Thursday 29, June 2017 by Jessica Combes

Fitch: dirham liberalisation poses little risk to Moroccan banks


The planned partial liberalisation of Morocco's exchange-rate regime will have a limited impact on the country's banking sector, according to Fitch Ratings.

Banks are unlikely to face significantly higher currency-related risks from greater exchange-rate volatility as their foreign-currency (FC) exposure is minimal in their domestic activities, FC lending is almost entirely trade related, FC deposits are rare and use of international capital markets is minimal. Net open FC positions are small and typically amount to less than five5 per cent of equity.

The liberalisation of the dirham is likely to have a limited impact on macroeconomic stability in the short and medium term. Fitch expects the new exchange-rate regime to be phased in gradually, leading to little increase in the volatility of the dirham against the currency basket currently anchoring the peg. The risks of a sharp adjustment of the dirham are low as the exchange rate is consistent with fundamentals, according to the IMF's latest assessment. Public finances and market access should not be significantly affected as public debt is mostly denominated in dirhams and held domestically. Morocco's reserves and the IMF's precautionary and liquidity line would provide an important buffer in case of external stress, which is not Fitch's base case.

Small- and medium-sized Moroccan importers would be most affected in the event of any weakening of the dirham, given their limited access to currency hedging tools. However, these companies' forward purchase orders tend to be short-term, so they should soon be able to pass the rising import costs to their customers. We do not expect a surge in impairments in the largest banks' SME loan portfolios triggered by exchange-rate movements.

Larger Moroccan corporates already actively use currency derivatives and banks do not expect these borrowers to have problems servicing their FC loans once the currency regime changes.

Banks that are active in currency trading or able to offer hedging instruments to their customers may benefit from opportunities brought about by greater exchange-rate volatility. These include Attijariwafa Bank, one of the largest banks with the most developed corporate and investment banking franchise, and the subsidiaries of leading French banks, which can tap into their parents' derivative expertise. Demand for derivatives is likely to increase among SME borrowers, boosting business volumes for banks in a position to offer such products.

The dirham is currently tied to a basket of currencies comprising the euro at 60 per cent and US dollar at 40 per cent. The Moroccan central bank can intervene to limit fluctuations and restricts bid-offer spreads to 0.6 per cent, meaning that all official dirham exchange transactions are settled within this tight band. Dirham volatility has been low in recent years.

It is not clear how soon the new exchange regime will start. A June 2017 date, indicated by the authorities this year, now looks unlikely but Fitch expects the reforms to begin in 2H17 with a long rollout period, which some banks expect could be as long as 15 years.


Features & Analyses