Bond Buyers' Trail to Casablanca Undeterred by Street Unrest

  • Investors stand by Morocco bonds amid anti-government stir
  • Government’s Eurobond yields near lowest since November

Moroccan demonstrators clash with security forces in the northern Moroccan city of Al-Hoceima on June 8, 2017.

Photographer: FADEL SENNA/AFP via Getty Images

Investors are ignoring the latest wave of anti-government protests in Morocco as they continue to pile into North Africa’s top-performing bonds this quarter.

Yields on securities issued by the region’s lone investment-grade nation have dropped even as thousands took to the streets in an escalation of discontent simmering since October over unemployment and corruption. The gains were spurred by an appetite for riskier assets and bets the government will maintain a six-year track record of defusing tensions.

The protests are adding pressure on a bond market that’s already showing signs of overheating. The risk premium on Morocco’s sovereign notes over U.S. Treasuries is hovering near the lowest since 2006, while a Bloomberg risk model suggests the country’s credit default swaps should be trading at least 50 percent higher. Yet, there won’t be a selloff as long as the monarchy prevails, said Hakki Vural, a money manager at Union Investment Privatfonds GmbH.

"We are paying attention to the recent anti-government protests," said Vural, who owns Moroccan bonds. But the conflict may be contained because "political and social support for King Mohammed remains high” and the government has taken steps to reduce rural unemployment, he said from Frankfurt.

Further gains will depend on whether the country’s economy continues to improve and whether the government can handle the growing discontent, according to Vural, who says any increase is unlikely to match the surge seen so far this year.

Investors are pouring money into Morocco and other developing nations as they seek higher-yielding assets to compensate for low returns in advanced countries even after successive interest-rate increases. Emerging-market bond funds have received more than $25 billion in new deposits this year, according to data compiled by Bloomberg and Morningstar Inc.

Buoyant Economy

Economists expect Morocco’s growth to accelerate to 4.2 percent this year, after a drought that curbed agricultural exports to Europe limited the expansion to 1.5 percent in 2016. Morocco’s current-account deficit has eased to 1.1 percent from more than 9 percent in 2012.

Protests in the north eastern province of Hoceima have persisted since October, when the police were said to have killed a fisherman. Chants against high unemployment, government corruption and demands to release political detainees spread to main cities including Casablanca and Rabat this month after police arrested Nasser Zefzafi, a prominent activist, along with dozens of others.

Moroccan bonds have appreciated 2.8 percent since the end of March, beating regional rivals such as Egypt and the wider Bloomberg index for dollar-denominated emerging government debt.

Bloomberg’s sovereign-credit risk model shows Morocco’s CDS contracts should be trading at more than 200 basis points, based on metrics including economic growth, debt levels, reserves, quality of local bank assets and political risk.

The yield on the government’s $1.5 billion of bonds due in 2022 is down 40 basis points this quarter to 3.19 percent, while the cost to insure those notes against default for five years has retreated to 127 basis points, near the lowest since the start of 2011’s Arab Spring.

"Contrary to many of its peers, there is a carefully calibrated space for dissent in Morocco," said Philippe Dauba-Pantannacce, a London-based senior economist and geopolitical strategist at Standard Chartered Bank. "Investors tend to have a certain confidence in the Moroccan leadership’s ability to steer the country and strike a balance between stability and space for dissent.”

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