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Feb 3 (The following statement was released by the rating agency)
The recent announcement by the Moroccan government that it will cut subsidies on some energy products reflects the authorities' commitment and political capacity to implement structural reforms, Fitch Ratings says. Subsidy reform should allow for continued deficit reduction, and augurs well for potential renewal of IMF assistance later this year.
The reform of government-financed subsidies is a key part of Morocco's deficit reduction strategy. Subsidies accounted for MAD53bn (USD6.4bn) in 2012 (6.4% of GDP) and MAD43bn in 2013. According to government estimates, the new cuts will help further reduce the cost of subsidies to MAD35bn in 2014 (3.7% of GDP). Given the authorities' commitment to subsidy reform and their success in enacting previous reforms, shown last year by the indexation of domestic administered prices of diesel, gasoline and fuel to world prices, we had already anticipated a reduction of around this level in our fiscal projections for 2014. The latest announcement therefore does not change our forecast that the budget deficit of the central government will fall to 5.2% of GDP this year and to 4.4% in 2015.
The reforms already enacted by the authorities have helped to cut the deficit from its peak of 7.6% of GDP in 2012 to 5.4% last year. A gradual recovery in the eurozone, Morocco's main economic partner, should also help the country reverse the deterioration in its fiscal and its current account deficit.
The reduction in subsidies is a key pillar of Morocco's current IMF programme, due to end in August. This provided a Precautionary and Liquidity Line (PLL) of USD6.2bn (6% of GDP) to Morocco since August 2012, giving the sovereign a buffer against potential severe external shocks. The IMF completed the third review of Morocco's economic performance under the PLL on Friday.
The ability of the Moroccan authorities to implement reforms after the adoption of policies to support the country's rapid and successful political transition is in contrast to other countries in the region following the 2011 Arab Spring. In addition to the reform of the subsidy system, the main expected reforms in public finance in the coming years include a modernisation and simplification in the tax system to broaden the tax base, including a harmonization of VAT rates and taxing the agriculture sector. In the longer term, reforming the public pension system would support the public finances.
Continued reform accompanied by political and social stability would support Moroco's 'BBB-'/Stable sovereign rating.
The authorities announced last month that subsidies on unleaded fuel, gasoline and diesel will gradually be reduced over 2014.