By James Eugene
According to Sanjay Arya, head of Morningstar Indexes, the rationale behind this demotion is due to a relatively large drop in liquidity over the past few years, consequently declining to levels below the minimum liquidity standards required to remain classified as an “emerging market”.
The Morocco Casablanca Stock Exchange CFG 25, which consists of 84% of the total market capitalisation of every company listed on the Casablanca Stock Exchange, has dropped by 25% over a five year period and things aren’t expected to get better any time soon due to lack of reforms.
The Moroccan government’s attempts to boost liquidity in its equity markets by issuing incentive grants to encourage initial public offerings and permitting short selling have failed. Around 60% of Moroccan equities failed Morningstar’s liquidity screening, providing even more proof that Morocco “no longer aligns with the emerging-market standard and hence will be reclassified as a frontier market”, according to the review.
The review points out that despite passing most of the classification criteria, such as market accessibility, quality of brokerage and transparency, it failed on many important sections, namely: equity market structure; the aforementioned market liquidity, short selling; off-exchange transactions; and delivery free of payment facilities.
Previous Liquidity Problems
Morningstar are not the first company to downgrade Morocco. MSCI were the first to reduce its status, which occurred in 2013. Towards the end of 2014, ratings agency Standard’s and Poor reduced the country’s status from “emerging” to “frontier”, citing “lack of liquidity on global markets” as a reason for doing so. Specifically, they said:
The lack of liquidity in Moroccan equity markets is a significant issue for market participants. The declining trend in market liquidity over the last several years does not align with other emerging markets, making it more appropriate to be classified as a frontier market.
Despite having a relatively large stock exchange in Africa in terms of market capitalisation, there are only 77 listed companies on the Casablanca Stock Exchange. For comparative purposes, Egypt has around 200 listed companies. Companies have been approached to be floated on the exchange, but refused due to low liquidity, low valuations and not being dynamic enough. The lack of investment options has been a major factor in behind the low liquidity problems.
There are a few solutions to this problem. Firstly, the government will need to try harder to provide incentives for local companies to list on the index. SMEs account for 60% of Morocco’s GDP as well as providing 50% of the country’s jobs, therefore indicating that targeting SMEs should be on the top of the agenda for leaders of the economy. Another solution is to increase the number of initial public offerings (IPOs) on the market to attract not only domestic demand, but foreign demand. By doing so, it may allow investors to research into other listed companies.
Elsewhere, Greece was demoted from “developed” to “emerging” market status, while South Korea failed to springboard from the current “emerging” market status.
The full review can be found here