Top-Performing Arab Economy Balks at Currency Float on Egypt

CAIRO (Capital Markets in Africa) – In five decades of importing steel wires, Zahar Benmoussa’s company never worried about currency risks — until Morocco announced plans to float the dirham.

“For the first time in our history, we started to hedge” in the currency market, said Benmoussa, managing director at Casablanca-based Grillages Marocains. Across Morocco, fears of a weaker dirham triggered a rush for dollars and euros, causing a $3 billion drop in its reserves in just three months this year.

Then in June, the government put its plans on hold again. It was at least the second time it stalled on a move supported by the International Monetary Fund and a centerpiece of Morocco’s ambitions to become North Africa’s dominant financial hub. By delaying, the country risks wasting a “perfect time” in terms of its economic health to loosen controls, according to Charles Robertson, global chief economist at London-based Renaissance Capital.

“It’s fear of the unknown and pessimism on the corporates’ part,” Robertson said after a research trip to Morocco in July. There’s also the shadow cast by Egypt, he said, which saw its pound lose half of its value against the dollar after the government removed most controls in November to end a foreign-currency shortage.

Trading Band
While central bank Governor Abdellatif Jouahri has repeatedly insisted that the float would be gradually introduced starting in the second half of the year, it’s now unclear when liberalization will take place. Prime Minister Saaddine El-Otmani said July 1 that the first phase will allow the currency to fluctuate within a daily range of 5 percent, up from 0.6 percent currently.

The dirham is pegged to a two-currency basket weighted 60 percent to the euro and 40 percent to the U.S. dollar. It has fallen 4.4 percent against the euro this year, and touched a three-year low of 11.1831 per euro last week.

“The move to a more flexible exchange rate regime, not a float, is still in the cards but the rollout will take place at the appropriate time,” government spokesman Mustapha El Khalfi told reporters on July 6. The premier wants to investigate what volatility or depreciation would mean not only for the purchasing power of Morocco’s 34 million people, but also for companies doing business abroad, he said.

Some see opportunities from a weaker currency. Abdelhai Bessa, chief executive of textile and garments producer Somitex, said he hoped for an “orderly depreciation” of the dirham that would help Moroccan products compete with Turkish and Chinese goods.

‘Not Competitive’
“The authorities say they want Moroccan companies to boost exports and expand in sub-Saharan Africa, but right now we’re simply not competitive enough,” Bessa said. “Currency reform might change that.”

Yet it could also aggravate unrest which has been building in Morocco since a fish seller was crushed to death in a garbage compacter in October following a run-in with police. The incident became a focal point for a protest movement demanding political and economic reform. This week, the first protester since the unrest started died from head wounds suffered in an anti-government march in the northern city of Al-Hoceima in July.

The protests probably played a minor role in the decision to delay the float plans, according to Riccardo Fabiani, North Africa analyst at the Eurasia Group in London. More significantly, he said, was political infighting and the need for Otmani to assert his authority. He took office in March at the head of a six-faction coalition, ending a five-month political impasse that had forced King Mohamed VI to intervene.

The prime minister “had been bypassed by everyone,” with the unrest handled by the interior minister and the justice minister — both of whom are close to the monarchy, Fabiani said. The central bank was relatively the easiest target for Otmani to show that he is in charge and “not ineffective,” he said.

Good Shape
Even so, analysts say Morocco’s economy is in good shape for removing restrictions on the dirham. Unlike Egypt prior to its float, Morocco has an investment-grade credit rating and an expanding private sector. With growth expected to average 4.1 percent in 2017 and 2018, it is set to outperform most Arab economies including Egypt and Tunisia, as well as Saudi Arabia and the United Arab Emirates.

Its budget deficit is forecast to drop to 3.1 percent this year from 4.2 percent in 2016, according to economist estimates compiled by Bloomberg. Inflation is under 2 percent.

“It’s not at all cut-and-dried whether the dirham will appreciate or depreciate when more flexibility is allowed,” Badr Fassi-Fihri, who trades currencies for Banque Centrale Populaire, said by phone from Casablanca.

The postponement was easy for Otmani because Morocco, unlike Egypt, isn’t facing a currency crisis that requires immediate action, according to Reham El Desoki, senior economist at regional investment bank Arqaam Capital.

Authorities are “thinking long about what could go wrong simply because they can afford to do so,” she said.

The repeated delays are exacerbating volatility, said Benmoussa at Grillages Marocains. “The way the authorities seem to be hesitating raises uncertainty,” he said.