The 2009-13 period was marked by a strong deterioration of the twin deficit in 2012, when the budget deficit and the current account deficit slowed by 6.8% and 9.5%, respectively. However, with the market starting to recover since 2014, interest rates have begun trending downwards, prompting investors – both globally and in Morocco – to turn to alternative assets for higher yields.
Challenges
In the challenging political context of the Arab Spring, public deficit worsened between 2009 and 2012, increasing from Dh15.9bn ($1.7bn) at 2.1% of GDP, to Dh63.3bn ($6.6bn), or 2.1% of GDP. This was mainly the result of:
• An increase in subsidies due to the surge in global oil prices, from Dh13.3bn ($1.4bn) in 2009 to Dh55.1bn ($5.7bn) in 2012;
• A strong increase in payroll expenditures at a compound annual growth rate (CAGR) of 9% over the 2009-13 period, from Dh75.5bn ($7.9bn) in 2009 to Dh98.8bn ($10.3bn) in 2013, following the government’s decision to progressively increase salaries for civil servants starting in 2012; and
• Limited growth in Treasury receipts, with a CAGR of 4% over the 2009-13 period. The interest rates environment in Morocco also suffered from a strong deterioration of the current account deficit, which reached 9.5% in 2012, following a sharp widening of the trade deficit, as well as a slight deceleration of remittances from Moroccan citizens living abroad and of tourism receipts. Indeed, the kingdom’s trade deficit reached 24.3% of GDP in 2012, under the pressure of:
• The country’s reliance on imports for energy.
• The signing of free trade agreements at the beginning of the 2000s with the EU, the US and other countries; the steep rise in purchasing power; and the high level of investment seen between 2000 and 2012, which have resulted in an increase in imports of consumer goods and capital goods, growing at CAGRs of 7.3% and 11.2%, respectively, over that period.
• The delay in the implementation of Emergence Plan – an industrial strategy introduced in 2005 and updated in 2009 – due to external factors, including global economic conditions.
Balancing Act
In 2014 Treasury yields started trending downwards. They currently stand at historically low levels due to the reforms brought to the subsidy system – including progressive cuts of gasoline and fuel subsidies that started in September 2013 – which helped improve public finances, ease liquidity pressures, boost the level of foreign reserves and reduce the current account deficit. Similarly, the level of foreign reserves benefitted from the tax amnesty on asset repatriation.
These developments occurred alongside an accommodative monetary policy, which saw three key interest rate cuts since 2014, to stand at 2.25% in December 2019. Meanwhile, as of February 2019 the 10-year-bond rate stood at around 2.8%, a notable decrease from its 5.6% rate at the end of 2013.
In a low interest rate environment, combined with foreign exchange controls, local institutional investors such as mutual funds, insurance companies and pension funds are likely to seek alternative assets to invest in. Indeed, at current levels, the spread between the 10-year bond and the equity market dividend yield ratio is reaching alltime high levels, at almost 120 basis points, in a market where institutional investors have limited exposure to international markets, mainly due to the foreign exchange control system in Morocco. According to our estimates, only 2.5% to 3% of total assets under management, including the equity invested by Moroccan banks, are invested outside of Morocco. In this context, Moroccan institutional investors might progressively reallocate a portion of their assets under management into alternative investment opportunities such as the equity market – as illustrated by the last rally of the main indices on the Casablanca Stock Exchange at the end of 2019 – and real estate investment trusts (REITs).
Alternative Asset Class
A REIT is a company that owns and operates income-earning real estate such as apartments, office buildings, warehouses, shopping centres, malls, hotels and retail stores, among others. Many of these companies are fully integrated organisations, meaning they engage in the acquisition, development and management of commercial real estate for their own account. Most REIT property portfolios are concentrated in a specific sector, for instance retail or apartments.
This type of company allows investors to own property without having to face the traditional entry hurdles inherent to the real estate sector, namely high levels of capital. REITs allow investors to partially own a mall or an apartment building by, for example simply owning shares of a REIT stock.
REITs are total return investments providing investors with both capital appreciation and income through dividends. Unlike other stocks, a REIT’s return profile has characteristics of both bonds and equities. The long-term nature of REITs leases provides income visibility, as bonds would, while the mark-to-market of leases allows REITs to be partially impacted by the economic cycle, as equities would.
REITs are not new to the investment landscape. Indeed, there are already around 40 countries offering them as a regulated investment vehicle, with total market capitalisation standing at $1.7trn in 2017, according to global consultancy EY. The number of countries having adopted the framework almost doubled between 2007 and 2017, demonstrating the growing interest in the asset.
High Potential
Morocco is currently experiencing a strong increase in demand for commercial real estate stemming from a need to externalise the development by local business operators, and from the increasing popularity of Morocco’s industrial acceleration zones designed to attract foreign investors and companies such as Delphi, PSA Peugeot Citroën and H&M. There is also a growing demand for new asset classes to split property and operating components in sectors such as health care, education and tourism. Hence, REITs show significant development potential.
Furthermore, since the mid-2000s the country has designed and implemented a number of strategies to boost the development of key sectors and major infrastructure. These include the Green Morocco Plan for agriculture; Plan Azur 2020 for the tourism sector; the Emergence Plan to attract foreign investment in duty-free industrial zones, such as Tanger Automotive City; and the Tanger-Med port for major logistics developments. These evolving strategies continue to boost demand for commercial real estate assets, such as procurement and logistics platforms for the agriculture sector; hotels for the tourism sector; industrial facilities; education and training facilities; and independently managed health care facilities that have been developed under an April 2019 legislation permitting the development of health care facilities by non-doctors.
While the Moroccan REIT legislation was initially drafted in 2016, stock market regulators and other bodies had, since then, been putting the final touches to the frameworks governing REITs before authorising this asset class in the kingdom. Following their ratification by the Moroccan Capital Markets Authority as a regulated investment asset in September 2019, REITs now offer both strong capital appreciation potential and above-average dividend yield. With the kingdom’s current low interest rate environment and 10-year risk-free rate levels, investors with a relatively high risk aversion will be attracted to investment vehicles such as REITs, driving up demand and boosting the valuation of asset classes with a low-risk profile and higher yields.
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