Rebuilding Morocco

Decades of economic restructuring are at stake as Morocco struggles to rebuild from a deadly earthquake.

The earthquake that hit the ancient city of Marrakech the morning of September 8 was a calamity in more ways than one. Over 2,500 people were killed in the disaster, and thousands more injured and driven from their homes. But the quake also disrupted a tentative economic recovery in Morocco. Growth in the North African kingdom had stagnated at 1.2% in 2022, due to spillover effects from the war in Ukraine, the economic slowdown in the eurozone, and a severe drought that caused agricultural production to shrink 14%.

Prior to the earthquake, growth was expected to pick up, reaching 3% this year, according to S&P Global.

“The rebound in agricultural output and robust performance by the country’s main export-oriented sectors, notably tourism and automotive, supported economic growth since the start of the year,” Remy Carasse, director, Sovereign Ratings S&P Global, said before the quake hit. 

In April, Fitch maintained a BB+ rating for Morocco, praising it for sticking to tough fiscal controls in the face of post-pandemic economic shocks. The same month, foreign reserves stood at $41 billion, equivalent to six months’ worth of imports. Also in the spring, Morocco issued $2.5 billion worth of eurobonds and secured approval for a two-year, $5 billion flexible credit line from the International Monetary Fund (IMF), a precautionary measure aimed at enhancing investor confidence and a “consecration of the solidity of the country’s economic policy frameworks,” said Abdellatif Jouahri, governor of Bank Al-Maghrib, the kingdom’s central bank.

Morocco’s recovery was still fragile prior to the earthquake, however. Inflation hit 6.6% in 2022 and peaked above 10% in February; in response, Bank Al-Maghrib has gradually hiked interest rates by a total of 150 basis points. To cushion the combined impact on modest households of a stringent fiscal belt-tightening program and soaring consumer prices, the authorities extended subsidies on basic goods like wheat, gas, electricity and transports.

Last month’s disaster compounds these problems. The earthquake has once again disrupted agriculture, which represents 13% of the country’s GDP, and tourism. Reconstruction is expected to be costly, hampering economic growth into next year. An estimate by the US Geological Survey has the quake reducing Moroccan GDP by anywhere from 1% to 9% as the country struggles to rebuild housing and key infrastructure, and a lost harvest forces it to rely on foreign suppliers.

Climbing Out Of The Crisis

Morocco’s recovery will be another severe test of the free-market, investor-friendly, fiscally conservative path the government has now followed for decades. After a severe economic crisis in the 1980s that culminated in hunger riots and the adoption of an IMF/World Bank structural adjustment plan, Morocco has remade its economy.

“We really learned from our mistakes,” says Hassan Benabderrazik a Rabat-based economist. “We had our backs to the wall and there was suddenly a realization that our policies were no longer working and that we had to renew all our approaches profoundly. It started with the liberalization of foreign trade, meaning the end of a protectionist logic and cuts in custom duties. Then there was a financial-markets reform and a fiscal reform. Basically, we opened up to the world.”

In the late 1990s and early 2000s, Morocco signed free-trade agreements with the European Union and the US that created better conditions for foreign investment and boosted the competitiveness of Moroccan companies.

“Morocco completely changed axes,” says Benabderrazik. “What appeared to us as a natural East-West regional integration strategy with Mauritania, Libya, Algeria and Tunisia failed, and now we are following a South-North logic. Our first partner is the eurozone. We also took great advantage of the Brexit to strengthen our relations with the UK and the African continent.”

Heavy investment in infrastructure including electricity, water, roads, ports, airports, trains, and telecommunications and internet, along with tax incentives and adjustments in corporate law, have made Morocco a favored business destination. Multinationals such as Procter & Gamble, Coca-Cola, Colgate, Mondelez, Abbott, Whirlpool, Dutch automotive group Stellantis, Unilever, L’Oréal, Renault, Swiss Nestlé, Siemens, Samsung, and Volvo have all opened branches and factories in the kingdom.

Last year, the authorities amended Morocco’s Investment Charter to further boost private investment, aiming to raise it from one-third to two-thirds of all investment by 2035. Other recent reforms include restructuring the welfare system to increase health-care coverage while increasing the tax base.

Even the pandemic and the war in Ukraine had their silver linings, making Morocco a destination for European companies looking to outsource operations while keeping them relatively close by, to reduce transportation costs and avoid logistical hurdles and shortages and protect themselves from reputational damage.

“Economic growth will benefit from the completion of additional large-scale projects, the expansion of Morocco’s export capacity, the promotion of the private sector, and the implementation of socioeconomic reforms,” Carasse predicted before the earthquake. “A series of business-friendly reforms seeks to prioritize investment in digitalization and the modernization of the legal, institutional and regulatory framework.”

While foreign direct investment in Morocco decreased by 6% to $2.1 billion in 2022, greenfield investment quadrupled to $15 billion, highlighted by Total Eren’s (Luxembourg) plan to build a $10 billion hydrogen and green ammonia production plant. Morocco holds a staggering 70% share of the world’s phosphate reserves and is the fifth-largest exporter of fertilizers globally, but it also ranks among the world’s top 10 economies by international investment in renewable energies, according to the United Nations Conference on Trade and Development’s latest World Investment Report.

Looking Ahead

As the UNCTAD report suggests. the energy transition has become an opportunity and a priority for Moroccan authorities.

“We have a lot of sun and wind, which means we have the potential to produce renewable energies in better economic conditions than Europe,” says Benabderrazik. Green energy could help the country reduce its reliance on coal and lower the cost of electricity production, he argues, making the economy more competitive. Morocco is also exploring solutions to water scarcity, including several desalination projects powered by green energies.

The financial sector is also a strong point for Morocco as local lenders scale up across Africa and the Middle East. Today, three of Africa’s top 10 banks by assets are Moroccan; they were expected to continue growing through mergers and acquisitions this year.

Even before the earthquake, however, Morocco’s economic transformation left it facing numerous challenges.

“Morocco still has a large informal economy, wide income disparities between more and less developed areas, and high unemployment, especially youth unemployment,” Caresse noted. “These structural weaknesses, although they are lessening, weigh on the Moroccan economy.” Prior to the quake, S&P Global expected GDP per capita to increase gradually in coming years but remain below its peers.

In 2022, unemployment stood at 11.8% and remained especially widespread among youth and women.

Another hurdle is over-reliance on agriculture, which still accounts for 30% of employment and makes the economy especially vulnerable to global warming. Last year’s drought resulted in a 67% year-over-year loss in production, forcing the country to ban exports of certain crops.

Along with the overriding need to save lives and rebuild following a devastating natural disaster, Morocco expects to feel the consequences of the economic slowdown in Europe. Eurozone GDP is expected to grow only 0.9% in 2023, compared to 3.5% last year.

Moroccan entrepreneurs, however, are resilient. According a pre-quake PWC survey, 73% of the kingdom’s CEOs remain confident their companies can weather an economic slowdown at home and abroad.