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International Markets On Morocco's Foreign Debt

Washington / Morocco Board News--   Do you remember that €1Bn eurobond borrowing the outgoing Finances Minister S. Mezouar had managed to land early September 2010? well, the yield has increased some 33% in just a little more than a year, thus placing the lower bracket to the effective future rate of borrowing abroad to a little less than 6%. and the pricing value is going down with little prospects for recovery. For a budget set on borrowing a lot more abroad to sustain its expenditure, this is a bit of a bad news: 6% is not daunting as a yield for the treasury to pay back, but it will certainly put a strain on public finances and mortgage the future. Regarding the bond itself, the yield is not going to change: 4.5% to be paid every October 5th all the way to 2020 and then set to pay back in fine the €1Bn initial borrowing. However, if the government needs to go back to Debt Capital Markets to issue additional bonds, they will certainly not get to issue them at 4.5%. And so far, these bonds need to yield a lot more to keep up: the 4.5% have been issued on a par value of 1000 for a €45 coupon; but because they have been issued at a discount – meaning, an investor need not pay the nominal value, but a little less, so as to make the bond more attractive- their yield to maturity should decrease as each day gets the bond issue closer to a payment date or its maturity. Sadly enough, this is not the case: the steep decrease in bond price up to the early 2011 was DCM beliefs that Morocco’s foreign debt sustainability was not strong enough to earn the 4.5% coupon rate.

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A 10% decrease over the depicted period, including regular 15% drop when coupons are paid off

 

Supposing the next government decides at this very moment to issue another bond on international Debt Markets (DCM) they will have to provide investors with at least 6% yield- a penalty to be paid for  because the present debt stock -foreign and domestic- is to high and most of bugdet expenditure goes into subsidies and pay-wage.

Who’s fault is it? The context for foreign debt issuance needs to be recounted beforehand: the last time Morocco went on DCM was June 2007, where it has levied 500 Mln and is in the process of being paid, and in excellent terms for investors; meaning, the last time Morocco borrowed abroad, it has done so with a reasonable coupon, and the required yield remained in line with it. In other terms, the previous bond issue has been a success, so why not the next one?

I do not believe the increase in required yield to maturity is the sole result of global economic downturn, or related to sovereign debt crisis. The yield to maturity on the Morocco “Eurobond 2017″ issue has picked up very quickly and recovered from 2009, and from then on sustained a robust premium price above the nominal value. The fact that the Eurobond 2020 cannot replicate these performances and dropped its value in the early days of its issue is tale-telling: investors doubt the Moroccan government will put the money to good use, both to Morocco and to themselves. In that sense, those high officials at the Ministry of Finance (as well as outgoing minister Salaheddine Mezouar) have failed in providing value for money.

I’d suggest this money has been squandered and could endanger not only Morocco’s freshly earned Investment Grade statuts, but the sustainability of its public finances. The coupon in itself certainly puts a strain: during the last couple of years, the treasury serviced MAD 2.1Bn in foreign debt and ceteris paribus, the 2020 Eurobond represents 74% of the average MAD 680Mln in paid interest since 2009. Though it is only 11.3% of all paid interest (foreign and domestic) the coupon drains a lot out of the country’s unstable foreign reserves, at times when they will be needed to sustain imports and the Dirham exchange rate.

From 4.5% to 6%... in less than 1 year. Disco unted Bonds are supposed to have a decreasing yield to maturity, not the opposite.

Government responsibility weights in heavily when it comes to the guarantees it was supposed to provide so as to insure value for money: what do we know of the expenditure the €1Bn was supposed to fund? Is it invested or just used to pay for compensation, pay-wage and other non-productive expenditure? Shouldn’t the Caisse de Dépôt et Gestion (CDG) sovereign fund be involved in managing the receipts? Will the next government find the money intact and invest it wisely? These are questions that will most certainly be left unanswered thanks to the institutional swamps of political irresponsibility and governmental weaknesses.

In order to address these issues, the next government needs to assure investors they can deliver. The most straightforward policy to do so is to raise taxes. Relative to GDP, direct fiscal pressure for 2010 was only 8.73% and total fiscal pressure 19%. There will be a need for a more balanced approach to the fiscal distribution. Alternatively, but not exclusively so, the same policy will be needed to reduce expenditure. Given that the budget appropriation for the compensation fund has inflated over the last year, the much promised -but never implemented- reform of CdC will have to be carried on; the boil has to be lanced, either with unpopular measures to the average/median household, or with a vicious fighting with the establishment; a ‘caring’ government with a popular mandate is supposed to choose the latter.

I am being only too pessimistic about it. Then again, I don’t have access to a Bloomberg or Reuters terminal to get all the facts. But from what I can see (and get) surely there is a lot of goodwill to prove on behalf of the Moroccan authorities to reassure investors about how serious they are in providing all resources and pay back the debt, because the best we can hope for -and afford- next time the Finances Ministry decides to borrow abroad is going to be 6%, and that is generous.

- Discounted Bonds: a bond with a nominal value of 100 issued at 99.64 is a discounted bond. The idea is to attract investors, who will then pay a lower price for the nominal value, and cash-in the coupons as well. Premium and Par Bonds pay respectively higher or exact nominal price

- Bond Prices vary inversely with interest rates: the standard bond pricing formula goes as follows:

the coupon is fixed with the issuance date. Prices and yields vary with respect to an array of variables, among others time and perceived risk; a higher perceived risk of default will lead investors to required a lower price -meaning, a lot less than the nominal 100 per bond, and thus increase the yield to maturity.

- The Price of a Discounted Bond should increase over time: because it has been issued with a discount to investors, the bond price should theoretically converge to its par value; the 2020 Eurobond clearly does not converge to 100 – but rather to its Market-perceived true value, 90. The textbook explanation is that since the discount is only there to encourage investors to buy the issue, its true (nominal) value needs to be discovered along the time-line and after the first couple of coupons have been paid for.

Comments (10)  

 
Moroccan Patriot
0 #1 To Simplify, Morocco is in bad economic shapeMoroccan Patriot 2011-12-29 11:11
Morocco hedged heavily on the Euro, and with the Euro trading sharply down, between 10.7 and 11.15 depending on the day, it seems this is yet another bad move made by the rocket scientists who work for the Moroccan government.

70% of Morocco's currency reserves are in Euro, only 30% in Dollar... Not a good move.

Morocco recently tried to get on the Gold band wagon, and had tons of it stolen from Casablanca, and ended up buying at the end of the bull run.

There is hope though... Morocco has an opportunity to put its economic house in order by revamping some of its tax code.

15% capital gains tax on Stock purchases is silly. It is impossible to really enforce, as most investors just sell off realized gains so as to avoid the tax all together, or they sell it to themselves under other accounts!

Instead, make the purchase commission .75% (currently 1%) and the sale commission 2% (currently 1%) - then eliminate the 15% capital gains tax all together.

You should only have tax laws that are clear and easy to enforce.

Morocco should also impose much heavier real estate taxes. I actually pay five times more for the yearly tax on my car than I do on the yearly tax on my villa!!! My car is worth around $20,000 - but because it has 14 (cheval) it is in the highest tax bracket (5000 DH) - My house, a villa in a top area of Rabat is worth around $800,000 and I only pay around 1000 DH a year ($120)!!!

Property taxes should be a minimum of 1% of the value of the property annually, this tax would do so many good things for Morocco, I don't even know where to start in the explanations... for starters, it provides badly needed revenue for the state, secondly it keeps the property prices from shooting up, it also encourages property owners to rent their empty apartments and might lead to the rule of law finally taking hold in some kind of Real estate law court! The property taxes on empty apartments should be a minimum of 2% annually... if you can't afford it, sell your apartment or apply for a waiver and provide proof of lack of income and a reason why you are either not living in it or renting it...

Gas prices are much too cheap, they need to be increased dramatically, and parking violations need to be increased dramatically...

These are just some of the idea's for raising revenue... but it is sad to raise revenue to pay soldiers and police to stand in the cold the whole day so they can watch the road as a car drives by... Priorities, priorities.
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S Hassi
0 #2 Not all of us in it togetherS Hassi 2011-12-30 00:33
Everyone knows that the King and his cronies do not pay any tax . they own 60% of the county economy and pay 0 tax!!! only the simple Hmaida pay for everything. It is time either we all in it together or tax free for everyone . The king should think of Morocco as a country not a farm and start paying tax like Hmaida and co
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mbt
0 #3 Beyond Mathsmbt 2011-12-31 04:14
The bond pricing formula is beyond my basic maths, but I can work out without any kind of formula that Morocco is suffering from its mismanagement so much so that its mouthpiece website www.map.ma is charging for the "The value of information". I wonder what value and what information? How absurd? But I suppose the king needs all the dirhams he can scrap.
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Passing by
0 #4 Thoughtful commentPassing by 2012-01-02 07:29
Dear Moroccan Patriot, your ideas are very interesting. I hope some of them get some attention from those soon to-be in power (at least in the headlines).
As for the relative value of your car vs. your villa, I suggest you change car, you might get some tax rebate by getting an even more expensive gas-guzzling one.
Cheers
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What to say, what to say...
0 #5 wa gheer allah yahfad!What to say, what to say... 2012-01-04 16:50
Moroccan Economy: Top 10 reason why we should all say "WA GHEER ALLAH YAHFAD OU SAFI"

10)The Dirham is pegged to the Euro
9) Morocco imports twice as much as it exports
8) The Moroccan economy is highly leveraged (too much credit)
7) Anybody can get credit these days in Morocco including Hmida azzawali
6) A Housing bubble that the government has decided to ignore although they can see clearly what has happened in US, Spain, and Greece
5) Literacy / education that is the worst in the Arab world (well, we are ahead of Djibouti if that makes you feel any better)
4) Lost tax revenue where > 60% of the politically powerful don't pay taxes
3) Inflation: It now costs more to live in Morocco than it does in the US (I know this because I now live in Morocco!)
2) More than 30% of the economy is still agriculture based
and # 1) RAIN FALL REALLY REALLY SUCKS THIS YEAR
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Morrocan curious
0 #6 COMMENT_TITLE_R E International Markets On Morocco's Foreign DebtMorrocan curious 2012-01-05 07:48
Statements like "they will have to provide investors with at least 6% yield- a penalty to be paid for because the present debt stock -foreign and domestic- is to high and most of bugdet expenditure goes into subsidies and pay-wage." are puzzling to me. I am actually surprised that investors only require 6% to lend to Morroco whereas they will typically require 7% to lend to Italie for example (and much more for Grece or Portugal). The only way to prove the author's statement is to compare Morrocan yield to Tunisia/Egypt and maybe Algeria and other comparable countries. I am not aware of other countries yiels but looking at them would be the least that can be done to analyze the Morrocan situation. My intuition on the issue is that the 6% yield for Morroco is not a real market yield and maybe Middle easter sovereign funds can squizze the market for Morrocan bonds (in other terms they overpay for Morrocan bonds and hold them and may be trade them at an "artificial price"). Myabe the auhtor can explain the sources of these yields? are they quote or transaction price?

The statement "discount bond should have a decreasing yield to maturity not the reverse" does not make sense to me. No one can predict how the yield to maturity will change over time. They can go up or down depending on market condition and more specifically depending on the "risk free" yield curve and the term structure of default spreads. The fact that the Morrocan yield goes from 4.5% to 6% can happen to any country even if there is no corruption and even if default risk goes down. It can happen for example if there is a systemic decline in ethusiasm for sovereign debt. Again, to make the point for Morroco, one has to compare Morrocan yields with yields for comparabale countries.

Overall the article is very interesting but I am curious to learn more about the issue.
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Moroccan Patriot
0 #7 China proof MoroccoMoroccan Patriot 2012-01-05 10:47
I had a very interesting conversation with a very smart captain of Industry from Morocco. Talking to him made me feel better about the state of things in Morocco.

He talked me through the immense number of investment opportunities available in Morocco. More impressively, he explained to me his concept of promoting industries and businesses that are China proof. He then told me about how Moroccan business owners are not particularly looking to break the business owner next door. When you go to a business in Morocco, he is very likely to tell you to go to his competition to get an item that he may have run out of.

So that is when I decided to follow his example and share some of the idea's he shared with me on how to China proof Moroccan industry.

This is something that should be discussed by all of us. How do we help reduce unemployment in Morocco? How do we help push Moroccan industry in the right direction? How do we reduce our trade imbalance?

Just passing by, thank you for the kind words. I hope that this government brought in by the PJD is more competent than the outgoing government. What is even more important than their competency level is the extent to which they will be held to account by the people they are supposed to be representing.

Responsibility, Accountability, Integrity, that is what needs to be developed in Morocco.
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Passing By
0 #8 Reducing trade Imbalances - Argentina ExamplePassing By 2012-01-06 01:19
http://www.bloomberg.com/news/2011-11-02/porsche-sells-malbec-to-keep-autos-coming-into-argentina-cars.html

"President Cristina Fernandez de Kirchner, who won re- election Oct. 23, is forcing sellers of foreign-made cars to become exporters of everything from bio-diesel to bottled water in return for access to an auto market that’s growing 30 percent a year. Argentina introduced the program in March to boost exports, increase investment in local industry and shore up dwindling central bank reserves. The government forecasts the trade surplus will shrink to $8.6 billion next year from $12.1 billion in 2010."

Whilst this policy is contrary to the "free-trade" dogma that Morocco is currently embracing, similar but less radical measures can help reduce trade imbalances by encouraging Moroccan Importers to help Exporters in market development and competitivity improvment
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Moroccan Patriot
0 #9 Passing by - I LOVE your idea!!!Moroccan Patriot 2012-01-06 07:13
The idea of requiring those who most benefit from doing business in your market to give something back is fantastic. How would you suggest we implement these kinds of programs and which companies should we target?

I hope you have the ear of the new Government. These are exactly the kind of progressive idea's that are needed to save the Moroccan economy.
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Passing by
0 #10 PJD Mail Box Passing by 2012-01-18 17:20
I heard that the PJD website has opened a mailbox to receive policy suggestions and ideas. We should use to share our thoughts
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