Moroccan dirham to rise once central bank loosens its grip

The spotlight in the region’s currency markets over the past couple of years has been on the threat of large devaluations but, as we explain in this Focus, the risks in Morocco appear to lie in the other direction. With the authorities pushing ahead with plans to loosen their grip on the dirham, we expect the currency to strengthen against the euro by the end of this year. A shift in exchange rate policy may raise some uncomfortable parallels with other countries in the region. Late last year, Egypt floated the pound and the currency has since fallen by 50% against the dollar. The Algerian and Tunisian dinars have also weakened over the past few years amid strains in the balance of payments, while there has been persistent speculation that low oil prices would force the Gulf countries to abandon their long-standing dollar pegs.However, Morocco is in a different situation and, if anything, the dirham looks undervalued. There are several ways of showing this. One is to look at conventional measures of external competitiveness, such as real effective exchange rates. On this basis, the dirham may be undervalued by around 3%. Perhaps a more compelling case, though, can be made by looking at Morocco’s balance of payments position, which has improved markedly over the past few years.