Rabat – Friday night, local media all brandished the same headline: the Dirham liberalization is finally here. After months of confusion, wild speculations and exchanged accusations, the reform of the Moroccan exchange-rate system is due this Monday. But away from the technical jargon, what does this reform really mean? What will change? And how will Bank Al Maghrib intervene from now on in the trading market?
The current fixed exchange-rate system means that Bank Al Maghrib meets all the operators’ foreign exchange needs, with no limit and no price adjustment. Currently, the Dirham has a small fluctuation band of 0.3 percent upwards or downwards, so it is moving in a 0.6 percent corridor at which the Central Bank intervenes to buy or sell currency.
Starting Monday, however, the corridor will be expanded to 5 percent, meaning a fluctuation band of ± 2.5 percent.
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Currently, Moroccan trading rooms are mainly acting as liquidity providers for their customers. They identify the needs in foreign currency and cover them, either with their currency stocks, or by acquiring financing from Bank Al Maghrib.
Trading rooms can also structure foreign exchange risk hedging products for clients and trade on their own behalf in the foreign exchange market. However, this activity is limited to low volumes compared to volumes achieved by major liquidity providers or market makers. Starting Monday, this deal will change.
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Contrary to what most believe, and what is widely reported by local media, Bank Al Maghrib is not a conservative institution. The central bank has a rather liberal philosophy which it respects in all its areas of intervention, without falling into the extravagance and excessiveness of the West. It always prefers to let the market regulate itself and only intervene as a last resort.
This is the case on the interbank market and soon on the participative interbank market, but also on what will be known from now on as the new Moroccan interbank currency market.
By pursuing this liberal philosophy, the Central Bank is always trying to push operators to develop their own tools, to be independent and resilient. In the “classic” interbank market, banks loan each other every day, refinancing and optimizing their resources in order to make their credit activity profitable.
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However, when it comes to currency, the banks have for the moment a unilateral approach with their customers on the one hand, and the Central Bank, on the other hand. Currency movements between banks are very limited, and BAM is there to provide when needed.
Once the Dirham is liberalized, Bank Al-Maghrib will initially set variation thresholds which, at their approach, provoke a systematic intervention on its part. But as long as these thresholds are respected, and there is no significant pressure on the price of the Dirham against other currencies, the market will simply self-regulate.
At the beginning of the reform, Bank Al-Maghrib will continue to intervene daily by feeding the foreign exchange operators. The objective is to allow a smooth transition without volatility to reassure operators during the transition from one exchange rate to another.
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In a second phase, the central bank will limit its interventions to more or less a single auction per week and in a single currency that will surely be the Dollar. Banks wishing to refinance their foreign currency reserve from the Central Bank outside these deadlines, for one-off operations, may do so but at prohibitive prices to avoid making it a habit. This funnel approach will gradually allow the market to self-regulate.
Concretely, the banks will most of the time have to refinance themselves in foreign currency, which will sign the birth of an interbank foreign exchange market in Morocco with all what this implies in terms of expectations, pricing and risk management.
The volumes in this market will be theoretically proportional to the needs of the real economy in the context of import/export, currency transfers, outbound or inbound dividends, but nothing prevents the development of a speculative secondary activity.
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The Dirham liberalization is a project that really stresses the role of the foreign exchange trader in the banks’ market activity. This job requires a good sense of ingenuity and anticipation, especially to value the price of currencies and their future developments.
Finally, the Central Bank through one-off operations will exceptionally serve the banking institutions in cases of absolute necessity at high rates. As a result, traders will learn how to manage their foreign exchange needs and, most importantly, how to trade between one another to avoid making Bank Al-Maghrib’s intervention a habit.
