Morocco: Poor harvest weighing on growth

Morocco’s near-term economic outlook has continued to deteriorate, leading us to downgrade our real GDP growth forecast for the country. We now project an expansion of just 1.0%, compared with our previous projection of 1.3%, and the risks are weighted to the downside as agricultural production remains under pressure from drought and global price pressures are increasingly feeding through into domestic inflation. Indeed, the Bank al-Maghrib (BAM) has just published its revised GDP growth forecast for 2022 and now expect only 0.8% this year. Next year we hold to our expectation of a substantial improvement and have left our forecast unchanged at 3.7%, broadly in line with BAM’s 3.6%, on the expectation of more favourable rains. However, it should be noted that Morocco’s growth has been subject to the vagaries of weather patterns in recent years, and another year of drought would see this target missed.

Real GDP, % y/y

Source: Haver Analytics, Emirates NBD Research

Morocco’s agricultural GDP, which accounts for around a tenth of total output, expanded 17.8% last year as it recovered from a contraction in 2020. Along with the easing of pandemic pressures in the non-agricultural sector, this drove the headline growth figure up to a multi-decade high of 7.9% in 2021. By contrast, y/y agriculture growth in the first two quarters of 2022 averaged -14.9% as insufficient rainfall has seen cereal production fall around 67% y/y to its lowest level since 2018 in the harvest just finished. This has led to an increasing reliance on foreign imports, with France in particular becoming a more important source market after India reneged on an earlier intention to boost its exports to Morocco as it endured its own scarcity issues. With food security concerns to the fore, the USD 184mn credit line recently provided by the AfDB for investment in wheat production will be welcome.

Aside from the diminished production itself, the failure of the domestic crop this year has also weighed on growth by feeding into accelerating inflation. In addition to the reopening pressures that were already evident in global inflation at the start of the year, the conflict in Ukraine led to a sharp spike in food and energy prices that economies are still dealing with now, not least Morocco. Headline CPI inflation hit 8.0% in August, having averaged 5.8% over the year so far, compared to a five-year average of just 1.0% over 2017-2021. Food prices were 14.1% higher in August than the previous year and they have been a key driver of the headline figure, along with oil prices. As global food and energy prices have eased somewhat, together with the government taking action to ease petrol prices at the pump, the headline pace should slow. However, price pressures are steadily becoming more widespread; in the communiqué from its September 27 meeting, BAM noted that ‘the latest available data show a broad spread to non-tradable products prices.’

Bank al-Maghrib benchmark rate, %

Source: Bloomberg, Emirates NBD Research

In this domestic environment and the global trend of rapidly tightening monetary policy, BAM enacted its first rate hike in 14 years in September, raising the benchmark rate by 50 bps from 1.50% to 2.00% in order to ‘forestall any de-anchoring of inflation expectations and to guarantee the conditions for a rapid return to levels in line with the price stability objective.’ The tighter policy will provide another drag on growth over the coming quarters as the cheap credit that was supposed to be passed on to SMEs and help revitalise the economy becomes more expensive. With households still recovering from the pandemic crisis, the accelerating price growth will also eat into disposable incomes, weighing on consumer demand. Nonagricultural growth averaged 3.4% y/y over Q1-Q2 but will slow as conditions bite and some of the base effect gains that benefitted key sectors such as tourism in H2 start to dissipate. Hotels & restaurants averaged 48.7% y/y over the first two quarters but with most domestic and international restrictions having been eased by the second half of last year this will slow sharply.