Morocco upgrading its stock exchange

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Spining

The re-classification of Morocco?s Casablanca Stock Exchange (CSE) from emerging to frontier market has the potential to boost capital flows to the bourse, which has faced an increasingly difficult exogenous environment in recent years. Authorities are also implementing reforms that stand to strengthen the exchange in the medium term.

Change in status

The decision by MSCI, a provider of global equity indexes, to re-classify the CSE was announced in June and is set to go into effect in November. While being a member of MSCI?s Emerging Market Index carries a certain cachet, the CSE has not seen many benefits since it was added to the group in 2001.

This is largely due to the CSE?s small weighting in the index. As trading has slowed since 2008, the number of Moroccan firms listed in the index has decreased. Today, three firms are included and the largest, Maroc Telecom, had its weight reduced by 50% last year as the stock?s liquidity dropped.

Far from a setback, Morocco?s move to the frontier market index in November 2013 may help provide the uptick in investor interest that CSE authorities have been working for. According to a recent Reuters report, Morocco is expected to have a 6.7% weight in the frontier markets index, providing greater exposure to investors. Local media reports indicate that traders expect an influx of foreign investment following the shuffle, which could help to correct the market?s decline in market capitalisation and trading volume since 2009.

Regulatory changes

Furthermore, state and bourse authorities are accelerating efforts to introduce new measures meant to deepen the bourse and improve liquidity. These include a new law permitting short-selling, which was expected in the first half of 2013, although no drafts have been introduced.

In addition, a project to establish a derivatives market on the CSE has been in the works for several years. This has become a priority as the government works to reinvigorate the bourse. The lack of market liquidity will likely be a restraint to the development of any new platforms in the near term, but once finalised, it stands to open up a number of new opportunities for investment.

Additional listings could also help to deepen market, and the CSE is taking steps to encourage new companies to file initial public offerings (IPOs). Last year, bourse officials reported meeting with more than 170 businesses, with some showing interest in IPOs. A number of incentives have been offered, including a CSE subsidy of up to Dh500,000 (?44,780) for expenses related to IPOs such as legal and financial consulting, which stand to encourage new offerings when the market strengthens.

Recent performance

These proposed reforms have the potential to boost activity in the medium term, and they come at an important time. The CSE had eased by more than 10% year-to-date as of late August, with the Morocco All Shares Index (MASI), a value-weighted index made up of all 75 listed companies, at 10.05% below its level on January 1 to reach 8419.04. The MADEX, an index representing the most liquid continually listed stocks, was 10.29% lower at 6830.53.

The bourse continues to be affected by the difficult domestic and external economic environment; the economic crisis in Europe has reduced demand for exports, which have been slow to recover in recent years. The fiscal deficit is on the rise, as the government balances concerns of stimulating economic growth with the need to reform its costly subsidy and public pension systems. The heightened economic risk and overall liquidity shortage has made banks more hesitant to lend, which has limited access to credit and made for a more reserved investment context.

However, state and bourse authorities do have an opportunity to improve conditions for companies to offer IPOs, to launch short-selling operations and to increase the number of trade and investment opportunities by developing new elements such as stock lending and a derivatives platform. While the market will need time to recover, authorities? more proactive stance in 2013 should see a jump in trading activity and capitalisation over the medium term.

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