Jun 17, 2011

Experts split on kyat’s appreciation

Supply and demand is the shortest answer to the hottest question in Yangon right now – why is the US dollar consistently losing value against the kyat?

Put simply, there are too many dollars and Foreign Exchange Certificates (FEC) floating around to buy an ever-diminishing pool of kyats.

For commodity exporters, employees paid in foreign currencies, and businesses or organisations that have project calculations based on a higher exchange rate than the K750 available for dollars last week, the weakening value isbad news.

But as chairman of the non-profit Network Myanmar, Mr Derek Tonkin, told The Myanmar Times last week: "There are as many explanations for the exchange rate conundrum as there are experts."

In the past 12 months Myanmar has seen an unprecedented wave of Foreign Direct Investment (FDI) wash over the country. From 1988 until the end of the 2009-10 financial year, a total of about US$16 billion had been invested here, mainly in oil and gas, hydropower and mining projects.

In the 12 months since March 31 last year, the total amount of FDI has more than doubled, with nearly $20 billion recorded by the government's Central Statistical Organisation. China has signed-off on projects totalling $14 billion.

The government has given the green light to several major infrastructure and energy projects in the past two years including the oil terminal and deepsea port at Kyaukpyu in Rakhine State, a number of hydroelectric power plants such as the Beluchaung scheme and Myitsone dam, and the $50-billion Dawei Special Economic Zone in Tanintharyi Region.

A significant amount of the funding for those projects never enters Myanmar and is used to buy materials and machinery abroad. Nevertheless, many costs must still be paid in kyat.

"You cannot pay skilled workers ... or buy local building materials with US dollars," said Mr Tonkin.

Mr Sean Turnell, an expert in Myanmar economics at Australia's Macquarie University, told AP news agency last week that another factor is the US dollar's international decline.

"Since the movement for the US dollar of late has been down, especially against currencies of countries that produce commodities, the rise of the unofficial kyat is not that remarkable," he said.

However, he said only "about half" of the kyat's rise in value against the dollar was attributable to the latter's global fall, with the rest made up by sales of state-owned assets, the drawing down of infrastructure and development loans from China and other factors.

Another major influx of foreign currency came from the 48th Myanma Gems Emporium that finished in Nay Pyi Taw on March 22.

That event recorded jade and gems worth more than 2 billion euros, or $3.03 billion, a Myanmar Gems Enterprise official told The Myanmar Times on March 31.

Another event that has seen kyats withdrawn from circulation was the last round of state-owned asset sales.

The last two auctions, in January and February, saw 291 properties sell for more than K800 billion, or more than $1 billion at last week's rate.

One property in Yangon, the Padonmar Theatre in Sanchaung township, sold for nearly K57 billion.

"The recent acceleration of the privatisation process has shifted money from private hands into the government's coffers," said Dr Maung Aung, a senior economist in Yangon.

U Khin Maung Nyo, economist, former lecturer at the University of Economics in Yangon and chief editor of Global Business Journal, said that while the value of the kyat has increased against the dollar in the past few months, its purchasing power for commodities has not improved.

"The dollar's exchange rate has fallen from K1200 to about or below K800. We don't know exactly how or why that has happened but we expect it is related to the FDI flowing into the country," he said.

To solve the problem, he said the government needed to buy dollars from the people, and banks need to reduce their interest rates, adding that both measures would release kyat back into the market.

U Than Lwin, a retired deputy governor of the Central Bank of Myanmar, also said the high interest rates for savings accounts at the banks could be keeping money out of circulation.

"Considering the bank interest rates here [12 percent savings], it is possible that kyat is being bought and saved in banks to earn high interest rates very safely," he said.

A Ministry of Commerce official based in Nay Pyi Taw said the fall in value of export credits – earned through export sales – mirrored that of the dollar.

However, he said the nation would not suffer a trade deficit in the 2011-12 fiscal year, regardless of the fall in commodity exports, because sales of natural gas to Thailand would easily compensate.

"Although the current situation might imply a trade deficit, the nation is making billions [of dollars] from the sales of natural gas and gems. We will definitely record a trade surplus at the end of the year" on March 31, he said.

"As far as I can see, the dollar situation will not be a long-term issue and there are many reasons that the market has been flooded with dollars," he said.

But if it's easy to answer why the dollar is losing value so quickly, it's far trickier to say where the depreciation will end.

Mr Tonkin pointed out that Myanmar is a member of the International Monetary Fund (IMF) and has obligations that it must fulfil. An August 2008 IMF working paper titled "Efficiency Costs of Myanmar's Multiple Exchange Rate Regime" concluded that a "unified" rate for the kyat against the dollar would likely be between K400 and K450.
Source: Myanmar Times