More than two years of economic and political turmoil in North Africa has reoriented foreign investors toward the most stable market in the sub-region: Morocco. The country’s relative stability is mostly driven by two factors: steep increases in food and fuel subsidy spending and modest political reforms following street protests in February 2011. These two factors have allowed Morocco to avoid the same fate as its North African neighbors and emerge as a top investment destination.
Running out of money
Government spending on subsidies has promoted stability, but it has also contributed to Morocco’s precarious fiscal position. FX reserves are barely enough to cover four months of imports, which is a 10-year low, and the budget and current account deficits are straining the economy. This is forcing the government to consider cutting the same food and fuel subsidies that promoted stability. Such a move could come this year and impact all industries operating in the country, raising input and supply chain costs and reducing customer purchasing power. The government estimates that reducing or eliminating subsidies would lead to annual inflation rates jumping to 7% from 2% during the next few years.
Planning for subsidy rollbacks this year
Companies should prepare a flexible response to Moroccan subsidy rollbacks to mitigate risk and identify opportunities. The impact of subsidy rollbacks will depend on which areas of the economy are targeted and speed of implementation. Below are three subsidy rollback scenarios and recommended actions for foreign companies:
1. Full subsidy rollback (high impact/ least likely)
This scenario includes rolling back fuel subsidies, which comprise more than half of total subsidy spending. A change to heavily subsidized fuel would reverberate across Morocco’s economy and lead to a higher cost of distribution and inputs. Companies should plan to adjust tactics for core functions like finance, marketing, and sales in the context of a period of significant belt-tightening in 2013. All industries should look into forward contracts for local inputs given the likelihood of a spike in inflation. Technology companies should position their products as cost-saving solutions and emphasize their after-sales services.
2. Partial subsidy rollback (medium impact/ most likely)
This scenario includes electricity and sugar with an initial reduction of up to one-third of total subsidy spending. The plan would undermine private consumption, especially for the middle class which is not eligible for cash payments that could go to as many as 2 million poor Moroccan families. Companies should consider supporting top partners and offering special prices to important customers, because higher electricity costs would hurt local businesses. Consumer goods companies should switch to smaller packaging and emphasize value items in their product portfolio.
3. Limited subsidy rollback (low impact / somewhat likely)
This scenario primarily focuses on sugar, which is an obvious target for the government. Artificially low prices created by subsidies led Moroccans to become among the highest per capita sugar consumers in the world. Not all companies will need to respond to limited subsidy rollbacks. FMCG and other consumer goods companies should consider offering short-term financing to top partners and engaging the overnment as a preemptive step to turn the potential crisis into an opportunity.
Do not run, Do not hide
Instead of investing time and energy in lobbying the government to spare your industry, leading companies should consider preempting the reform initiative. Assess the feasibility of waving your eligibility for subsidies, agree to replace government payments for top suppliers for a two- or three-year period, or adjust pricing downward as part of a corporate social responsibility effort. This effort could be a high-profile move and highlighted as an effort to support the Moroccan people during tough economic times.
Maintaining a foothold in Morocco is critical for foreign companies operating in North Africa, which has the greatest long-term investment potential in MENA. The region is not for the faint of heart, but companies are often rewarded for sticking out short-term instability for long-term opportunity. Other companies may leave in response to protests or uncertainty, opening up opportunities for gaining market share.