Moody's: Government of Morocco introduces gradual foreign exchange rate
The Morocco (Ba1 positive) Ministry of Finance launched a gradual foreign exchange rate liberalisation policy.
The new policy widens the daily trading band around the reference rate, which is pegged to a basket of 60 per cent euro and 40 per cent US dollars, to 2.5 per cent in each direction, from 0.3 per cent previously. The central bank, Bank Al-Maghrib, recommended the wider trading band.
Moody's expects that widening the trading band to five per cent from 0.6 per cent is the first step in an incremental policy shift that will extend over several years and is intended to increasingly allow nominal exchange rate adjustments to reflect changes in terms of trade or in capital flows. We expect this to safeguard Morocco’s foreign-exchange reserves and to improve its competitiveness, a credit positive development.
No major currency disruptions or depreciation pressure are expected because of the policy measure because the gradual liberalisation occurs amid a current account deficit that is broadly in line with fundamentals at a forecasted four per cent-five per cent of GDP over the next two years, and which is backed by a significant foreign-exchange buffer amounting to about six months of import cover. Morocco’s access to the $3.5 billion two-year Precautionary Liquidity Line that the International Monetary Fund approved in July 2016 provides an additional backstop in case of unforeseen balance-of-payment disruptions, which is not our expectation.
Moody's assessment of a broadly balanced external position in Morocco is also informed by the country’s real effective exchange rate dynamics compared to Egypt’s (B3 stable) run up to its currency’s full flotation in November 2016, for instance. The exhibit below shows that both countries’ nominal exchange rates with trading partners have remained broadly stable since 2010, reflecting their respective pegs. However, Morocco’s relative price stability and average inflation rate of 1.2 per cent between 2010 to 2015 has ensured a broad alignment of the nominal and the real effective exchange rates with no indication of significant trend deviations between them.
In contrast to Morocco, Egypt’s average inflation reading of 10 per cent from 2010 to 2015 caused an appreciation of the real effective exchange rate, resulting in a sharp depreciation in 2016 at the time of the flotation and a temporary surge in inflation readings to more than 34 per cent year over year at the peak in July 2017. Although Egypt’s devaluation has subsequently restored the country’s external competitiveness and prompted restoration of its foreign-exchange buffer to 2010 levels, we do not anticipate similar adjustment pressures in Morocco.
Looking forward, Morocco’s geographic trade diversification strategy toward Africa and other emerging markets from its current orientation toward the euro area could weigh on its relative cost competitiveness under a rigid peg to the euro and US dollar basket versus a scenario where the nominal exchange rate absorbs any shifts in relative labour or production costs more flexibly. To the extent that the foreign-exchange liberalisation strategy is accompanied by easing capital controls that we expect once the stability of the more flexible exchange rate regime has been tested, it could also encourage higher direct investment inflows in the domestic economy.
The banking system’s direct risks stemming from the gradual liberalisation of the Moroccan exchange rate are limited. Moroccan banks’ average net foreign-exchange position was MAD4.7 billion at the end of September 2017, comprising 3.8 per cent of banks’ equity. Banks’ operations with their clients in foreign currency remain relatively limited and are primarily related to import and export transactions, which amounted to roughly MAD40 billion in the third quarter of 2017 on the sell-side and MAD26 billion on the buy-side. The majority of these were spot transactions.
As a result, Moroccan banks’ funding needs in foreign currencies are modest. Deposits in foreign currencies accounted for only 4.6 per cent of total deposits (MAD40.9 billion), and recourse to international capital market and foreign loans is also very modest. Banks’ recourse to central bank foreign-currency reserves is therefore relatively modest: on average, Moroccan banks had around MAD500 million recourse to Bank Al-Maghrib in the third quarter of 2017.