With investor appetite for euro-denominated bonds
low, Morocco issued US dollar-denominated bonds
for the first time in December 2012. However,
Europe is its main trading partner and the
Moroccan dirham is largely pegged to the euro. To
manage the currency risk of its dollar-denominated
liabilities, Moroccan authorities approached the
World Bank to exchange the dollar-denominated
coupon payments and the principal repayment of
the US$1 billion bond into euro. The World Bank
acted as an intermediary for Morocco and executed
the first non-IBRD hedge to help a member country
manage risk of liabilities owed to a third party.

                                                    strategy which resulted in central government debt
                                                    declining from 68 percent of GDP in 2000 to 50.3
Morocco has made significant economic headway       percent in 2010. To improve debt management
since the 1990s, averaging 4.9 percent of growth    capacity, the debt management office strengthened
over 2001-2011. The unemployment rate declined      its institutional structure by creating front, middle,
from 12.3 percent in 2000 to 8.9 percent in 2011.   and back office functions. The Ministry of Economy
Absolute poverty decreased from 15.3 percent to     and Finance (MEF) also partnered with the World
roughly 9 percent between 2001 and 2007. Based      Bank to manage financial risks on its IBRD loan
on these achievements, Morocco reached              portfolio, making use of opportunities to execute
“investment grade” rating in 2007, which was        interest rate and currency hedges.
confirmed over 2009-2011 despite ongoing global
economic turmoil. These achievements were in part
the result of sound macroeconomic policies.
                                                    As Europe is its primary trade partner, the Moroccan
The policies adopted include a prudent debt         dirham is largely pegged to the euro. But with
investor appetite for EUR-denominated bonds
uncertain, the government issued a US$1 billion
                                                        This marked the first time that the World Bank and a
10-year global and a US$500 million 30-year global
                                                        client partnered to manage risk on liabilities owed to
bond in December 2012. However, the MEF was
                                                        a third party. This will allow Morocco to better
concerned about the currency risk on its dollar
                                                        manage its exposure to the US dollar and protect its
obligations and wanted to exchange its US dollar
                                                        investments and development programs from
liabilities into euro.
                                                        fluctuations between the dollar and the euro. The
                                                        transaction also helps Morocco maintain the
                                                        composition of the external debt portfolio in line with
At the request of Morocco, the World Bank               the currency risk management strategy. This
executed a free-standing currency swap, which           transaction was also part of the Bank’s efforts to
allowed the country to manage its exposure to the       provide a comprehensive menu of financial
dollar in relation to the US$1 billion bond issuance.   solutions to meet the risk management needs of
The USD/EUR cross-currency swap exchanges               member countries.
into euro the bond’s semi-annual fixed rate coupon
payments and the final notional exchanged at
maturity. The terms of the swap exactly match
those of the bond. The transaction was executed
under the terms of an ISDA (International Swap
and Derivatives Association) agreement signed
with the World Bank in 2004. When executing the
swap transaction with Morocco, the Bank also
executed a mirror transaction with a market
counterparty in order to off load the currency risk
it took.




Miguel Navarro-Martin, Head of Banking Products, mnavarromartin@worldbank.org, +1 (202) 458 4722



                                                                                                     Photo Credits
                                                                             Front: Curt Carnemark / World Bank