No Rush for Dollars in Morocco as Looser Peg Boosts Currency

(Bloomberg) -- It finally happened: Morocco eased its grip on the dirham. But there was no stampede for dollars and the currency strengthened.

Bank al-Maghrib set the reference rate at 9.2184 per dollar, 0.2 percent stronger than Friday’s, even after the central bank widened the dirham fluctuation band to 2.5 percent above or below its peg.

And the regulator allocated less than a fifth of the dollars it offered to sell at an auction earlier Monday, a sign that banks and businesses aren’t panicking, according to BNP Paribas’ Moroccan affiliate Banque Marocaine pour le Commerce et l’Industrie. Morocco’s MADEX index of stocks advanced the most since October.

“The hostilities haven’t started yet,” said Olivier Bru, a senior banker at Banque Marocaine pour le Commerce et l’Industrie. “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.”

Exchange-rate reforms are supported by the International Monetary Fund and are the centerpiece of Morocco’s ambitions to transform itself into North Africa’s dominant financial and trade hub. The shift was originally slated for last year but was postponed when fears of a weaker dirham triggered a rush for dollars and euros, causing a $3 billion drop in reserves in three months.

FX Auction

The central bank announced on Friday that the shift to a more flexible regime was back on and confirmed that the band would be widened to 5 percent. This time around, companies say there was less uncertainty about what the change would entail.

They also started regular foreign-currency auctions as part of a pledge to ensure sufficient foreign currency in the banking system. On Monday, they offered $20 million but allocated just $3.5 million at a weighted average of 9.2307 dirhams per dollar.

Monetary authorities are expected to allow market participants access to additional hedging instruments on top of the current forward and options, according to Amine Hassani, a currency trader at CFG Group in Casablanca.

“We’re advising clients to hedge their import and export transactions” given the potential increase in volatility, Hassani said.

Not Angola

Morocco’s shift 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.

Unlike commodity-exporting countries, which have floated or devalued to end crippling dollar 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, sectors that stand to benefit from an orderly depreciation of the dirham.

Gross domestic product expanded faster than the majority of countries in the Middle East and North Africa in 2017, according to IMF estimates.

Fund Flows

Investors said Monday’s move probably won’t spur a deluge of foreign inflows as it did in Egypt, which devalued its currency in 2016 and had severe fiscal imbalances.

“It’s good they are moving forward and the government progresses with economic and financial liberalization, but we are not expecting a very large reaction,” said Mohieddine Kronfol, the chief investment officer for global sukuk and Middle East and North Africa fixed income at Franklin Templeton Investments in Dubai. “The market needs more structural reforms to increase foreign participation. We will monitor developments to be in a position to take advantage of opportunities should they present themselves.”

The wider band is the first phase in Morocco’s currency liberalization. The central bank is expected to introduce further reforms.

©2018 Bloomberg L.P.