A Closer Look at Moroccan Growth Potential

“The most dangerous man to any government is the man who is able to think things out… without regard to the prevailing superstitions and taboos. Almost inevitably he comes to the conclusion that the government he lives under is dishonest, insane, intolerable.” — H. L. Mencken



The message appeared on a dusty old Dell laptop, proudly displayed by the store clerk around the corner from our riad here in the Medina. We’d asked some directions…in broken, barely-French…and the young man, no more than 16 years of age, quickly set about punching the information into Google Translate. His smile, upon reaching an answer, stretched from ear to ear.

We would find the Wi-Fi cafe after all…

What happened since we left you, Fellow Reckoner? Ah, yes. The Fed concluded its back-slapping fête in Jackson Hole on Friday, with The Bernank going way out on a thin limb:

“Bernanke Bets New Economy Is Same as Old One,” was how one paper put it.

The world’s most powerful central banker is facing growing concern that persistently high unemployment — officially at 8.3% — is due to “structural shifts in the economy wrought by the financial crisis.” Critics of his policies “contend joblessness is permanently elevated.”

Bernanke responded as one might expect someone in his position to respond. “I see little evidence of substantial structural change in recent years,” he said, arguing for “more of the same.”

“The costs of non-traditional policies, when considered carefully, appear manageable, implying that we should not rule out the further use of such policies if economic conditions warrant,” waffled Bernanke. “Over the past five years, the Federal Reserve has acted to support economic growth and foster job creation, and it is important to achieve further progress, particularly in the labor market.”

“In other words,” wrote Dave Gonigam in Friday’s edition of The 5 Minute Forecast, “he’s ready to once again sacrifice savers on the altar of ‘quantitative easing’… but not just yet.”

Surely Fellow Reckoners will agree, achieving “further” progress implies having achieved some progress in the first place.

Bernanke & Co. have used all manner of tools to pin interest rates to the floor since the crisis began, mushrooming the Fed’s balance sheet over $2 trillion in the past three years alone. Where is this “growth” of which Bernanke speaks? Where is the job creation? Where is the progress? According to the Fed’s own tortured figures, the economy continues to merely sputter along, growing at just 2% annually, barely enough to keep its head from slipping under the waves.

Unemployment levels, too, are largely unchanged. Some 13 million Americans still find themselves unemployed…a figure which does not take into account a few conveniently-dismissed groups. “Involuntary part-time workers,” as the Feds categorize them, totaled 8.2 million for the month of July. “Marginally attached” workers numbered another 2.5 million. “They were not counted as unemployed,” explained the Employment Situation Summary from the Bureau of Labor Statistics, “because they had not searched for work in the 4 weeks preceding the survey.” Hmm…guess they don’t count, then, eh?

The number of long-term unemployed (those jobless for 27 weeks and over) was little changed for the month of July at 5.2 million. This group now accounts for over 40% of the total unemployed.

Of course, the Feds don’t measure success the same way that, say, an honest (or even dishonest!) individual might. How, for example, would Bernanke and his well-degreed peeps categorize our friendly helper here in Marrakech? The fact that this young man was tending (probably his father’s or uncle’s) store at all would likely run him afoul of American child-labor laws. He certainly didn’t charge us for providing his services, nor log his work in a journal, though we did offer a few dirhams for his help (which he politely waved away.) Moreover, we doubt his operation, which, as far as we could make out, dealt largely with repairing old computer monitors and keyboards, reports earnings to the “appropriate authorities.”

What, then, would they make of this young lad? Is he “marginally attached”… “underemployed…” … “discouraged”…or does he wedge into some other creative, politicospeak definition?

To be sure, there’s not much to envy in the Moroccan economy. The country ranked a dismal 130th in the UN’s 2011 Human Development Index. Almost 40% of the population cannot read or write and the telltale signs of extreme poverty are ubiquitous. Donkeys still stand in for taxis in many parts and, under the sweltering midday sun, even the spice sifters in the main square slip seated to supine for a few hours of precious shuteye. Little, in fact, is accomplished during daylight. The bustling souks only come alive in the cool of the evenings.

Our point is not that the United States government should start emulating the Moroccan government…though with the comparative resource riches that remain under governmental lock and key in the US, it might not be entirely a bad thing…

Since 1993, the Moroccan economy, Africa’s fifth largest, has undergone a series of privatizations of industries previously under the government’s control. These include airlines, telecommunications, a slew of large industrial projects and the increasingly important tourism sector. In addition, the government plans to sell off agricultural lands currently managed by state farms, a move that will impact roughly 40-45% of the working Moroccan population. Growth rates, (as far as official figures can be trusted…on either side of the Atlantic) are today about two and a half times those in the US. And, in recent years, both the budget deficit and overall debt have fallen as a percentage of GDP.

There are other important indicators too. As our young friend happily showcased, the country now has the fastest Internet usage growth on the continent. With increased access to information comes a kind of “social liberalization.” It is not uncommon, for example, to see young women walking arm in arm down the streets, one in traditional garb, the other in “western-style” clothing…a prospect that would have been unthinkable not so long ago.

That said, there are many challenges still ahead. Morocco is the world’s biggest exporter and third largest producer of phosphorus, a key component in fertilizer. Its production plays an inordinately large part in the national economy and, therefore, price fluctuations of the mineral in the international market strongly influence the country’s economic vitality. Along with most other commodities, phosphorus took a nosedive toward the end of 2008, collapsing from over US$430 per metric ton at its peak to just $90 per ton by mid-2009. It has since recovered to $180 a ton, but that’s still a long way from the record prices of four years ago. So as you might imagine, Morocco’s major market indexes have tracked a similar course. The MASI (Moroccan All Shares Index) is down almost 33% from its 2008 all-time high…and is very close to hitting a 6-year low.

We have no idea if this represents an interesting value play or merely an offbeat idea…or somewhere between the two. Therefore, to borrow a phrase from our senior editor, Eric Fry, we’ll simply conclude that, although Morocco might not yet be a “buy,” it is probably less of a “sell.”

Hoping to gain greater conviction about the timeliness of investing in phosphate (or the Moroccan stock market), we asked Chris Mayer, editor of Mayer’s Special Situations and the only man we know who can provide on-the-spot insight on everything from Burmese rail travel to Moroccan phosphate, for his opinion on the matter.

“I just visited a phosphate miner last week in Toronto,” he replied in a manner suggesting he had been expecting just this question. “Morocco is who everyone in the business pays attention to because they have 70% of the world’s phosphate reserves. And they are the world’s largest producer. They essentially set the price. The market for phosphate should remain tight as long as the Moroccans don’t flood the market. So far, every indication is that they want to make a good return on their assets.

“If that’s true,” continued Chris, “then we could have tight phosphate markets for the next several years, especially in North America. It’s the same old story, the best mines are getting old and need to be replaced. There is not much new supply, but demand grows apace. The price for the rock is still $180-200 per tonne, a healthy price and it tends to follow the FAO food price index. With grain prices likely to stay high given the damage drought did to grain inventories, the picture looks pretty good for phosphate.”

Joel Bowman
for The Daily Reckoning