VZCZCXYZ0004
RR RUEHWEB

DE RUEHRB #1712/01 3111713
ZNR UUUUU ZZH
R 071713Z NOV 07
FM AMEMBASSY RABAT
TO RUEHC/SECSTATE WASHDC 7720
INFO RUEHAS/AMEMBASSY ALGIERS 4577
RUEHMD/AMEMBASSY MADRID 5838
RUEHTU/AMEMBASSY TUNIS 9431
RUEHCL/AMCONSUL CASABLANCA 3656
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS RABAT 001712 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR NEA/MA AND EB/IFD/OMA 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD MO
SUBJECT: MOROCCO MOVES GINGERLY TOWARDS FOREIGN EXCHANGE 
LIBERALIZATION 
 
 
¶1. Sensitive but unclassified - entire text.  Please handle 
accordingly. 
 
¶2. (SBU) Summary: A series of new circulars issued by 
Morocco's Office des Changes this fall represents further 
intensification of preparations for the country's medium term 
goal of transitioning to a freely floating exchange rate. 
Central Bank and government officials speak officially of a 
three year transition period, but privately tell us that they 
hope that the change can occur more rapidly, given 
difficulties in managing the current fixed or basket peg. 
Exporters have clamored for the change, citing competitive 
problems that have resulted from the dirham's appreciation 
against the dollar and currencies in the region (given the 
weight of the Euro in the currency basket).  The IMF, 
however, concluded earlier this year that "the dirham is not 
misaligned."  End Summary. 
 
¶3. (U) Morocco is currently one of only 9 countries that 
applies a basket peg exchange rate mechanism.  Its current 
exchange regime dates to April 2001, when the basket to which 
the dirham is pegged was adjusted away from the dollar in 
favor of the Euro.  The move reflected the country's 
increasing economic integration with the European Union, and 
followed a decade in which the dirham appreciated by 21 
percent in real terms because of the dollar's then strength. 
The shift brought an immediate five percent devaluation in 
the dirham.  The peg has worked well since that time, and the 
dirham has not come under pressure recently, as evidenced by 
the country's relatively low real interest rates and healthy 
official reserves (which currently represent nearly a year of 
imports).  Those reserves have grown steadily despite the 
country's structural trade deficit, thanks to transfers from 
Moroccans abroad, tourism, and burgeoning foreign direct 
investment.  Central Bank officials indicate, however, that 
the peg has at times been "difficult" to manage, and that 
complications could increase as the country pursues further 
capital account liberalization. 
 
¶4. (U) The most frequent complaint about the current system 
stems from the fact that as the Euro has appreciated against 
the dollar, it has pulled the dirham along in its wake.  The 
IMF concluded this year in its Article IV consulations with 
the Moroccan government that the "dirham is not misaligned," 
but exporters have not agreed.  They point to the fact that 
since 2001 while the dirham has depreciated by 9 percent 
against the Euro, it has appreciated by some 28 percent 
against the U.S. dollar.  This has also entailed significant 
appreciation against other competing currencies in the 
region, including those in Tunisia and Egypt.  Casablanca 
market analysts are reluctant to give a figure to the impact, 
but concur that the change has undoubtedly slowed the 
country's export growth.  Though Morocco has continued to run 
a current account surplus in recent years thanks to tourism, 
transfers and investments, analysts have sounded the alarm at 
the fact that exports now cover only 48 percent of imports. 
 
¶5. (SBU) A recent study by Morocco's leading bank, 
Attijarawafa, highlights the fact that Morocco is at the 
crossroads between a fully flexible system and its current 
peg.  The current system, the bank concludes, is best adapted 
to small countries with open economies that are "insulated" 
from external influences and have the ability to deal with 
temporary shocks through fiscal policy.  In contrast, the 
bank argues, a flexible exchange rate is best suited for 
large well-integrated economies that have significant trade 
flows and strong labor mobility.  Morocco, in the view of 
Attijarawafa is precisely in midstream, having graduated from 
the former category thanks to its policy of trade 
liberalization and openness to international commerce (which 
now constitutes 55 percent of GDP), but it is not yet in the 
latter category, given the small size of its economy and the 
weakness of its labor market.  As a result, Chakib Erquizi, 
Director of Market Activities argued to us in a recent 
meeting, Morocco is in need of three to five years of reforms 
to put in place the mechanisms that will permit it to 
successfully implement a floating or flexible rate. 
 
¶6. (SBU) Houssam Barakat, who handles exchange transactions 
at rival BMCE Capital, concurs that the moment is approaching 
for Morocco to begin the move to a more flexible monetary 
policy.  The current system, he told us, has ensured 
stability vis-a-vis Morocco's principal European partners, 
and has also minimized currency risk for foreign investors, 
contributing to their confidence in the Moroccan economy. 
 
 
For Moroccan markets to take the next step, however, the 
country should graduate to a a floating regime.  Both Erquizi 
and Barakat believe that market sophistication has greatly 
improved since the foreign exchange market was launched in 
Morocco in 1996.  They note the existence of varied 
instruments including swaps and options that were not present 
at that early date.  The continued increase in Morocco's 
currency reserves, in their view, also demonstrates the 
country's readiness for the transition.  What is lacking, 
they argue, is a "culture of risk" and full understanding by 
Moroccan market players of the range of international options 
open to them.  In their view, however, the new measures 
announced by the Ministry of Finance and its Office des 
Changes in August open the door to significant progress in 
these areas. 
 
¶7. (U) Those measures, contained in eight circulars, include 
significant new measures to further liberalize Morocco's 
capital account.  Among them are a reduction in the surrender 
requirement on export proceeds, partial liberalization of 
trade-related credits and payments, expansion of the range of 
transactions that can be covered by currency hedging 
instruments (together with lengthened maturities for such 
instruments), and partial liberalization of portfolio 
investment by securities firms, insurance companies  and 
mutual funds.  Foreign direct investment by firms and 
Moroccan residents was also liberalized.  The measures are in 
line with recommendations by IMF staff, and aim at helping 
market players develop the savoir faire that will enable them 
to compete and prosper in a fully globalized marketplace.  In 
remarks in early  August, Morocco's alternative Executive 
Director at the IMF characterized the measures as "important 
additional steps" on the road toward capital account 
convertability, which should encourage more efficient use of 
resources and risk diversification, while facilitating the 
task of liquidity management," thereby helping assure 
continued control of inflation. 
 
¶8. (SBU) The new rules are not the only significant change in 
Morocco's foreign exchange regime.  Central Bank Governor 
Jouahri also earlier this year lifted the veil of secrecy 
that surrounded the exact composition of the dirham basket, 
revealing that the relative weight is 80 percent for the Euro 
and 20 percent for the dollar.  Specialists had earlier 
roughly determined this by modeling the currency, but public 
confirmation brought a welcome dose of transparency to the 
system.  Morocco also signed a "Master Derivatives Agreement" 
with the World Bank to help it hedge currency risks related 
to its external debt. 
 
¶9. (SBU) Attijarawafa's Erquizi predicted to us that the new 
measures announced by the Office des Changes will have a 
positive impact on overall market dynamics in Morocco, as 
currently "the yield curve doesn't fully reflect the 
economy."  Instead, liquidity has been trapped in the 
Moroccan economy, keeping interest rates down and leading to 
inflated prices for assets that "sometimes do not reflect 
fundamentals."  He pointed particularly to several IPO's on 
the Casablanca Stock Exchange, which have dramatically 
appreciated since their launch.  (Overall, the Casablanca 
exchange has been one of the best performing in the region, 
rising 70 percent in 2006 and a further 40 percent this year, 
despite a brief correction in May.)  The impact of the 
current system on Moroccan real estate, he said, has been 
similar.  If the market were not closed, he argued, investors 
would have other assets abroad, and prices would be more in 
line with the Moroccan economy's underlying fundamentals. 
The new rules, he said, should start to begin this 
transition.  Barakat cautioned, however, that this will not 
happen overnight, given the extremely high profits that 
investors have realized from Moroccan assets in recent years. 
 
¶10. (SBU) Erquizi noted that deepening of capital makets and 
greater investment bank expertise are nt all that Morocco 
needs, however.  In his view,further structural reforms in 
the Moroccan econoy are necessary as well.  These include 
particularly reform of the Moroccan labor market to provide 
for added "flexibility of employment."   Erquizi greed with 
the point that Treasury Director Geneal Chorfi and others 
have made in public that a iberal regime does not 
necessarily imply a devaluation of the dirham, given that 
demand has exceedd supply for the last five years.  He 
cautioned,however, that this may not be the case once locals 
have greater opportunity to place their assets aroad. 
 
¶11. (SBU) Comment: Change is coming to Morocco's foreign 
exchange markets, and while full liberalization is still some 
distance away, experts concur that the changes announced this 
fall represent a dramatic break with the past and clear 
evidence of the seriousness of Moroccan plans to move to a 
floating rate.  How fast the change occurs will depend on the 
success of these initial reforms and how adept Moroccan 
traders are at exploiting them.  Historically Morocco has 
preferred to adopt a gradual approach in this sensitive area, 
however, so the transition is likely to be longer rather than 
shorter.  End comment. 
 
 
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