Morocco: A New Financial Capital?

It would be sad if the Arab Spring cemented more turmoil than it sought to end. But the current state of politics in post-Arab Spring, specifically Tunisia and Egypt, suggests things could worsen before they improve. Ongoing security concerns in Libya and the not-so-forgotten hostage situation in Algeria has further caused chaos in the North African balance of power.

Prior to the January 2011 revolution, Cairo served as the entrance point to North Africa and home to one of Africa’s biggest financial centers. Paired with three other big African entry points – Nairobi (Kenya) in East Africa, Johannesburg (South Africa) in Southern Africa, and Lagos (Nigeria) in West Africa – Cairo played an important role in maintaining Africa’s four-pronged financial nucleus. But the unending conflict in Egypt, a lack of direction and timing on the military government’s voluntary forfeit of power, and an uncertain capacity of the state to fully implement and maintain democracy have altogether opened a gaping hole at the north end of Africa’s financial brain.

Coming to the rescue in newly bought clothes and jewels is Morocco and its custom-designed Casablanca Finance City (CFC). Home to Africa’s sixth largest economy, the Kingdom, under the auspices of the ambitious King Mohammed VI, thrives to fill the hole created by Egypt’s instability as well as be the vein to French-speaking African markets. Morocco does not pretend to hide its ambitions to head the Community of Sahel-Saharan States (CEN-SAD), the often-overlooked member of the African Union’s eight regional economic communities that has swollen from its original six to 28 members in less than 15 years. Unlike the Western Sahara, the country Morocco opposes as a member of the African Union, it is unreasonably not a member of the African Union – something that will have to change.

Strategic Location and Presence

Morocco provides easy access to Africa via its strategic location at the northwest point of Africa. With just 14km of water between Morocco and Spain, the country connects North Africa to Europe and indirectly to the United States. Known for vibrant medinas, a picturesque landscape and a welcoming culture, Morocco has always boasted itself as a tourist destination with even a greater untapped potential as an investment and financial hub.

Morocco’s majestic city of Marrakesh originally hosted the ministerial meeting in April 1994 which led to the creation of the World Trade Organization (WTO). Since then, the Moroccan leadership has diligently employed its efforts to opening its borders to foreign capital and foreigners. Sitting with Spanish immigrants in route to Morocco via ferry from Tarifa (Spain), you can hear the stories of the opportunities in Morocco accompanied by a true belief in the country’s will to keep its borders open to foreigners.

Morocco maintains advanced economic status with the European Union (EU) under the European Neighbourhood Policy, a free trade agreement with the United States, and a strong relationship and voice of participation within the Arab League. The increasing visits by the King and his foreign minister in sub-Saharan Africa comes as the last prong to building an influential position across four geographies (the EU, the US, sub-Saharan Africa, and the Middle East and North Africa (MENA) region).

Stable Economy and Politics

The Moroccan economy has performed well in recent years, growing at an average of 4.6% from 2005 through 2012. A slowing in GDP growth in 2012, as the economy grew only by 2.7% according to the International Monetary Fund (IMF), stirred concerns in the region. But the slump can be attributed to a complicated and unexpected constellation of issues, including the Eurozone’s economic recession and a continuing hangover from conflict across the MENA region.

Moroccan Minister of Finance Nizar Baraka maintains earlier assertions that the economy will grow approximately 5%, surpassing the government’s initial projection of 4.5%, for 2013. The rebound bids well for the country’s image amongst North Africa’s currently fragile economies. Yet the statistics hide some glaring concerns for the country’s long-term position.

A growing government deficit and ballooning subsidies remain a problem. The country secured a US$6.2 billion credit line from the IMF mid-last year to help fill the budget gap. The IMF extended the credit line in July 2013, accompanying their extension with a stern warning that Morocco had to address subsidies and budgetary issues to avoid falling into social and economic distress.

The government managed to pass initial subsidy reforms. Yet implementation of these reforms, particularly with fuel subsidy reforms, have been delayed behind fears of social and political unrest. A drastic cut to fuel subsidies would have grave effects on the pockets of locals while providing an immense benefit to government accounts, as current fuel subsidies account for an estimated 54% of the total subsidy spending.

The country is home to a very skilled workforce. Yet the country is plagued by a high unemployment rate, particularly among its youth. A march on the capital in October 2013 by a couple thousand Moroccans illustrates the challenges, as youth vocally petitioned the government for increased public sector employment. Although the official unemployment rate stands at a mere 9%, it is approximately 17% for university graduates and nearly 30% for those under the age of 35. Past governments have generally placated unemployed graduates and youth with increased public sector jobs. But it is this bloated public payroll that is conspicuously draining the government’s accounts.

A cut in agricultural and power subsidies would be a great step. But fears over inflation and the unrest this reform can cause have slowed government efforts in this space. Downwardly distorted power prices have misled consumer perceptions of cost and arguably minimized incentives to improve the situation. Agricultural subsidies, specifically sugar subsidies, have artificially lowered the impact of food costs on inflation. Local supporters of the subsidies argue that any drastic cut would destabilize the economy. But critics are correct to argue that local and international companies possess sufficient capital to develop trade financing agreements and partnerships to fill the short-term financial gaps and overcome any shock. A growth in partnership and efficiency over the long-term could transform the economy for better.

Long-Term Perspective

Concerns over the budget deficit, at 7.6% in 2012, and related subsidies will ease. All indicators point to a smaller budget deficit, at less than 6%, for 2013 and 2014. Though inflation concerns are palpable on the streets in Casablanca and Marrakesh, the reality is that inflation has stayed below 2% annually in recent years. The economy is expected to grow annually north of 5.5% between 2014 and 2016.

Focused legislation, including the Green Morocco Plan (GMP), has proved successful. According to the Minister of Agriculture Aziz Akhannouch, the GMP, which was launched in 2008, has boosted agricultural production on average by 43% in 2012 as compared to 2005 through 2007. Making improvements at the Tanger-Med port an imperative has only benefitted what is already one of Africa’s busiest ports.  It is estimated that the port will have an 8 million container capacity by 2017. A robust network of rail and highway connected to industrial parks and free zones continue to demonstrate the country’s potential.

Making the country a financial hub only seems to be the next step. Stability and unrest concerns will continue to linger. But, if history serves us right, these concerns come with their ups and downs. As long as officials do not ignore the concerns, as leaders did in regional neighbors Egypt and Tunisia, the economic and investment outlook could spell staggering success for the King’s ultimate vision of making the star on the Moroccan flag an indicator of the new capital on the African financial map.

Kurt Davis Jr., Director and Co-Founder of Crescimento Inteligente in Mozambique, previously served as Senior Associate with Schulze Global Investments, Associate/Counsel with Swicorp, S.A., a fund manager with US$1.4 billion under management for the Middle East and North Africa, and Private Equity Consultant with Kukula Capital, a venture finance and private equity firm in Zambia. He serves as Private Equity Advisor to Precise Consult International in Ethiopia and is also a contributor to Ventures Africa and Africa.com.

Kurt Davis Jr
Kurt Davis Jr