Rabat – A recent note published by JP Morgan came to confirm Moroccans’ worst fears about the dirham liberalization reform. The American bank predicts a 7 percent depreciation of the dirham over the next 12 months.
In a recent note issued by the Emerging Markets Research department of the bank, JP Morgan goes into details about Morocco’s new flexible exchange rate regime reform.
Now or Never
After the botched launch of the first phase of the dirham liberalization reform in mid-2017, which led to a severe rush on currency that drained $3 billion from Bank Al Maghrib’s foreign currency reserves, JP Morgan believes “this time to be different.”
According to JP Morgan, Morocco’s central bank discretion about the new date of the launch of the reform allowed it to “limit pre-emptive demand for foreign currency.”
In addition, the American bank explains that the shock-effect of greater exchange rate flexibility should be much more muted now compared to April 2017, “as some policy steps towards exchange rate flexibility have been expected for some time already and fears of a large devaluation have been dispelled.”
However, the shocking piece of information revealed by JP Morgan’s note is the 7 percent depreciation of the dirham against the euro-dollar basket in the next 12 months.
For the bank, this depreciation “will be inconsistent with Bank Al Maghrib’s plans,” which widened the fluctuation band against the euro-dollar currency basket, trading up to a +/- 2.5 percent around a central rate.
“The graph shows that the market prices in a gradual depreciation path of the dirham against the euro and dollar basket from MAD 10.47 (current spot) to MAD 11.18 in a year’s time.” says JP Morgan’s note.
However, the bank adds that “current market pricing is inconsistent with this gradual sequencing of events,” namely because “it is not obvious that the dirham is significantly overvalued at current levels,” and the authorities are transitioning to the new system “under a relatively supportive global economic environment.”
Limited impact on the economy
In this sense, JP Morgan believes that since Bank Al Maghrib is stepping carefully towards greater exchange rate flexibility, “we see the impact on the economy to be limited at this juncture.”
For the bank, there is no scenario of undervaluation or overvaluation for the dirham in the medium term. “While the deficit in the external balance suggests that dirham could be overvalued modestly, our Consumer Price Index has appreciated by only about 4 percent since the 2012 low and remains below the long-term average.”
JP Morgan believes that the alignment of the dirham close to its fair value, combined with a limited Foreign Exchange open position in the financial and corporate sectors, “explain why the currency has not come under pressure and has remained well within the band since the central bank announcement.”
“Foreign Exchange loans were only 2.7 percent of total loans in the banking system in 2017 and banks’ net open foreign exchange positions to tier 1 capital had narrowed from 10 percent in 2010 to 4 percent at the start of 2017,” explains the bank.
Moderate rise in inflation
On the other hand, JP Morgan expects the current account deficit to reach about 4 percent of GDP, about the same level as in 2017 according to its projections. The balance of payments remains “supported by buoyant exports despite rising energy prices,” says the bank.
“We do not expect a material increase in the volume of exports of goods and services which has slowed from an average of 8.6 percent in the last 5 years to about 6 percent in 2017. Nonetheless, the current steps to increase the dirham flexibility and the reduction in the weight of the Euro in the currency basket from 80 to 60 percent in 2015 should limit any deterioration in external balances and support competitiveness against the background of a rising Euro.” adds JP Morgan.
“Given the limited increase in the flexibility of the Dirham, we expect a moderate rise in inflation, projected to average close to 2 percent, up from 0.7 percent in 2017.”