People feel the pinch of sliding currency

Niyom Waiyawatchapanich, chairman of the Thai Chamber of Commerce’s Neighbouring Countries Trade Promotion Committee, said the depreciation has resulted in a drop in Thailand’s trade volume with Myanmar.

“Some Myanmar buyers have delayed their spending and ordering of goods from Thailand due to the currency depreciation,” he said.

“Normally orders increase significantly [towards the end of the year], as consumers would start to stock up on goods and food for the New Year celebrations. However, during the last two months, consumers have adopted a ‘wait and see’ attitude and are purchasing only necessary products,” he said.

From September 1 through last Thursday, the kyat had weakened by 4.74 per cent against the Thai baht, as per foreign exchange data of the Central Bank of Myanmar (CBM). As of Thursday, Ks 31.8 could be exchanged for one baht, compared to 30.36 nearly three months ago. 

In the same period, the currency also weakened against other major currencies. Against the euro, it fell from 1,273.2 per euro, or 2.8 per cent to 1,309.3 as of Thursday. The value of the Singapore dollar also rose, being exchanged for Ks 802 on Thursday against Ks 776.25 on September 1. The kyat also dropped 8 per cent against the Chinese yuan, to 170.60 from 157.89.

It only appreciated against the Japanese yen, rising by 5.11 per cent, from 931.13 per 100 yen to 883.51, thanks mainly to the Bank of Japan’s monetary easing, which weakened the Japanese currency against the greenback.

 

US dollar influence 

Some economists said this is influenced by the reversal of fortunes in major developed economies, led by the economic recovery in the United States. Thanks to the improvement in macro-economic indicators, the greenback has appreciated against other currencies, including the kyat.

Under the managed float system adopted in April 2012 to re-engage Myanmar’s trade with the world, the kyat is now moving nearly freely, in line with market demand and supply. From Ks 6 per US dollar before the system was adopted, the new official rate started at Ks 820. 

The gradual depreciation against the US dollar prior to September 2014 did not spark concerns among the authorities or the International Monetary Fund (IMF), considering Myanmar recorded a high trade deficit, estimated to exceed US$3 billion in fiscal 2014-15.

There were then expectations that foreign direct investment and other inflows would boost the country’s foreign reserves and strengthen the currency. The recent situation is alarming, though, given the rapid depreciation of the kyat.

The kyat was first traded at below 1,000 per dollar in October. And the downward slide has continued since then. After staying at 1,016 per US dollar for five days since November 10, the official rate fell to 1,029 last Monday. On Tuesday, the rate plunged to 1,040 before sinking further to 1,048 the following day, a new low since the managed float system was introduced in April 2012. The rate went up slightly to 1,044 on Thursday and 1,040 on Friday.

Since September 1, the US dollar has appreciated by 8 per cent against the kyat, by 4 per cent against the Singapore dollar, by 3.4 per cent against the Philippine peso and by 2.6 per cent against the baht.

 

Speculation 

Some economists and local businessmen have blamed speculators for the situation. 

The source of capital of investors awarded licenses are not being thoroughly scrutinised. These could include government cronies, many believed.

As the source of income was not precisely scrutinised, there has been wide speculation that some illicit money – generated from sale of illegal drugs, gems or the timber trade – may have been channelled into the financial system. The money could be converted to the US dollar to finance the import of items necessary for their investment projects. 

This explained well why the blackmarket $/kyat rate shot up to 1,080 on Wednesday.

Another theory is that private banks trade the currency beyond the legal band, to make profit from the currently high demand. 

Banks are allowed to quote selling and buying prices within a band, which is set within 0.8 per cent of the CBM’s reference rate. It was reported that the CBM last week dispatched a circular to all private banks, instructing them not to speculate on currency. It also pumped in $50 million into the system to ease the demand for dollars.

The central bank took the action amid doubts among some economists on what measures it could take considering the limited foreign exchange reserves.

According to the IMF, reserves in 2013-2014 were estimated at $4.55 billion, worth 2.9 months of imports. It is estimated to grow to $6.4 billion this fiscal year and $8.9 billion in the next, equivalent to 3.5 and 4.3 months of imports, respectively. 

 

Impact on consumers 

San Thein, a banking expert, is concerned that this could fuel inflation, as commodity prices – especially imported goods – tend to rise along with the greenback’s appreciation. The shifts in the exchange rate always affect the economy, and it is people from the middle and working classes who are hit hard.

He urged the government to tackle the rapid depreciation in a systematic way, before inflation spirals out of control.

“Rice prices are rocketing now. Raising salaries is only a temporary solution. It should be increased with a long-term plan. If not, all prices will be chaotic,” San Thein warned, referring to the government’s decision to raise the salaries of civil servants next year.

Khin San, a trader in the Bayintnaung Market [the largest commodities trading market in Myanmar], who regularly buys and sells food items particularly to the delta areas on a daily basis, said the kyat’s depreciation could severely affect consumers.

“Low-income and middle-class people will suffer its impacts the most. Nowadays, nearly all goods have become more expensive when compared to their prices last month. The prices of all food items imported from other countries are obviously high,” he said.

According to Khin San, one viss [A Burmese unit of measure for weight, approximately 1.63293 kg] of Chinese garlic cost Ks 2,300 on Thursday, which is Ks 500 more than in the previous week; one viss of chilli that cost Ks 2,600-2,700 for months shot up to Ks 3,200 last week; one viss of Myanmar chicken also spiked to Ks 9,000-9,500 last week, from Ks 7,000 a week earlier and one viss of pork cost Ks 9,000 on Thursday, up sharply from Ks 6000-7000 a week ago.

“Merchants are always finding ways to increase the prices of their goods. Once they hear some news, they raise the prices. I am very eager to know why the greenback has been appreciating so much, particularly in Myanmar. The government should control the situation as soon as possible and find possible ways to solve it. Otherwise, all the people may face extreme price hikes in the weeks to come,” Khin San said.

 

Room for optimism

Myat Thin Aung, president of Hlaing Thayar Industrial Zone Management Committee and CEC member of Union of Myanmar Federation of Chambers of Commerce and Industry (UMFCCI) expects the depreciation to continue in the weeks or months to come. 

“It usually takes about three months for an importer to clear inventories. But if importers had bought something at Ks 950 per dollar for sale when the dollar is over Ks 1,080, the proposed sale price may be rebalanced,” he said. 

Besides the planned salary hike for civil servants, he said he was also worried about the current increase in the prices of food and other goods, including pharmaceutical products. 

He admitted that it remains difficult to predict which products would become more expensive, as that also depends on government actions. For example, paddy rice prices may not go up despite floods if the government puts a lid on exports. 

Contrary to concerns among prominent local economists and businessmen, outsiders seem to have a different opinion particularly when it concerns trade and investment.

Almost on a daily basis, foreign companies still unveil their business plans for Myanmar. The authorities recently also revised up the foreign direct investment projection to US$5 billion in this fiscal year, ending March 31, 2015. 

Niyom from Thai Chamber of Commerce also believes that Myanmar’s economy would keep expanding and this would sustain the high demand for imports. As such, in the long run, overall Thai shipments would not be affected by the kyat depreciation. 

In the first nine months of this year, cross-border trade between Thailand and Myanmar was valued at about Bt140 billion. The chamber is still optimistic that the cross-border trade value would grow by 20 per cent from last year, as targeted.