Friday, August 22, 2008

Does Morocco's Inflation Surge Put Rate Rises On The Agenda?

Moroccan consumer price inflation rose to a year-on-year of 5.1% in July 2008 from 4.7%percent in June. Such a rise has been prompted by rising food costs due to soaring world commodity prices. The latter had risen 9.1 percent compared with July 07

Transport price inflation accelerated to 3.2%, more than double the 1.3% increase seen over the two preceding months, largely because of the government's decision to allow the state-controlled prices for several types of fuel to rise with effect from July 1st. The fuel price increases in July will have ramifications for other categories of inflation, as transport costs will rise and retailers will seek to pass these on to consumers.

As a consequence the Moroccan government revised its annual inflation forecast in June to 2.7-2.9% up from an initial estimate of 2%. The risks surrounding the forecast continue to be on the upside. Externally, they concern the uncertain development of the pricesof hydrocarbons and primary products, while internally, the main sources of uncertainty are linked to the impact of world prices on the subsidization system, particularly for oil products, with a greater-than-expected effect of rising income on inflation and with the credit growth rate (Bank Al Maghrib).

Financial authorities are worried that higher inflation may lead the Central Bank to hike interest rates further. Such worries stem from the fear that monetary tightening would stifle growth, at precisely the time when the government is striving to promote job creation and reduce poverty.

According to their latest report, the Bank Al Maghrib (Central Bank of Morocco) left interest rates on hold - at a rate of 3.25% - at the last meeting, although they did use the now par for the course expression "heightened vigilance" with regard to the development of inflation and risk factors in the coming months.


Anonymous said...

Interest at 3.5% with an inflation shooting at 5%...One could say that they are behind the curve but on the other hand there is no chance of having wage spiraling there...

I understand that they have clearly a housing boom issue and it seems to me that too much money has been pouring into real estate speculation.

It will be good to know if the speculation is external, in this case the central cannot do anything with regard to interest rates, but if it's caused by banks lending too much then it's a big issue and the central should have then tighten monetary policy long ago...

Just wondering if this central bank is "independant"...

Edward Hugh said...


Thanks for your interest.

"Interest at 3.5% with an inflation shooting at 5%...One could say that they are behind the curve but on the other hand there is no chance of having wage spiraling there..."

Yep. But this situation isn't as straightforward as it seems, since Morocco has, along with many other emerging economies been receiving substantial capital inflows since the sub-prime issue broke out in August 2007. It also receives substantial funding in remittances - estimated by the World Bank at 9.5% of GDP in 2006.

In this context simply raising rates can be countreproductive, since the increased yield and the prospect of a further rise in the dirham can attract even more funds, and hence fuel the construction boom and inflation even further.

So the BAM is to some extent, and rightly, focused on the echange rate, since they need to improve the goods trade balance, and hence there is no point in keeping inflation down at home if you simply make your exports more expensive (look at the Czech Republic if you want a clear case of this problem). So there is a delicate balance to be struck here, and the fuel and food subsidies also have to come off at home at some point, so I do think a one step at a time approach is intelligent, provided, that is, the steps are taken.

"on the other hand there is no chance of having wage spiraling there..."

exactly, at the moment the emphasis should be on moving away from construction boom and tourism dependence by keeping exports competitive and attracting greenfield FDI, thus creating employment at a rate which can realitically and stably bring unemployment down.

Real wages were up 1% y-o-y in Q1 2008, you compare this with what has been happening in Eastern Europe.

"It will be good to know if the speculation is external, in this case the central cannot do anything with regard to interest rates"

Yep. This is the point, and it isn't really specualtion, since if the country really grows as it might then property prices can reasonably be expected to sustain a steady rise (I think they are only going up at about 10% per annum, and construction output was only up 7% y-o-y in Q2 2008). And remember the dirham is being held steady and there is inflation, so the real price rise is much less. Real estate lending was up 42.7% y-o-y in April, but we are talking about increases from a very low base here.

This is all very different from what happened in Spain 2000 to 2007. Also remember the remittances are fueling construction from family members for homes that are really needed, and this again isn't speculation. Given the proportion of young people the rate of new household formation must be quite high at this point.

"Just wondering if this central bank is "independant"..."

Well, as I say in another post, nothing in this life is perfect, and I am sure they are not completely independant, but then is the ECB?

What I think is that since they got their new charter in Feb 2006 they have made considerable steps in the right direction, and this is an ongoing process. This is also the most recent IMF view.

They did for example issue a veiled warning to the government in their June inflation report:

The recent decision to raise the minimum wage (SMIG), in July 2008 and 2009, will have a significant and long-lasting effect on average wages and on inflation. According to our estimates, the impact of a 5% rise in the minimum wage on inflation is of about 1 percentage point after four quarters and 1.1 percentage points approximately after eight quarters.

ie, be careful what you are doing.

The IMF said the following about this position from BAM in their latest report on Morocco:

The wage increases awarded in the context of the Spring 2008 social dialogue, which come into effect on July 1, could also have an impact on inflation through second-round effects. If these risks do not materialize, the mission projects average inflation at around 3 percent in 2008. BAM is well aware of what is at stake in the new environment, and the mission notes with satisfaction its determination to defend price stability.

Let me put it another way, they seem to be streets ahead of Argentina. Give them time, and lets wait and see.

Anonymous said...

Thanks for your answer! I still have few questions marks ;->

"Let me put it another way, they seem to be streets ahead of Argentina. Give them time, and lets wait and see."

Could expand on that?

Regarding Speculation:

A recent study on the “current situation of the real estate sector”, conducted by the Ministry of Housing, Urban Planning and Space Development (MHUPSD), highlights that part of the price increased recorded from 2003-2007 is due, among other factors, to speculation. I agree with you that some part are linked to fundamentals, but when I look at wage growth which was negative last year and is mere 1% growth this year, it's hard to explain this growth...

I understand as well that last week more measures have been put in place by the government, to fight speculation, which highlight the fact that the problem exist. I don't think it's a good idea to try to target any particular asset class as greenspan highlighted once, it can produce more damage than benefits. I do agree with this approach as it will kind of self regulate later on...but sometime the price to pay is very elevated...

If now, I look at the performance of the Moroccan Stock Exchange, it has had an exponential growth in the past year. I think this is typical sign of a "bubble". We had the same pattern for the Chinese stock market by end of 2007 which then corrected 60% as today or most widely known, nasdaq in 2000 which corrected 80% by 2003.
I would say on purely technical basis, the stock market is about to correct, and most probably led by Banks, leasing, real estate companies...

A growth of 42.7% for real estate loans (62% of that being private household) and a 21.6% growth for private business...that quite big. Intuitively, it should raise alarms at a time of a deteriorating marcoeconomic environment. One could argue in favor of a rise in interest rates...

I understand that the main trading partner of Morocco are France, Germany, Italy and Spain...the latest data is pointing a possible recession for all of them. Should that happen it will have a big impact on their already ballooning trade deficit.

I'm not an economist, but i undestand that if the economy of a country deteriorate than the currency will weaken because interest rates yield will have to go down...unless we have stagflation.

Interest rates in Morocco are really low, so they cannot really manoeuver on that front. Second, the problem with their currency Dirham is that it is (semi?) pegged to the Euro. I think at some point the Dirham need to weaken considerably against the Euro in order to boost the exports and put a break in their import but then it will be a threat for inflation and social stability.

Now another risk is the decline in price or volume of export of phosphate then foreign trade deficit could well in the red...something not good for the medium term...