As Europe Muddles Through, the Bank of Morocco Must Plan Accordingly
After months of meetings and much hand wrangling, the government officials in Europe have yet to find the “magic formula” that will put its members on a path of growth and resolve in the long run the mounting deficits and debts of its weaker member states. As the entire world is held captive by this ongoing Greek tragedy, the global economy suffers in lock step. No longer do we have the luxury of true commercial independence. In this new era of globalization, all economies are interconnected like never before. This new reality is one reason why Morocco may have a tough road ahead if Europe continues to stumble along, slowly slipping back into recession.
In this modern age of inter-dependency, the “shock absorber” between a nation’s economy and the goings on outside of its borders is its central bank. The Bank al-Maghrib is the central bank of Morocco. It was founded in 1959, fashioned after the prevailing operating model in other countries. It is an independent body, managed by financial professionals, and has the expressed purpose of stabilizing prices and encouraging employment in the private sector. Regulating banking institutions, managing foreign exchange reserves, and promoting a stable “Dirham”, the national currency,are a few of the specific responsibilities of the bank.
Accumulating and publishing relevant economic data is also a major task of the central bank. Lately, the basic fundamental economic data has not been that encouraging:
· Morocco’s trade deficit has grown from $3.1 billion to $4.5 billion over the past year, the majority coming in the last few months;
· Imports are up by 16% while exports are down 4.6%;
· The current account deficit is now 6.5% of GDP;
· Foreign currency reserves have dipped 12% to $20 billion;
· Tourism is down;
· A prolonged draught and low temperatures have reduced agriculture output and related exports.
The data very clearly reflects the impact of Morocco’s dependency on Europe for nearly 60% of its exports and 80% of its tourist trade. Unfortunately, the prospects going forward for the near term will be neutral at best as Spain, Italy, and France continue to slip towards recession. Vacation holidays to the south will most likely be cut back, and import demand will wane until economic activity resumes a positive growth trend. After a review of these unfavorable events, the central bank recently reduced its primary interest rate from 3.25% to 3.0% in March.
How has the Moroccan Dirham fared in the foreign exchange market? With an interest rate downward adjustment and deteriorating trade balances, one would expect a sizable weakening in the Dirham. The exchange rate versus the U.S. Dollar did weaken by 11.5% over the past year, not nearly as great as one might expect. This result can actually be viewed as favorable. Morocco’s reputation as a stable and prosperous kingdom in North Africa may be part of the reason, supported by the efforts of the nation’s central bank to manage its value in a predictable fashion. A weaker Dirham should make exports more desirable, but imports will be more expensive.
A roadmap for the future will entail funding deficits along the way. In preparation, the central bank is considering future bond auctions. Increased government spending has helped the domestic economy, but GDP forecasts, which normally have been in the 5% range, have recently been reduced to 3% for 2012, due to a poor harvest and reduced European demand.
The road ahead will be rough for the Kingdom of Morocco. Public demonstrations are prevalent, but positive growth forecasts will permit moderation at a later date.
This has been a guest commentary provided by the team at ForexTraders.com