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Morocco (Scope Ratings BB/Stable Outlook) faces milder credit shocks than South Africa (BB/Stable Outlook), driven by above-potential economic growth, a fiscal position, and larger clients for reform. This explains the one-tier difference between Morocco’s countries and South Africa’s long-term scores. Scope Ratings downgraded South Africa’s score in October 2023.
Emerging economies such as Morocco and South Africa face four important demanding situations (socioeconomic, monetary, fiscal and external) amid economic uncertainty.
The priorities of the two non-investment-grade borrowers (Figure 1) are accompanied by a return to stronger, more sustainable, and more inclusive economic growth, which is to address poverty and inequality.
It is also vital to keep inflation under control by reducing exposure to commodity value volatility. The same is true for rebuilding fiscal reserves and controlling public deficits, while restricting the accumulation of public debt in a context of higher debt rates today. Countries want to harness the resilience of their external sectors to cope with long-term economic shocks.
Although the two countries have similarities in terms of economic profiles, production industries, and herbal resources, Morocco’s capita production growth trajectory and flattening public debt reflect the strength of its credits.
Figure 1. Morocco outperforms South Africa on most key economic, social metrics
Morocco’s Progress on Reforms and Cooperation With the IMF Are Strengths
Morocco’s greater progress on reforms also helps offset its challenges in setting monetary policy and managing its exchange rate. Morocco’s close co-operation with the IMF, both on financial-sector and technical fronts, is also a core credit strength.
In addition, South Africa performs well in terms of inflation targeting and exchange rate flexibility. However, the country faces abundant political uncertainties, in addition to infrastructure deficits, particularly with the state-owned electric power company Eskom, and governance issues, particularly with regard to corruption, which helps keep expansion well below its potential. The final results of this year’s elections will determine the speed of reforms in South Africa.
To take a look at all of today’s economic events, check out our economic calendar.
Thomas Gillet is Head of Public and Sovereign Sector Ratings at Scope Ratings GmbH. Dennis Shen, chairman of the Scope Ratings Macroeconomic Council, and Thibault Vasse, former managing partner of Scope Ratings, co-authored the full report.
This article was originally posted on FX Empire
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