concerning loans to the non-financial sector, they slowed down to 3.1 percent in 2018, reflecting mainly a sharp deceleration of loans to private companies, and should keep this pace in 2019 before accelerating to 4.4 percent in 2020.

13. In terms of public finance, data as at end-2018 show an improvement in current revenues by 1.8 percent, due to a 4.2 percent rise in tax revenues to 234.9 billion, and a decline of non-tax revenues owing mainly to declining GCC grants. Overall spending rose 2.4 percent, covering mainly increases by 5.5 percent in expenditures on other goods and services to 62.2 billion and by 15.6 percent in subsidy costs to 17.7 billion, as well as a drop in investment by 2 percent to 65.7 billion. Overall, budget execution resulted in a widening deficit at 41.4 billion or the equivalent of 3.7 percent of GDP as against the 3 percent target in the Finance Act. Over the medium-term, fiscal consolidation should, according to Bank Al-Maghrib’s projections, slow down, as the deficit, excluding privatization receipts, is expected at 4.1 percent of GDP in 2019 before dropping to 3.5 percent of GDP in 2020. "



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