March 12, 2018

IMF issued staff report and selected issues report in the context of the 2017 Article IV consultation with Morocco. The IMF Directors noted that the banking sector in the country remains sound and well-capitalized. They welcomed continued efforts of Bank Al Maghrib to increase supervisory capacity, in line with the 2015 Financial Sector Assessment Program (FSAP) recommendations, including more risk-based and forward-looking supervision and tighter provisioning requirements.

The staff report highlights that banks are well-capitalized, but levels of non-performing loans (NPL), credit concentration, and expansion in Africa remain significant risks. Tier 1 capital ratio of banks was at 13.7% at the end of June 2017. NPL ratios remain relatively high at 7.9%, but provisioning levels are comfortable (70%) and increasing. Risks from large credit exposures persist and have increased slightly in 2017, despite strict regulatory limits. The new legal framework for collateral execution, which will help accelerate NPL resolution and increase recovery rates, is expected to be approved in early 2018. The continued expansion of Moroccan banks in Africa (most recently in Egypt) provides diversification and profit opportunities, but is also a channel of risk transmission, given the riskier local operating environment and lower regulatory standards in host countries. Regulatory limits to reduce credit concentration as well as collaboration with cross-border supervisory bodies, to contain risks related to the expansion of Moroccan banks in Africa are being strengthened.

The staff report also states that the new macro-prudential framework includes countercyclical capital buffers as a policy tool. Progress is underway to address data gaps for macro-prudential surveillance (for example, loan-to-value and debt-service-to-income ratios) and to design capital surcharges for systemic banks. Additionally, the authorities are pursuing a multi-year initiative to upgrade the bank resolution framework of Morocco, consistent with the recent FSAP and Technical Assistance recommendations (including the “least-cost” principle, changes to the deposit guarantee scheme, and bail-in powers). Given the need for a comprehensive overhaul of the legal framework, designation of Bank Al Maghrib as the resolution authority will not be introduced in the new central bank law that is expected to be approved by parliament in 2018.

The selected issues report discusses the distributional effects of tax reforms in Morocco and highlights that further improvements in governance, labor regulations, and education are needed to support structural transformation in Morocco.

 

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Keywords: Middle East and Africa, Morocco, Banking, NPLs, Macro-prudential Framework, FSAP, Article IV, IMF

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