Bank Al-Maghrib, key interest rate consistent with economic conditions
le 1 février 2018
From one Board meeting to the next, Bank Al-Maghrib has left its key interest rate unchanged at an historic low of 2.25%. This has been the case since as long ago as 22 March 2016.
Unsurprisingly, the explanations and justifications of the Bank’s Governor, Mr Abdellatif Jouahri, remain the same, namely, that inflation is below 1% and that, despite an improvement Morocco’s economic growth prospects, inflationary pressures, in particular, have not yet materialised!
A low interest rate environment has indeed become the norm.
For the 2-year, 5-year and 10-year maturities, rates are at their historic lows at between 2.8% and 3.3%.
The capital market is experiencing a real imbalance between the supply and demand for capital, with the latter concentrated in the hands of the Treasury (cf. our article about the Treasury, which reigns supreme on the domestic capital market, published in the 21 December 2017 issue of La Nouvelle Tribune, No. 1053). BAM’s key interest rate lies at the very heart of the money market’s functioning, however, in that it corresponds to the Central Bank’s 7-day bank refinancing rate i.e. the bank base rate.
It must be recalled that between April and June 2016, the repo rate, which is the rate at which credit institutions refinance their operations overnight, had fallen to 1.5%, well below the bank base rate in question.
Bank Al-Maghrib had to react by raising banks’ reserve requirement ratio from 2% to 4%, so as to absorb the excess liquidity and re-establish the primacy of its key interest rate.
A liquidity surplus had arisen in the interbank market, causing rates to fall further because banks no longer needed to refinance their operations during these two months of 2016.
It is worth noting that excess banking liquidity is caused by surplus external capital flows.
Our country’s trade balance remains unbalanced, however, with an import coverage ratio of less than 60%.
The services balance, on the contrary, is in surplus! It is a beneficiary of MAD 50 billion of tourism receipts, underlining the resilience of Morocco’s tourism industry.
The same is true for net foreign direct investment which, from one year to the next, amounts to between MAD 25 billion and MAD 30 billion on a recurring basis. Predicting such figures is a relatively risk-free task due to the ongoing investment by foreign investors in major industrial projects.
Remittances from Moroccans living abroad are also relatively stable at around MAD 55 billion annually. In 2017, transfers rose by a slow but steady 4%.
As a result, the services balance surplus went some way to offsetting the trade deficit.
The current account balance, excluding FDI which is recognised in the capital account, remains in deficit. But the deficit has declined by some 60%, however, from a peak of 10% of GDP, when the oil price was more than 100 US dollars, to just 4%.
If FDI were included, the balance would be restored.
Morocco’s foreign exchange reserves have also been recovering very rapidly as can be seen from the recent losses incurred due to concern over the dirham’s possible devaluation, which resulted in sizeable volumes of foreign exchange hedging.
In just four months, foreign exchange reserves recovered by MAD 50 billion. There has been excess liquidity in foreign currencies ever since the oil price declined sharply in 2016, which saw the country’s energy bill halve from MAD 100 billion to MAD 50 billion. The counterpart to these currencies transferred to BAM in dirhams can be found with the banks, which therefore have surplus liquidity as a result.
BAM’s reaction at that time could have been to move from a system of injecting liquidity into one in which it removes it.
But it did not do so immediately, instead waiting until the June Board meeting when it raised the reserve requirement from 2% to 4%, so as to mop up all money market surpluses in one fell swoop. It could also have resorted to lowering the key interest rate, especially given that inflation remained subdued at below 1%.
But the issuing Institute knew that lowering the key interest rate even further would not serve to increase lending because of structurally weak demand, not to mention the impact on banks’ financial health.
For all these reasons, BAM’s key interest rate will likely remain at 2.25%, resulting in a flattening of every type of yield curve, beginning with Treasuries to corporate bonds and bank interest rates!
Wealth creation alone will be able to turn this situation around. As long as the latter remains weak, returns on both debt and equity will remain low.
Investment is the best indicator of future prospects when it comes to wealth creation, thereby restoring confidence, which is itself a guarantor of wealth creation, a fundamental condition therefore for improving returns…