Adverse factors point tomore pressure on kyat

The US economic recovery, Myanmar’s trade deficit and the political situation are highlighted as the three main factors putting pressure on the dollar/kyat exchange rate, according to Maung Aung, senior adviser to the Ministry of Commerce.

"In the second quarter of this year, the US economy expanded by 4.6 per cent, which is the highest quarterly growth since 2008. That lures back investment from other parts of the world and drives upward demand for the dollar," said Muang Aung.

The US also showed a 3.6-per-cent growth in the third quarter.

The adviser added that the situation in Myanmar exacerbated the situation.

"In our country, the trade deficit also sparks high demand for the dollar to pay for imported goods. We need a lot of dollars for imports, while our export income remains low. Meanwhile, dollar repatriation by migrant workers overseas has been falling due to the political situation in Thailand," he said.

About 2 million Myanmar migrant workers are in Thailand. Exporters in Thailand have cut working hours in response to lower orders, while the tourism sector has also suffered with the number of foreign visitors dropping by 10.8 per cent for the first nine months of this year. During January-August, Thailand’s exports contracted 1.36 per cent year on year, convincing the authorities that the annualised growth would be only 0.5-1 per cent.

Aung Muang noted that migrant workers also find it harder to go to Malaysia due to strict employment rules.

Maung Aung said instead of paying attention to the daily exchange rates, the authorities should ensure that the exchange rate movement is in line with global markets. He noted that action is needed to curtail excessive movements in the foreign exchange rate, to assure investors about financial stability.

San Thein, an expert on financial sector development with German development agency GIZ, also underscored the importance of a stable exchange rate system and macroeconomic policies. He urged the central bank to carry out all the necessary measures to maintain stability.

Than Lwin, senior consultant of KBZ Bank and former deputy governor of the Central Bank of Myanmar, added that the dollar phenomenon is difficult to avert, given that other currencies, including the Chinese yuan, cannot yet replace the greenback.

He expects the kyat would remain under pressure as long as growth pace continues in the US economy.

"It is out of question that the greenback would weaken in the next few months. Yet, this should result in gradual depreciation in the kyat, due to higher inflation here," he said.

A more worrying situation is when money supply increases along with the conversion of more dollar into kyat, he said. He said that the authorities should address this problem with a long-term strategy to boost export revenue.

At present, the Central Bank of Myanmar is issuing bonds to address parts of the budget deficit. The International Monetary Fund has repeatedly urged the government to free the central bank from this role, as this compromises its role in maintaining price stability.

"The authorities may need to curtail loan extension if inflation is driven up. For now, the government needs to focus on boosting exports. Meanwhile, it must also reduce the budget deficit. If the central bank has full authority to maintain the financial stability, it will be the best," said Than Lwin.

San Thein agreed that increasing exports would be the best way to stop the kyat depreciation in the long term. Indeed, the situation should encourage exporters to be more active. Exporters stand to gain more when they exchange dollar income into the local currency.

Maung Aung said that this is the best time for the public and private sector to import more capital goods.

From April 1 to early September, Myanmar’s total imports amounted to US$7.76 billion, but only $3.58 billion or 46 per cent was for capital goods. The rest was for industrial goods ($2.56 billion) and consumer goods ($1.43 billion).

He noted that foreign companies bring with them capital goods, while the development of special economic zones in Thilawa and Dawei would also drive up such imports.

"Capital goods imports are a very good sign for the economic growth. This will encourage production of value-added products and create more employment opportunities. So it is vital to our sustainable growth," he said, adding that this would not significantly push up inflation as in the case of industrial and consumer goods imports.

He noted that the kyat depreciation at this point has only a slight impact on inflation, as most of the imports are not stable food. The higher prices would thus not be transferred to consumers.

"The weakening currency may lead to price hikes and higher inflation rates. It can harm the purchasing power of the general public. In reality, the impact of this will directly depend on the imported items.

"I believe that there are more advantages from the depreciation than disadvantages to consumers. This will help increase our exports so that we can enjoy a significant growth in trade," he said.

Than Lwin noted that capital goods imports would depend largely on foreign direct investment (FDI).

"To be honest, we are not getting as much FDI as expected. Many big corporate are still at the stage of planning to invest. It is not a good timing to import many capital goods. Instead, we need to improve our exports first. Then we should focus on the imports. It may take one or two years to import many capital goods," he said.