Capital Market Development in Morocco

Workshop on Improving SME access to Capital Markets

Casablanca, 19th May 2015

Overview of Capital Market Development

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Introduction

Joint IFI efforts – Deauville Partnership – Capital Market Development focus

Overview of current financing environment for corporates

Potential improvement levers

From passive to active - Capital Market Initiatives already ‘live’ by EBRD

Conclusion

Capital Market Development in Morocco

G-8 Finance Ministers‘ Deauville Partnership

Module on development of local currency capital markets in four transition countries – Jordan, Egypt,

Tunisia, Morocco

• Joint-IFI assessment mission undertaken in March 2013

Scope of capital market assesment;

• Macroeconomic Environment

• Banking Sector, money and hedging market

• Government Securities Market

• Corporate Bond Market

• Equity Market

• Islamic finance

• Investor base

• Market infrastructure

Impediments and bottlenecks identified

Recommendations – set out measures to improve the functioning of the capital markets

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Capital Market Development

4 Workshop - Casablanca 19 May 2015

Sequencing is important

Source: IMF WP/03/116, Karacadag-Sundararajan-Elliott

Current financing environment

Banking sector has proven resilient but plays a limited role in financing SMEs

Structural issues curtail development of a more dynamic sector

‘Normal’ market mechanics and risk management instruments are largely absent

Lack of incentive to service SME sector

Corporate Bond issuance has increased significantly

Relatively developed market but dominated largely by State-owned utilities and Banks

Secondary market liquidity very limited which means that pricing reference point is absent

Demand side dominated by institutional investor base with no international investor activity

Buy and hold approach compounds liquidity problems

Equity Market underutilised

Equity capital not playing a major role in financing

Valuation concerns and lack of liquidity are key constraints

Lack of supply and small free float

Private equity exits through the stock exchange very rare

IPO supply limited

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Demand and supply side reasons for underdevelopment

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International investors

• Lack of demand based on low weighting of local market in international portfolios

• Lack of research coverage

Domestic institutional investors

• Insufficient number of local institutional investors

• Low level of local stock investments

Lack of attractive stocks

• Few top performers

• Corporate Governance

• Partly weak fundamentals

• Value orientation

• Lack of growth segment

Ownership structure of listed companies

• Few majority owners

• Small free float

Private stock ownership

• Low level of retail investors

• Based on voucher privatisation a big number of passive stock owners

• Lack of awareness/education

• Invest outside of country

Pension system

• Lack of private pension schemes

• Missing capital market orientation

Venture Capital/Private Equity

• Underdeveloped or even not existing

• Exits rare

Specifics of companies

• Mainly SMEs

• Not listed or no intention to list

• Rely on bank financing

• Prefer to list abroad

Low quantity of supply

Low quality of supply

Low demand of institutional investors

Low demand of retail

investors

Low liquidity

Under performance

Lack of investor interest

Improvement levers - Recommendations

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Banking Sector

• Allow higher degree of fluctuation of interbank deposit rates to restore market price

signaling function

• Prepare strategy for gradual further liberalization of interest rate setting mechanism

in interbank money market

• Introduce risk management tools to reduce maturity and interest rate mismatches

Equity Market

• Address structural issues to encourage long-term supply , focusing on large flagship

issuances and continuous flow of new issues from average sized issues

• IPOs of state-owned enterprises can help jump-start the public equity market

• Explore options in relation to amending the ownership structure of the exchange

• Encourage development of research functions, capabilities and best practices

• Introduce new instruments – REITS, infrastructure funds, ETFs and SME funds

• Education and public awareness can play an important role

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Corporate Bond Market

• Ensure effective and speedy resolution of bankruptcy when needed

• Enhance credit analysis and consider the benefits of introducing external credit

ratings to bond market

• Implement capacity building for selection of managers and IR management

• Encourage local banks to provide secondary market liquidity for their own bonds

• Revise valuation rules for institutional investors of corporate bonds to reflect credit

spread changes

• Other areas also relevant and covered in the assessment work undertaken;

• Government debt

• Market infrastructure

• Sukuk

Workshop - Casablanca 19 May 2015

Improvement levers - Recommendations

Key themes

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Policy makers face a delicate balance between addressing the immediate challenges

and fostering long-term capital market development.

• Addressing financial stability needs in the short term

• Stimulating entrepreneurial activities and ultimately employment growth

• Developing viable and sustainable sources of finance (including via capital markets)

Strong coordination as well as a shared long-term perspective is essential

• Casablanca Finance City can play an important role

• Prioritise key actions at the local level

• Utilise the IFI community efficiently – investment and technical assistance

Todays topic features strongly as a regional theme and is a key focus for EBRD

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EBRD is already active in a number of areas;

Derivatives

Assistance to develop derivatives legislation in Morocco with Ministry of Economy and Finance

REITs

Representatives from the Bank’s LTT and LC2 Team are engaged with the authorities on the

development of the Real Estate Investment Trusts (REITS) in Morocco.

Stock Exchange

Various areas for assistance are considered for Casablanca Stock Exchange

SME access to capital market finance

Initial study on SMEs in the SEMED region to gain a better understanding of the state of readiness

to access capital market funding

The study may also highlight existing impediments faced by SMEs in accessing finance.

Flagship report on SEMED region

Moving from Recommendations to Action

Workshop - Casablanca 19 May 2015

Leverage Impact – Enhance Value

EBRD is well positioned to supporting local capital market development based on its private

sector focus and service/product range:

• Policy dialogue

• Technical cooperation projects

• Local currency lending

• Asset Backed Securities/Covered Bonds

• Unsecured Bond issues – senior/subordinated

• Small Business Support services

• Equity and bonds play an important role in securities market development

• Pre-IPO and IPO Investments in Private Equity Funds

• Corporate Bond Investments

• Investments/Equity participation in private sector companies

EBRD’s activities strongly support local capital market development

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Setting the Tone for the Workshop

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SME access to capital market finance is an area where we feel we can make a

meaningful intervention

Encourage an open and honest discussion and exchange of views

Leverage the expertise present at this unique and innovative workshop

• Expertise from local market, combined with..

• International perspectives and experiences

Local commitment to the issue is clearly demonstrated

EBRD stands ready and willing to play an active role

Workshop - Casablanca 19 May 2015