Monday, 4 January 2010

The re-establishment of Morocco’s historic trading routes

All tariff barriers between Morocco and the EU will come down in 2012. The opportunity that this represents is immense; akin to a rebuilding of the silk routes of the past. Co-incidence with this, the kingdom has undertaken a number of strategic liberalizations and a revision of its legal framework that investors should now take notice of. This, combined with the modernization of its infrastructure and a new focus on upgrading the educational system, will result in medium term GDP growth of at least 5.5% annually. That is pretty impressive for a country that, only ten years ago, was considered as an undeveloped nation. Zin Bekkali, the Moroccan CEO of London based Silk Invest, believes that this can be translated into investment performance going forward. Indeed, that is why Silk Invest has placed its Maghreb hub office in Casablanca.

Bekkali points out that the Moroccan investment theme is one of convergence. The open sky agreement with the EU is the most talked about convergence between the EU and Morocco. This is because it represents cross border transportation and that brings the geographies closer together. Domestically, however, even equally important improvements have been made in infrastructure. These improvements have been made both in the road and the rail system. In the 1990’s 40km of train track were laid per year. This year that figure will be 160km. By 2011 the distance covered by new track will be 320km.

Hesham Saad, the lead manager of the Silk Falcons fund, points out that although Morocco has a diversified economy it is a net importer of oil. As a result, it has to focus on its biggest asset, its geographic positioning. This is historically where the country has been most successful. The country now appreciates this and the new vision is to become a strategic hub for the region, particularly in services. This is why the ports, railways and roads are the focus of so much attention. USD 16bn a year is now being spent on infrastructure. The port of Tangiers is the largest such project. After only three years in operation, Morocco’s position as a shipping destination has improved from 76th to 30th place.
In addition to the convergence programs with the EU, Morocco has numerous free trade agreements with amongst others the US. Equally interesting is its commercial and cultural links with many of the Arab countries. At the corporate level, Moroccan companies are expanding into Sub Saharan Africa, leveraging the country’s status as a hub. Maroc Telecom and Attijariwafa bank are clear leaders in this trend. The telecom operator is expanding through Africa buying majority stakes in telecom companies in Mauritania, Burkina Faso, Gabon and Mali and prospecting in other African countries. While Attijariwafa bank, Morocco largest private bank, and the seventh largest bank in Africa in terms of total assets, has been very active in Africa acquiring majority stakes in major banks in Tunisia, Senegal, Gabon, Cameroun, Ivory Coast, Mali and Congo. This should enable Attijariwafa Bank to become a leading regional bank in both North Africa and Africa as a whole and contribute to local economic development.

Daniel Broby, Chief Investment Officer at Silk Invest notes that in the past, Morocco has been accused of a lack of transparency and a less than level playing field. He claims this is now changing. He points, for example, to the fact that the English language is now being jointly used with French for public tenders. Broby also says IFRS is now mandatory for listed companies (in a country where 30% of companies used to fail to produce international annual reports).

Corruption is being addressed by a powerful government commission. Taib Fassi-Fihri, the Minister for Foreign affairs and Co-operation, points out that the country is benchmarking its ‘openness’ policy on EU regulations and norms. Still, all is not perfect. More has to be done to improve justice, upgrade corporate to best practice and to simplify procedures at the government level. The point, however, is that the political will exists to do this within the country’s democratic framework.

Wages are 8 – 10 times less the European levels and the labour force is very young. As a result, the country is particularly suited to added value industries. Tourism is obvious but agriculture and outsourced manufacturing are clearly areas which will grow strongly going forward.

According to Silk Invest, revenue per capita has doubled over the last ten years. As a result, increasingly, growth is also being driven by internal demand. The country has low and stable inflation around 1.2%, a balanced budget and has reduced government debt substantially. Foreign exchange reserves now represent 7.4 months of imports.

The financial sector was one of the first to be modernised. Following the centrally co—ordinated reforms, it is now both dynamic and robust. Ismail Douiri, Vice President of the Moroccan Banking Association, said that Moroccan banks had “resilience due to the careful regulation in which we operate, thereby avoiding the first phase of contagion.“ The minimum solvency ratio was increased from 8% to 10% one year before the credit crisis began. Banking loans have increased fourfold in ten years. The capital backing this was largely raised in the local institutional market.

Abdeltif Stitou, Silk Invest’s Chief Operating Officer and also a Moroccan, point out that the capital markets are developing at a rapid rate. There has been a historically strong link between the state and the private sector. Thanks to new tax breaks the number of listed companies will likely double by 2015. Karim Hajji, Managing director of the Casablanca Stock Exchange, points out that the capital markets in Morocco are the oldest in Africa. The current stock exchange goes back 80 years and now has a market capitalization of $85bn.

Valuations in the Moroccan market reflect a fair amount of the growth ahead. The market has been a laggard in 2009, actually falling by 3% (as at 9th November) against a world where most markets have risen. That said, Zin Bekkali notes that over the last ten years returns have averaged 15% per annum. His company’s Silk Arab Falcons fund allocates 8.5% to Morocco and the Silk African Lions fund allocates 9.3%.

Youssef Lahlou, a portfolio manager at Silk Invest based in Casablanca, points out that “the Moroccan Stock Exchange should benefit from a return of international investors looking to diversify their holdings in the MENA region”. He invests in companies relatively sheltered from the impact of the financial crisis. In Lahlou’s opinion the real estate sector is one of the most interesting in Morocco. With a shortage of 1.5 million housing units especially in the low-income and the mid-range segments, companies operating in this sector (especially Addoha and Alliance) are set to reap the fruits of the accelerating demand. This should also benefit companies in the cement and Iron and Steel sectors.

The Silk Invest funds are also positioned to benefit from the financial sector. Moroccan Banks such as Attijariwafa bank and BCP will continue to growth rapidly, with more than 100 branches opening yearly. They will continue to develop their activity in sub-Saharan Africa. The region has helped Morocco promote growth and reach economic stability, allowing it to average over the past five years a growth rate in excess of 6%.

According to Youseff Lahou another success story out of Morocco is Maroc Telecom (the country’s largest Market Capitalization stock). The group, present in several Sub-Saharan countries, has been able to sustain strong annual earnings growth, over the last few years, thanks to an improvement in the Group’s operating performance, solid sales growth, primarily due to an increase in subscriber numbers which reached 14.5 million in 2008 against 8.2 million in 2005 (i.e. an increase of 77%) and a much tighter control over operating costs.

In conclusion, Morocco looks set to be one of the winners in the post credit crisis world. The next ten years will see a rapid convergence with Southern Europe. The Silk route is being re-invented and companies close to the capital markets, those in the emergent sectors, look set to enjoy above average growth.

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