RABAT Dec 5 Almost every day without fail, hundreds of unemployed graduates storm through downtown Rabat calling for the government to fall. La st month, they went a step further, crossing a red line by targeting their anger at the royal family's spending.
"Shame on you, you have squandered the budget!" a small group of several dozen chanted during one march a few days before parliament voted on the first draft of next year's budget.
They never made it to the parliament building, however, because police, aware of the protest through social media, were waiting with truncheons to beat them back.
Though King Mohammed's royal expenditure is higher than those of European monarchies, it amounts to less than 1 percent of Morocco's budget.
The monarchy - whose descent from the Prophet Mohammed has been a powerful deterrent to popular challenges to its authority - instituted constitutional reforms last year in the wake of the Arab Spring in the Middle East, deferring more of its power over political, economic and security affairs to the elected government.
But trying to correct deteriorating public finances without inciting more protests, which would probably include political demands to make the monarchy more of a symbolic ruler, looks an increasingly tough task for the authorities. That is making them reluctant to heed IMF demands and cut massive subsidies on staple goods and is forcing them to seek new sources of government revenue.
Public finances in Morocco, a country of 33 million, are in dire straits because of the financial crisis in the euro zone, the country's main economic partner, and after the government increased social spending last year to help contain protests after uprisings brought down the rulers of Egypt and Tunisia.
Subsidies on food and energy have shot up this year to 52.3 million Moroccan dirhams ($6.14 million), from 48.8 million in 2011 and 29.8 million the year before.
Trade deficits are at levels not seen since structural adjustment programmes of the 1980s when Morocco saw riots over food prices that left hundreds dead.
The trade gap was 10 percent higher in October than a year ago at 163.9 billion dirhams, accelerating from a 5 percent year-on-year increase in September - largely due to a surge in key imports of energy products and wheat, which the state passes on to Moroccans at heavily subsidised prices.
In August the IMF approved a $6.2 billion precautionary line of credit for Morocco over two years and urged action to reform the subsidy system, although it did not formally tie that to the aid.
"The government effectively defused large-scale protests by implementing referendum-approved constitutional reforms," Standard & Poor's said last week, giving a BBB- rating to a maiden U.S. dollar bond proposed by the Moroccan government.
"Although this process has preserved the country's traditional social cohesion, managing popular expectations amid comprehensive subsidy reform or an economic slowdown will remain a challenge."
In October S&P warned it could lower Morocco's BBB- investment grade credit rating, citing the need to significantly narrow the fiscal shortfall and current account deficits, which averaged more than 7.5 percent of gross domestic product during 2011-2013.
In the face of simmering unrest the government is hurriedly trying to find cash to avoid having to roll back subsidies, which account for 15 percent of total public spending.
One solution it has come up with is Morocco's first international dollar-denominated bond, a $1 billion, 10-year issue launched on Wednesday.
But economists say that won't solve structural fiscal weakness and the situation was worse than is being acknowledged.
"For now, our reserves cover four months of import needs," said Najib Akesbi, an economist at the Hassan II Institute of agronomy in Rabat, referring to foreign currency reserves of 134 billion dirhams in October. "After this bond issue they will cover four and a half months."
The government seems to be betting that it can plug the gap with money from a new funding source: Gulf Arab rulers who have an interest in propping up a fellow Arab monarchy after revolt brought down other rulers in the region.
King Mohammed led a delegation on a tour of the Gulf last month. Though no major deals or loans have been announced, Morocco expects to receive early next year the first part of $2.5 billion in aid from Gulf states, an advisor to the king said during the tour.
"In the short term, Morocco doesn't have a problem raising the money it needs, mostly because the Gulf states are going to finance Morocco's deficit for the next few years," said Riccardo Fabiani, London-based North Africa analyst for political risk consultancy Eurasia Group. "(The bond) will be heavily subscribed by Gulf countries."
With those extra funds bolstering public finances, the government plans to cut spending on subsidies only slightly in its 2013 budget, which parliament is expected to sign off on this month, to be t ween 45 and 49 billion dirhams, or 6.1 percent of GDP.
Finance Minister Nizar Baraka told Reuters that subsidies would be lower and more targeted towards lower-income Moroccans next year, and this would be enough to maintain investor confidence in Morocco.
"We are thinking of spending around 40 billion dirhams, which fits with our plans to reduce subsidy spending and to be more helpful by targeting the poorest class," he said on the sidelines of a parliament debate last week. "I'm sure that this subsidy spending level will not alarm investors in the bond."
Baraka, who like most government officials rarely explains policy at length, declined to give more details or say if Morocco had dipped into the IMF facility.
Economic growth is supporting government finances with Rabat projecting GDP growth of 3.4 percent this year and 4.5 percent next year. It aims to cut the budget deficit to 4.8 percent of GDP in 2013 from 5 percent this year.
Income from tourism, however, which accounts for 7 percent of GDP and is heavily dependent on visitors from Europe, fell 4 percent in January-October from a year earlier, while remittances from the 2 million Moroccans living abroad fell 3.1 percent - highlighting the risk of an economic slowdown that would exacerbate pressure on volatile government finances. (Editing by Susan Fenton)