External Support May Offset Fiscal Impact of Morocco’s Earthquake –Fitch
Recovery efforts in the wake of the earthquake that struck Morocco in early September will drive higher public expenditure, widening fiscal deficits in the near term, but international assistance is likely to offset some reconstruction cost pressures, and higher remittances will provide further support to external liquidity, says Fitch Ratings.
The earthquake had a devastating human cost, claiming more than 3,000 lives and leaving many more injured or homeless. The authorities recently announced a reconstruction plan valued at around USD11.7 billion (8.5% of GDP) over five years.
Around 30% of this is targeted for emergency aid, housing reconstruction and repairs, and restoration of affected infrastructure including health and education facilities. The remainder is focused on the social and economic development of the affected region.
The government will pay for the plan through on-budget spending and a MAD2 billion (roughly USD195 million) contribution from the state-run Hassan II Fund for economic and social development.
Prior to the quake, the government had planned to narrow the budget deficit to 4.5% of GDP in 2023 and 4% in 2024, though in June Fitch forecasted slightly higher deficits of 4.9% and 4.4%, respectively, partly to reflect the impact of inflation pressures on spending.
Recovery costs are likely to push spending up further, leading to larger deficits and higher debt than we had forecast at the time of the last review. When we affirmed Morocco’s rating at ‘BB+’ with a Stable Outlook in April 2023 we noted that its ratings were constrained in part by high public debt and a budget deficit larger than peers.
Nonetheless, it is unclear what share of the reconstruction plan’s costs the government will bear. The planned spending will also be supported by a fund that the authorities have established to collect donations from citizens and local businesses.
So far, this has raised around USD700 million. Some post-earthquake international assistance will also be channelled through the plan, though the amounts remain unclear at this stage.
The IMF concluded a staff level agreement in September to provide USD1.3 billion in long-term financing for climate resilience, but this was not linked directly to the earthquake. In addition, we believe the plan’s development spending component could be flexible, depending on the funding available.
“We expect the government will have access to additional external funding, which will help to offset reconstruction costs and higher borrowing requirements”.
The IMF and World Bank affirmed that they still planned to hold their annual meetings in Morocco in October, which we believe will provide an opportunity for international governments and institutions to offer further funding support.
External liquidity pressures are unlikely to be significant. Morocco has a two-year flexible credit line with the IMF – approved by the IMF board in April 2023 – worth around USD5 billion, which the authorities could look to draw upon if they wished.
“We also anticipate an increase in remittance and donations in the short-term as the large Moroccan diaspora is likely to send aid to their families, as occurred during the Covid-19 pandemic”.
Remittances in 2022 were equivalent to around 8.3% of GDP, and were already up by 10% year on year in January-July 2023, to MAD66.0 billion.
Tourism remains an important driver for economic growth and foreign currency earnings. The quake may set back the post-pandemic recovery, but receipts had already increased by 50.9% yoy in January-July, taking them well above pre-pandemic levels.
Moreover, tourism operators report more postponements than cancellations. Key centres for important industrial activity, such as the automotive manufacturing sector, were not located close to the epicentre, and Fitch Ratings analysts said they do not expect them to be affected significantly by the quake. Naira Devaluation Deepens Economic Crisis in Nigeria