A Star Arab Economy Eases Hold on Currency to Lure Investors

CASABLANCA (Capital Markets in Africa) – Morocco loosened its currency peg in a long-awaited move aimed at strengthening its economy and avoiding financial imbalances that forced a slew of emerging nations into sharp devaluations.

Bank al-Maghrib on Monday allowed the dirham to fluctuate 2.5 percent above or below its official rate, significantly widening the band from 0.3 percent each way. The central bank updated the dirham’s band from to 8.9783 to 9.4328 against the dollar as of 12:57 p.m. in Rabat, according to data compiled by Bloomberg, but it didn’t announce the reference rate.

The shift in the currency regime is “another positive step forward for the country as it gives additional flexibility for monetary policy,” Mohieddine Kronfol, the chief investment officer for global sukuk and Middle East and North Africa fixed income at Franklin Templeton Investments Ltd. in Dubai. “We are not expecting a very large reaction.”

Exchange rate reforms are supported by the International Monetary Fund and are the centrepiece of Morocco’s ambitions to transform itself into North Africa’s dominant financial and trade hub. The move was postponed from last year, when fears of a weaker dirham triggered a rush for dollars and euros, causing a $3 billion drop in reserves in three months. The central bank announced on Friday that the shift to a more flexible exchange rate regime was back on and confirmed that the band would be widened to five percent.

FX Auction
The authorities introduced regular foreign-currency auctions as part of a pledge to ensure sufficient foreign currency in the banking system.

They offered $20 million on Monday, but allocated just $3.5 million at a weighted average of 9.2307 dirhams per dollar, 0.3 percent stronger than the dirham’s last price on Friday, according to central bank prices compiled by Bloomberg. It’s a sign that there’s no rush for foreign currency, according to BNP Paribas’ Moroccan affiliate Banque Marocaine pour le Commerce et l’Industrie.

“The hostilities haven’t started yet,” said Olivier Bru, a senior banker at BMCI in Casablanca. “Companies and investors are still assessing, identifying and reflecting on their potential needs. As for demand on hedging against dirham fluctuations, clients are querying their options and seeking information, but they are not buying for now. There is no panic.”

Not Angola
Morocco’s announcement came days after Angola ditched a currency peg in place since 2016 in an effort to revive an economy hit by the slump in oil prices four years ago.

Economists and business people said Morocco was unlikely to join the long list of countries from Egypt to Uzbekistan that allowed their currencies to plummet in recent years, because the central bank was sitting on ample reserves and the dirham is already fairly valued. Gross domestic product expanded faster than the majority of countries in the Middle East and North Africa in 2017, according to IMF estimates.

Unlike commodity-exporting countries, which have floated or devalued to end crippling foreign exchange shortages, Morocco is an importer of grain and oil and has benefited from lower global prices. It relies on exports, remittances and tourism for its hard currency earnings.

Main Risk
The main risk Morocco faces is a combination of poor harvests and surging global commodity prices that could raise costs for the government and prices for consumers in a country that has seen bouts of unrest since the Arab Spring protests that swept the region in 2011.

The central bank says the fixed exchange rate regime has helped keep inflation, expected to average 0.7 percent in 2017, under control as the government reduced state subsidies on refined oil products.

In Egypt, which floated its pound in November 2016, the currency quickly halved in value, pushing inflation above 30 percent. But Morocco, which has an investment-grade credit rating an expanding private sector, isn’t facing such wide imbalances.

The economy grew 4.1 percent in 2017, according to central bank estimates. Foreign reserves have stabilized at a level sufficient to cover more than five months of imports.

The dirham is pegged to a two-currency basket weighted 60 percent to the euro and 40 percent to the U.S. dollar. The wider band is the first phase in Morocco’s currency liberalization, which it hopes will encourage foreign investment and make Moroccan exports more competitive abroad. As the interbank market becomes more liquid, and reliance on central bank guidance subsides, the central bank will introduce further reforms.

Ahmed Derrab, secretary-general of Morocco’s association of citrus producers, said a more flexible exchange rate was necessary to boost competitiveness and should not pose major risks for exporters as long as authorities move cautiously.

“We are serene because this is only the beginning of what is going to be a gradual liberalization process,” he said. “This is controlled flexibility.”

Source: Bloomberg Business News


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