Rabat – According to Moody’s, the dirham risks “no major currency disruptions or depreciation pressure” following the launch of the flexible exchange rate regime.
In its latest analysis report, the United States-based rating agency echoed the reassurances of Bank Al Maghrib and Morocco’s Ministry of Finance.
The gradual liberalization of the dirham is expected to improve Morocco’s foreign exchange reserves and its competitiveness, according to Moody’s. In a note published Monday, the rating agency’s analysis presented a favorable outlook of Morocco’s new exchange rate regime.
Moody’s explained that Morocco’s current account deficit, which rests at about 4 to 5 percent, in combination with its significant foreign exchange buffer that amounts to six months of import cover, is sufficient to sustain the first phase of the liberalization reform with no risk of devaluation.
Morocco’s access to the $3.5 billion granted by the International Monetary Fund under the Precautionary Liquidity Line agreement approved in July 2016 “provides an additional backstop in case of unforeseen balance-of-payment disruptions, which is not our expectation,” added the agency.
According to Moody’s, Morocco is far from following Egypt’s example, as the kingdom’s relative price stability and average inflation rate of 1.2 percent 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, Egypt’s inflation rate reached over 34 percent 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 [Moody’s] do not anticipate similar adjustment pressures in Morocco.”
As for future forecasts, Moody’s wrote that Morocco’s trade diversification strategy toward Africa and other emerging markets “could weigh on its relative cost competitiveness under a rigid peg to the euro and dollar basket, versus a scenario where the nominal exchange rate absorbs any shifts in relative labor 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,” explained the agency.