North Africa’s Dusty Machinery Machinations
North African stock markets struggled to overcome single-digit losses as other main and frontier index components turned positive or consolidated gains, with anti-Islamic party backlash intensifying in Egypt, Tunisia and Morocco on below 3 percent GDP growth and whopping budget and current account deficits. In Cairo the military-led government has rounded up Muslim Brotherhood officials and business supporters as ejected President Morsi remains incommunicado since July’s house arrest. A new constitution is being drafted under a broad “road map” envisioning elections early in 2104, three years after the Mubarak regime’s overthrow. While the US has cut defense assistance it maintains economic aid of several hundred million dollars, paling against the $12 billion infusion from GCC members in the form of loans, grants and fuel shipments which has steadied reserves and the currency to under 7/dollar. Local Treasury yield have come down to 12 percent, but ratings agencies highlight increased risk to banks with 20 percent of assets concentration. Public debt is almost 100 percent of GDP and servicing absorbs one-fifth the budget, with the gap at 15 percent following a $4.5 billion jobs and infrastructure stimulus package and a 60 percent minimum wage hike. Youth unemployment is at 30 percent and private sector capacity is sidelined with the PMI in the low 40s. Tourism is off with the exception of Asian and Russian arrivals and the new prime minister has indefinitely dismissed resort to an IMF program with the relatively untied Gulf support. Tunisia in contrast is under a $1.75 billion standby which already has resulted in modest gas price increases and emphasizes bank recapitalization and business climate overhaul. Eurozone exports and travel inflows are flat and exchange rate depreciation has fostered 6 percent inflation. The Islamist-headed coalition fractured again on labor union and secular party opposition, and a technocrat administration is to be appointed to oversee final election and constitution preparations in the coming months. Terrorist incidents and political assassinations have underscored law and order erosion and educated women have left the country on fears of rights rollbacks.
Morocco agreed on a reshuffled cabinet in October after the Islamic wing of the coalition left to protest IMF accord subsidy cuts, and agriculture rebound could bring 4 percent growth, but the current account hole will be around 7.5 percent of GDP as phosphate values are hurt by the commodities correction. The Casablanca exchange may be demoted to frontier rank as banking system credit and deposits continue to slide to around 5 percent of output. The loan-to-deposit ratio tops 100 percent reflecting a push to reach small business borrowers. Another sovereign Eurobond is planned despite non-bank institutional investor size at 40 percent of GDP to lead the sub-region. However local debt markets are “weak” according to the IIF’s annual outlook and a yield curve and better corporate disclosure and governance could transform the desert space.
