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Morocco: Taxing Capital Gains

Morocco's 2008 budget raises capital gains tax in an effort to increase government revenues used to subsidise the rising prices of commodities on international markets. The move has raised concern in the securities industry, with some insiders saying the new provisions could undermine the recent renewed interest of small investors in the stock market.

Capital gains were totally exempted in 2005, though the tax was reinstated at a rate of 10% in 2006. The 2008 budget law includes a provision to raise the rate to 15%. Of the 325 members of parliament, 96 members voted for the draft bill last week and 67 against.

Investors began adjusting their portfolios even before the legislation was passed, beginning in early November when Salaheddine Mezouar, the minister of economy and finance, presented the proposed budget provisions to the press. The massive rearrangements triggered a drop in the country's benchmark MADEX index, which had gained 47.6% at its highest level in September. The index had dropped 9.6% by the beginning of December. As the fiscal year draws to an end, individuals are expected to join institutional investors in asset reallocations that may well exacerbate this decline.

The tax hike could also jeopardise the renewed interest of investors in the Casablanca Stock Exchange , reviving memories of the late 1990s correction that took its toll on investor confidence.

The booming initial public offerings (IPOs) seen in the kingdom in recent years, most of which have posted hefty gains, are largely responsible for the renewed interest in the stock market. Seven companies have already sold stocks to the public this year. This follows the record ten IPOs listed in 2006, when property developer Addoha more than tripled its stock price in less than six months.

Stokvis , a construction equipment distributor, along with consumer credit agency Salafin , are scheduled to make their bourse debuts in December, raising the number of companies listed on the Casablanca exchange to 72. Total market capitalisation currently stands at Dh590,000bn ($77bn).

The rush to snap up stocks sold in IPOs frequently leads to overwhelming subscription rates, resulting in low stock allocation. Atlanta, an insurer which said it would raise Dh1.2bn ($156.7m) in a share sale in October, received applications for more than 100 times the number offered, forcing the exchange to close the share sale on October 3, one day ahead of the initial four-day subscription period. The 111,777 Moroccan individual investors who had placed orders for as many as 55m shares were allocated only 520,683 securities, less than one stock for every 100 sought. Frustrations continue to run high as the company's stock has performed well following listing, surging by 58.8% in less than two months.

Another to experience the rush to buy newly listed shares was Compagnie Générale Immobilière (CGI) , a property developer in which the government's investment arm Caisse de Dépôt et de Gestion has an 80% stake. When the Rabat-based company said it would raise Dh3.5bn ($457m) by selling 3.5m new and existing shares, analysts did not expect massive oversubscription, given that it was Morocco's second-largest IPO ever. Yet investors placed orders for as much as 520m shares, 141 times the number of shares available, dragging down the rate of allocation for the 54,872 new shareholders to less than 0.8%. CGI shares have more than doubled in price since their listing.

If the new fiscal provisions undermine the interest of small investors in the stock market, it may well drag down the trading volume, which has picked up speed in recent months, boosted by the launch of on-line brokerage services by three Moroccan banks.

Although the tax increase might generate additional revenue, it is unclear whether it will be able to bridge the gap generated by the rising subsidies the government has pledged in an effort keep retail prices stable.

In addition to the tax revenue forfeited after lowering the corporate tax rate from 35% to 30%, the government has also earmarked Dh20bn ($2.6bn) to subsidise the inflation in prices of cereals and oil products seen on international markets, 49% more than was allocated last year. In a bid to improve the purchasing power of low-income households, the government-run Caisse de Compensation will allocate Dh12bn ($1.56bn) to finance oil product prices in the kingdom. An additional Dh8bn ($1bn) was budgeted to subsidise the prices of wheat, sugar, and cooking oil. The amount set aside for subsidies represents 8.4% of the government's total revenues of Dh 238.6bn ($31bn) for 2008.

© Oxford Business Group 2007