Kuwait City: Morocco’s default risk had the biggest monthly drop in 10 after the Arab nation obtained financing from the International Monetary Fund to shield the economy against a worsening of Europe’s debt crisis.

The North African country’s five-year credit default swaps fell 48 basis points in August, the largest retreat since October, to 225 on August 31, according to data provider CMA. That outpaced a 19 basis-point decrease to 276 in the Middle East’s average credit risk, excluding Morocco, while contracts of Asia Pacific nations lost seven basis points to 190, the data show.

Almost two thirds of Morocco’s 2011 exports were destined for Europe. Eurozone economies will contract 0.4 per cent in 2012, the median estimate of 39 economists compiled by Bloomberg shows. Morocco received a $6.2 billion (Dh22.8 billion) liquidity line from the IMF on August 3 to draw on if Europe’s policy makers fail to contain the debt crisis.

Support from the Washington-based fund is “credit positive and improves investor confidence towards Morocco credit,” said Frankfurt-based Sergey Dergachev, who helps manage $8.5 billion of emerging-market assets, including Moroccan debt, at Union Investment Privatfonds. Morocco is “fiscally relatively sound” and the “IMF help only works as an additional stabilising force,” he said by email on August 28.

Tourism, trade

Morocco’s debt has rallied since the agreement. The yield on the nation’s 5.375 per cent euro-denominated bonds maturing in June 2017 dropped 14 basis points in August to a record low of 3.42 per cent on August 31. The yield was little changed on Monday.

The country home to about 32 million people would draw on the credit line only if it “experiences actual balance of payments needs from a deterioration of external conditions,” the IMF said. The government stands to lose revenue in the event of a slowdown in trade with its biggest partner, which accounted for 62 per cent of export revenue last year, compared with 16 per cent to Asia and 11 per cent to the US, Ministry of Industry data show.

Europeans are also the single-biggest group visiting Morocco’s tourist sites, among them the nation’s largest city, Casablanca, the Atlas Mountains and beaches bordering the Mediterranean Sea. At least 83 per cent of the 9.3 million tourists who visited in 2011 were from Europe, according to the Ministry of Tourism’s website.

Wider deficit

Morocco is likely to post a budget deficit of 5.4 per cent of gross domestic product this year, the second-biggest fiscal gap in at least six years, according to IMF forecasts.

The government expects economic growth to slow to 3.4 per cent in 2012 from 5 per cent last year, Finance Minister Nizar Baraka said in an interview on June 6. Combined production of soft wheat, durum wheat and barley fell 39 per cent in the 2011-12 crop year after dry weather hurt yields, Morocco’s Agriculture and Fisheries Ministry said in July.

“Dealing with the European slowdown and the agricultural decline would be challenge enough, but the Moroccan government is also looking to rein in its budget and counter political risk and unemployment,” Liz Martin, Dubai-based senior economist at HSBC Holdings Plc, said in an email on August 22.

European demand

Outstanding domestic debt rose 14 per cent last year to 333 billion dirhams, or 41.4 per cent of GDP, the central bank said in its 2011 annual report. The current account deficit widened to 8 per cent of economic output, the highest since the early 1980s, the regulator said.

“Services, particularly tourism, which relies heavily on European demand, and current transfers inflows will perform sluggishly in 2012, owing to EU weakness, but they will strengthen from 2013” the London-based Economist Intelligence Unit said in a report on August 8.

Still, remittances from Moroccans living abroad advanced 7.8 per cent to 58.6 billion dirhams last year, with transfers “dominated by France, Spain and Italy,” together amounting to 62 per cent of the total, the central bank said.

The IMF expects growth in Morocco, which managed to avoid the so-called Arab Spring that swept the region beginning last year, to pick up to 4.3 per cent next year. Regional unrest toppled several Arab leaders, including those in the North African states of Tunisia, Egypt and Libya.

Top Performer

The kingdom, which may sell bonds denominated in dollars this month or in October, has managed to retain its BBB- credit rating at Standard & Poor’s, the lowest investment grade, even after Tunisia, the birthplace of regional unrest, was stripped of similar status in May due to worsening fiscal and current account deficits.

“Morocco has been one of the top performers I would say politically and economically since the Arab Spring,” Martin said. “It has made arguably the most-successful attempt in the region to pre-empt unrest through democratic reform.”

To spur the economy this year, the nation’s central bank cut its benchmark interest rate in March to 3 per cent from 3.25 per cent. In June it raised the price of subsidised fuel to help fund the budget deficit.

The precautionary IMF credit line “relieves Morocco from potential pressure in the future,” Xavier Deschamps, Geneva-based head of fixed income in the treasury department at Banque de Commerce et de Placements, said by email last Thursday. Morocco can fall back on funding at times when there are “sudden pressures in financial markets and it is difficult to borrow at normal conditions or in adverse economic conditions.”