Libya, Morocco calamities blot investor glimmer

Libya, Morocco calamities blot investor glimmer
/ UNHCR / Ahmed Al Houdiri
By Gary Kleiman of Kleiman International Consultants October 4, 2023

The coincidental natural disasters in Morocco and Libya captured global headlines with their near biblical ferocity, wiping out entire towns without warning and historical experience, but also came as the neighbours were again drawing in foreign portfolio and direct investors after bumpy political and economic rides last year.

Morocco’s quake, centred in the Atlas Mountains, killed 3,000 around Marrakech, a popular tourist destination that will host the annual International Monetary Fund (IMF) and World Bank meetings still going ahead during the second week of October. 

Libya’s flooding destroyed 50-year-old dams around the Eastern coastal city of Derna, with the immediate death toll at 10,000 and likely to double, as a global aid effort arrives for the first time in the decade-old civil war that has bequeathed two governments.

In both cases, adjacent countries with their own similar tragedies and regime tribulations have been quick to pitch in, with Turkey at the top of the list after its tremor earlier this year, and as a military ally to Libya’s Western administration in Tripoli. Tunisia has dispatched rescue missions, and Algeria opened its airspace to humanitarian flights despite severed diplomatic relations with Rabat over the disputed Western Sahara.

Morocco in 2022 endured another catastrophe when record drought contracted agricultural output 15% for barely positive 1% gross domestic product (GDP) growth. Double-digit inflation accompanied food price spikes, and King Mohamed organised emergency funding for the sector that accounts for one-tenth of economic activity and almost one-third of formal employment. Libya was coming off a formal currency devaluation to LYD4/$ and a failed election roadmap under UN auspices, as oilfields came under attack and were hit by strike action from opposing militias and political interests. Production vacillated, with core capacity at over 1mn barrels per day (bpd), and multinational partners from Asia, Europe and the region hesitated over fresh commitments. The ex-dictator Qaddafi’s son waited in the wings as a self-proclaimed saviour, while facing trial over past abuses whilst in power.

These burdens were mitigated with notable strides this year during the first half in both countries, through signature moves such as an oversubscribed Eurobond issue for Morocco and central bank first phase reunification in Libya. Now a new nightmare is upon them that will demand redoubled efforts to maintain fiscal discipline, particularly under the weight of the reconstruction spending that these wealthier developing countries will have to mobilise domestically and on commercial terms despite avowed international community support.

Morocco’s initial damage estimate, including 500 destroyed schools, was set at $10bn or 8% of GDP, according to the US Geological Survey (USGS). This fraction ironically equals tourism’s contribution, which is the area’s main industry, where traditional mud-brick houses and medina shopping have intersected with eco-friendly attractions. It is among the world’s top five phosphate exporters, with the listed state conglomerate OCP in the vanguard of a 15% frontier stock index gain in August.

Its world-class auto assembly with European and US partners is on course to churn out 1mn vehicles by mid-decade, one quarter being electric vehicles (EVs) in keeping with a comprehensive green strategy also promoting solar and wind energy. China is the main investor and financed almost half of the Tanger Med Port, providing components for the supply chain, and Russia is working to extract uranium from mining deposits and forge a Maghreb-wide free trade pact with the Eurasian Economic Union (EEU) it leads.

The US accounted for 30% of over $2bn in foreign direct investment last year, in part buoyed by the Abraham commercial-diplomatic accord with Israel, beating out traditional leader France and followed by the United Arab Emirates. Remittances are also a mainstay to bridge the 3% of GDP current account deficit and rose 10% to a record $6.5bn during the first seven months this year. Morocco’s banks are outward investors in their own right throughout Africa, as a diversifier to mushrooming bad loans at home approaching 10% of the total. Real estate remained in a slump in the first half, with transactions down 25%, but better weather lifted the growth forecast to 3%, while inflation was 5% in July, with the central bank benchmark rate at 3%.

The IMF gave its stamp of approval to policy direction with a two-year, $5bn precautionary line in May, after a decade of successive arrangements following the Arab Spring. The dirham is up over 1% against the dollar and euro in a managed peg, and officials pledge greater flexibility under the current maximum 5% fluctuation, with almost $35bn in foreign exchange reserves, covering more than five months of imports.

Six months ago, a $2.5bn Eurobond was oversubscribed at a 6% yield, and rating agencies maintain a BB+, stable outlook. The debt to GDP ratio is 65%, evenly split between domestic and foreign, with one-third of the latter being concessional World Bank loans and average maturities of over five years for the former. The Russia-Ukraine war is a factor with dependence on fuel and wheat imports, and at the recent BRICS summit potential membership was raised. The King has been on the throne for almost 25 years, and faced labour union protests during the past year over living costs. A new UN envoy has reopened the possibility of a long-signalled inhabitant referendum on the West Sahara, after the Trump Administration acknowledged sovereignty as the quid pro quo for the Abraham Accords.

Before its epic deluge Libya was in the foreign policy spotlight with a kerfuffle over the then foreign minister’s either deliberate or chance encounter with her Israel counterpart, resulting in immediate dismissal and exile as cabinet colleagues excoriated the move. It is also a longtime host for thousands of Russian Wagner mercenaries after murdered founder Proghozhin extended his reach from Syria and allied with General Khalifa Haftar’s forces running the East, which took the tsunami-like hit.

These groups display scant interest in building state capacity, and instead focus on illegal activity around natural resources exploitation and human/weapons smuggling. Libya’s migrant centres, supported by EU aid, are notorious for human rights abuses and Haftar is a main arms supplier of Sudan’s paramilitary, which is engaged in its own civil war.

Libya’s parliament appropriated $2bn for the immediate cleanup, as authorities reportedly diverted previous cash allocated for shoring up the old dams. Total budget spending was €9bn from January to July, half for public sector salaries. One-third of the population, 2mn, is on the government payroll, absorbing two-thirds the workforce.

The World Bank warned in its annual update over the public debt level at 70% of GDP and 125% of revenue, and the absence of any transparent fiscal process reduced to dickering between central bank and state oil company representatives. However, in the first half of this year high-profile infrastructure was a main purpose, with power restored much of the day to the capital Tripoli, and Benghazi receiving a symbolic outlay to restore the stock exchange building.

Oil majors from Italy, France and the UAE also returned to position themselves for the continent’s largest reserves, and marginal fields were opened to private ownership despite sporadic militia fighting. Chamber of commerce delegations from Algeria, Tunisia and Turkey passed through with local exporters seeking duty-free entry from Ankara. With wheat import reliance on Russia and Ukraine, both sides seemed to agree on the urgency of ensuring a reserve stockpile. The respective central banks held seminars on co-operation sponsored by foreign aid agencies such as USAID.

In June, the IMF issued its first Article IV surveillance report in a decade, which predicted another year of 15%+ growth from a low base and called for retrenchment in fuel subsidies that maintain the world’s second cheapest gas after Venezuela. It noted the outlier cushion of a whopping $85bn foreign exchange reserves at 200% of GDP, backed up by sovereign wealth fund assets at $70bn, which have remained frozen by the UN since the Qaddafi era. As a “wealthy but fragile state”, diversification is in order with hydrocarbons forming 95% of exports, and 2,000 mainly loss-making state enterprises. The central bank must also divest from commercial banks providing three-quarters of system credit, align capital adequacy and loss provision measures, and better define the Islamic style approach, the Fund concluded.

Economic and financial officials and aggressive frontier investors should not lose sight of pre-tragedy momentum, and in the coming months, although the priority in both countries will be well-funded and managed reconstruction, further removing fiscal and structural rigidities magnifies the odds. In the aftermath, this path invites a more visible appearance on foreign bank and fund manager radar than the sideline relegation to date complicated by delicate geopolitics. 

–  Gary Kleiman, senior partner, Kleiman International Consultants, Inc.

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