Thursday, August 17, 2017

Kyat slumps but uncertainty clouds claims of record low

While economic analysts argue over whether the weakening kyat is a preventable blight on the economy or a natural by-product of global macroeconomic conditions, a second question has arisen – how to tell if the currency is actually at record lows against the US dollar.

 Determing whether the kyat is at record lows against the US dollar is not straightforward. Photo: EPADeterming whether the kyat is at record lows against the US dollar is not straightforward. Photo: EPA

Many people in Myanmar seem to think it is – from money changers in downtown Yangon to former government officials and senior figures in the financial industry.

U Ar Dun, a money changer in Yangon, said on December 16 that the exchange rate for one dollar had reached K1440 in the informal market – its weakest ever. Several others agreed the rate had hit record levels. U Naing Gy, who also works in downtown Yangon, said that the previous record was K1400 to the dollar, which occurred some 30 years ago during the socialist era.

Money changers in downtown Yangon were offering K1420 to the dollar yesterday.

U Hla Maung, former deputy director of Ministry of Commerce, told The Myanmar Times last month that the historical exchange rate record was K1405 during the 2007 revolution.

“The record price was there for only one day and there was no trading,” he said. “The price fell the next day and was stable at K1360.”

U Mya Than, the recently retired chair of Myanmar Oriental Bank and former managing director of state-owned Myanma Investment and Commercial Bank, said yesterday that throughout his decades in the banking sector he thought the informal market rate had never broken through K1400.

“At this time it’s the highest ever,” he said.

But the history of Myanmar’s exchange rate regime adds an element of uncertainty to any claims. For decades there have been two rates, the official rate, which is provided by the Central Bank, and the informal rate used in the wider market.

The Central Bank ended a currency peg system with an effective K6-to-the-dollar exchange rate in 2012 in favour of a managed float– where it allows the currency to fluctuate but will intervene to prevent large moves. However, it also restricts money changers and banks to providing currency exchange within a narrow range based on its own rate.

When the Central Bank rate diverges too far from where the market thinks the real exchange rate should be, money changers typically flout the prescribed band and individuals and firms opt for the informal market rather than banks.

The kyat’s record lows against the US dollar – pre and post-2012 – were therefore set in the informal market, where there are no records. The Central Bank’s reference rate, on the other hand, is recorded daily and has been hitting new records daily since December 7.

The bank increased its dollar-kyat reference rate from K1320 to a new record of K1365 between December 12 and December 16 – the biggest weekly move since the float system began.

But some long-time Myanmar watchers say informal exchange rates are not yet at record levels. Sean Turnell, an Associate Professor at Macquarie University’s Economics Department and the author of numerous books and articles on Myanmar, said the kyat has been above K1440 to the dollar before.

In a paper titled: Burma’s Economy 2008: Current Situation and Prospects for Reform, Mr Turnell reported that the unofficial exchange rate was K1450 in 2006. He also told The Myanmar Times the kyat had reached similar levels in more recent years.

Mr Turnell’s figure of K1450 was the highest quoted estimate The Myanmar Times could find.

There is no shortage of factors that could help push the kyat past the K1450 mark, however. The US Federal Reserve announced it was raising its federal funds rate from 0.5 percent to 0.75 percent on December 14, prompting a surge the dollar’s value against other global currencies.

U Mya Than said the US rate rise would help push the dollar up globally as well as against the kyat.

The Irrawaddy recently quoted auto industry officials attributing some of the dollar’s rise against the kyat to a restriction on the importation of right-hand drive and old model cars, which is set to come into force at the start of next year. That has sent people rushing to exchange kyat to dollars in order to import such vehicles while they still can, the officials said.

The authorities have shown some signs of action. Officials from the Central Bank and the Ministry of Planning and Finance sit on a recently established currency volatility committee, tasked with determining what the authorities can do to stabilise the kyat.

The Central Bank recently announced it wants people to declare foreign currency accounts they hold in overseas banks, and that it is working with the government to investigate foreign currency export earnings either going undeclared or being held outside the formal banking system.

But the Central Bank also announced it will make renewed efforts to narrow the gap between its own rate and that of the wider market. Starting next year, it plans to let exchange rates in the interbank market inform the daily reference rate, and free banks from the trading band around the rate.

Translation by Zaw Nyunt