The elegant pile of whitewashed colonial architecture which houses the Casablanca Stock Exchange (CSE) appears to have been designed to shield its inmates from the dangers of the Boulevard Mohammed V outside, rather than to bother them with any immediate threat of future enrichment. Beyond the circular lobby, the flavour is more of a gentleman’s club than of Africa’s second largest bourse (after Johannesburg).
Until recently, mutual funds were an unknown concept in Morocco. Hand-written share certificates were shuffled from vault to vault in state-owned banks, which held a monopoly on all broking activity. Even now, when share traders breathe the name Casablanca with some of the reverence of an ageing movie buff, trading still begins at a leisurely 11 am – and it stops just an hour later, when dealers scatter to the sidewalk cafs to sip mint tea and calm their frazzled nerves. Casablanca’s upgrading from the fog-choked setting of the eponymous film to one of the hottest of emerging markets seems not to have turned its head in the slightest.
But appearances can be deceiving. Since 1987, Casablanca’s 25-share index has shown an annual gain of 26 per cent and a combined average return of 37 per cent in 1994. Apparently unaffected by Mexico, the rise has continued this year – from 316 to around 347 by mid-June – which means 9 or 10 per cent for dollar shareholders.
Though it lists only 80 companies, the market’s capitalisation, swollen by offerings under the government’s privatisation programme, has enjoyed a steady 40 per cent annual growth rate over the past five years, culminating in a 60 per cent rise from $2.8 bn in 1993 to $4.4 bn last year, with a 57 per cent increase in turnover. Foreign inflows are expected to reach $500 mn this year.
Morocco’s privatisation programme, announced by King Hassan in 1988, is one of the largest outside the former Soviet bloc, involving 112 enterprises valued at $2.2 bn and representing some 40 per cent of the government’s portfolio. The list includes four banks, two holding companies, two insurance companies, ten sugar plants, a dozen textile factories, seven oil and petroleum distribution chains, 37 hotels and two refineries. Some 27 disposals were completed by the end of 1994, either through private placement, selective tendering or public offer, realising some $640 mn – a third of that coming from foreign investors.
To prevent asset stripping and to secure the relevant company’s future after privatisation, the government has reserved the option of calling for tenders for the noyeau dur or ‘hard core’ of its participating interest, ‘anchoring’ the share capital with a group of stable shareholders with the requisite financial capabilities and technical expertise. To safeguard the interests of minority shareholders, a core consortium is usually preferred to a single acquirer and it must lock in for a minimum of five years before selling its interest. There may be other restrictions as well.
In the case of Socit Nationale des Investissements, Morocco’s largest holding company with interests in over 40 enterprises from brewing to finance, the government sold just under half its 67 per cent holding through an offer on the CSE, with 35 per cent going to a group led by the Banque Commerciale du Maroc, Morocco’s largest private bank. To prevent the holding being broken up, the terms of reference in the tender prohibited the sale of more than 15 per cent of the book value within any single year, with the added proviso that 70 per cent of all assets realised should be reinvested. ‘After five years,’ said the minister of privatisation, Abderrahmane Saidi, ‘the new owners are free to do what they want, but we want this first step to be a good one.’ It was: SNI fetched just under $300 mn.
Of the eight companies and four hotels so far sold wholly or in part to foreign buyers, most have been once-only, strategic acquisitions, with Shell, Total, Mobil, Dragofina and the Swiss cement giant, Holderbank, all buying majority shares following direct negotiations with the Ministry of Privatisation. But the sales have had a strong appeal for portfolio investors specialising in emerging market funds in the Middle East, the Maghreb, Africa or Morocco itself. Their participation accounted for 50 per cent of turnover on the bourse in 1992, 70 per cent in 1993, according to Mr Abderrazak Laraki, the CSE’s director general.
High on the list of companies to be privatised was the CSE itself, which became the Socit de la Bourse des Valeurs de Casablanca (SBVC)in November 1994, with the twelve independent brokerage houses taking equal shares of the DH1.8 bn ($214 mn) capital, along with 13 mutual funds admitted for the first time to the market.
A Conseil Dontologique des Valeurs Mobilires (CDVM), or Securities Commission, now supervises exchange activities with representatives of three government ministries sitting on the board. And the SBVC is in the process of appointing a central custodian, along French lines, with banks acting as sub-custodians. The first priority, according to Adil Diouri of the Casablanca Finance Group (CFG), Morocco’s first investment banking group, founded in 1992, is the introduction of a computerised delivery and settlement scheme before eliminating paper transactions altogether.
But there is a clear need for greater transparency from listed companies. For the first time last year, Omnium Nord African (ONA), Morocco’s largest private conglomerate in which the royal family owns a 13.7 per cent stake, published consolidated accounts in accordance with international accounting standards. Until recently, listed companies rarely responded to brokers’ questions and had generally left a good deal else to be desired on the IR front. But, this should start to change, not least since the CDVM launched its media campaign on 23 March, part of which involved addressing letters to all listed companies reinforcing the transparency laws with various sanctions.
The Soros Factor
It was the appearance of the US financier George Soros, which put Morocco squarely on the map for US and UK fund managers. Their interest in the Casablanca equity markets to date has far outstripped that of France or Spain, Morocco’s closest financial and trading partners.
In March 1994, Soros’s Quantum Emerging Growth Fund invested $40 mn in the capital increase of ONA, buying 2-3 per cent of its capital, together with 15 per cent of its financial holdings subsidiary, Financire Diwan. ‘We have chosen ONA,’ Soros told a local journalist, ‘because it is a modern company in a society that is not quite yet. Along these lines, it has a growth potential greater than that of Morocco, and this is what makes good investment sense.’
The same month, Salomon Brothers joined forces with ONA and the Banque de Paris et des Pays Bas to raise $200 mn for investment in the privatisation programme. And in June the Framlington Group independently launched a Maghreb Fund, closing at $30.5 mn three months later.
The privatisation in January of the Banque Marocaine du Commerce Extrieure (BMCE), Morocco’s second largest bank, drew concerted foreign interest with two groups of investors bidding for the government’s 26 per cent share of BMCE’s capital. The best offer, 33 per cent above the price set by the Ministry of Privatisation, came from a consortium led by Royal Marocaine d’Assurances and including Morgan Grenfell, Pictet & Cie, Union Bancaire Prive, three Morgan Stanley funds, Quantum Emerging Growth Fund and Framlington Maghreb Fund.
With the added sale of SNI, the CSE’s market capitalisation has grown a further 11 per cent since January, according to Laraki, while turnover is up by 52 per cent on the DH8.6 bn total for the same period of 1994. ‘We expect to end the year with at least DH10-12 bn ($1-1.4 bn). There has been a slowing down since Mexico,’ he says, ‘but no retreat.’
‘It has been a smooth year,’ agrees Diouri of the CFG, which claims 40 per cent of the country’s brokerage business and which advised the buyers of SNI and BMCE, as well as providing financial analysis for ONA. ‘It’s a consolidation with lots of profit-taking in the first quarter by foreign investors, which has been well absorbed by Moroccan institutions and buyers. I’d say it’s very healthy because, instead of having a sharp drop to correct the 1994 rise, we’re having a healthy, slow consolidation with a flattish index, which is helping to raise confidence among domestic investors.’
The CSE’s sudden resurgence after decades of stagnation, as well as its weathering of the peso crisis, indicate the striking change in investor perceptions of Morocco, a country whose proximity to the bloody events in Algeria and whose own Islamic tradition might otherwise have pegged it as a by-word for risk. But the potential rewards of the growing convergence of the economies of Morocco and the EU countries, coupled with the results of a structural adjustment programme dating back to the early 1980s, have produced a stark appreciation of the dangers of being excluded from the financial and export markets, as well as the baseline figures to help prevent that.
Though Morocco’s $26 bn external debt is swingeing for an energy-deficit country, its macro-economic indicators generally compare favourably with double-B rated countries in Latin America, some eastern European countries and many investment-grade countries as well. While subject to volatility in the agricultural sector, its ten-year average growth rate, at 3.7 per cent, is higher than Greece, Mexico or Brazil, while the ten-year inflation rate average of 5.2 per cent is well below that of most emerging markets and significantly lower than investment-grade economies like Chile and Greece. The fiscal deficit as a percentage of GDP is also low, at 2.2 per cent, although Morocco – unlike Argentina – is not yet running a surplus. The Moroccan dirham, soon to become fully convertible, remains relatively stable – if overvalued – at DH8.40 to the dollar.
The privatisation decree was part of a series of more wide-ranging reforms aimed at meshing the Moroccan economy more tightly within the EU by providing overseas investors with the fiscal, financial and accounting frameworks necessary to exploit the underdeveloped attractions of its proximity to the Iberian peninsula, its political stability and its low labour costs. Europe already accounts for two thirds of Moroccan exports, but King Hassan’s ultimate objective is a free trade agreement, in which each would have tariff-free access to the other’s market under terms similar to the GATT Accord, formally ratified in the Moroccan city of Marrakech in April 1994. Free trade would benefit Moroccan agriculture, but would seriously threaten industry and manufacturing, which badly need investment and improved management if they are to compete in the European market.
One of the premises of the liberalisation programme is that the loss of receipts from lower customs tariffs would be replaced by increased foreign investment. This has been true, though not in the way or to the extent that the Ministry of Privatisation had envisaged. By June 1995, privatisation receipts amounted to some $870 mn, well short of the $1 bn forecast. However, new investment from all sources was 36 per cent up on the previous year, with the sharpest growth in metal-working and chemical (+151 per cent), electrical and electronic (+83 per cent) and chemical and pharmaceutical (+67 per cent). Foreign participation amounted to DH2.47 bn of the total, 76 per cent up on 1993.
The goal of the privatisation programme, however, was not exclusively to produce revenue. ‘We’re trying to enlarge the shareholding public,’ says privatisation minister Abderrahmane Saidi. ‘In the beginning, the only operators in the CSE were the insurance companies and the banks, and the insurance companies withhold their shares. I think there were a few hundred shareholders, maximum, just professionals and financial managers. Since 1992-3, through the advertising we have done and because we insist they make a profit, we have got more than 50,000 shareholders for the BMCE and the total number who have participated in all seven companies sold through the stock exchange now exceeds 150,000.’
Although domestic savings are low, at 16 per cent of GDP, turnover at the bourse doubled from $500 mn to $1 bn in 1994, helped by share offers from ONA and the privatisation ministry. With yields one and a half times the bank rate, Moroccans are crying out for stock. ‘Our big problem is liquidity,’ says CSE’s Laraki. There’s just not enough paper to go round. With SNI, we put 1.2 mn shares on the market and received 7.5 mn subscriptions. With BMCE, we put up 1.4 mn and received seven times more. We have the future ahead of us: if you put out good paper, a lot of people will come.’ CSE’s resilience in the face of the Mexican crisis, he adds, was mainly attributable to Moroccan funds’ demand for stock jettisoned by foreign fund managers who had reached their threshold.
Holdings in twelve more enterprises are due to be privatised in 1995, including 99 per cent of Samir, Morocco’s largest refinery; 75 per cent of Banque du Crdit Populaire, the development bank; 49 per cent of the housing bank, CIH; 99 per cent of the steel-maker, Sonasid; three sugar plants; and interests in five mines. Indeed, the only company not likely to turn to the CSE is the Office Cherifien des Phosphates (OCP), Morocco’s flagship enterprise and the world’s largest exporter of phosphate rock and phosphoric acid. But telecoms, the railways and parts of the electricity generation and distribution network – all, like OCP, once viewed as strategic sectors of the economy – are now candidates for disinvestment.
‘As we go further in the privatisation programme,’ says Diouri, ‘and reach much larger companies, like the telecommunications sector, which must be worth over $1.2 bn, you can expect a specific international tranche for institutional investors, in addition to the public offering and those to Moroccan institutions and strategic buyers. You would definitely expect the larger deals to draw savings from all sources. Up to now it has not been needed. It’s been a great success without tapping international savings.’
‘It’s a really big step that the government has decided to privatise the Bourse,’ continues Diouri. ‘Within two years, we’ll have the same level of disclosure and settlement as sophisticated markets like Madrid or Paris. That’s the target. Not only to compare ourselves to emerging markets but also to neighbouring markets.’
