By Arno Maierbrugger
The free-fall of Myanmar’s currency, the kyat, over the past weeks has alerted foreign investors in the country, as well as put severe pressure on people’s purchasing power in an economy that is in transformation by opening itself to free market forces. The exchange rate of the kyat to the US dollar, which was set in April 2012 at a small band around 818 kyat, on November 7, 2014, for the first time crossed the 1,000-kyat mark and has since been expanding significantly further to 1,038 kyat as of yesterday. As a result, prices for imported goods — from rice to electronics to pharmaceuticals — have been under heavy inflationary pressure, with price tags showing increases between 20 and 30% month-on-month as merchants and traders try to pass on their higher procurement costs for foreign goods to consumers. At the same time, the exchange rate on the black market — which has been more or less under control since 2012 — shot up to more than 1,100 kyat to the US dollar. The kyat also fell against the currencies of its main trading partners Thailand, China and India. Local businessmen have raised concerns that inflation could spiral out of control if the government doesn’t intervene quickly and stop the currency’s rapid depreciation which is already impacting low-income earners and the growing middle class alike who have less and less money to spend for every-day-items, let alone consumer goods. Foreign investors who are heavily exposed to the mass market — such as Qatar’s telecom company Ooredoo — could quickly feel the pinch of the sliding spending power in the country as people begin to struggle to afford new mobile phones and pay their phone bills. What is particularly worrying economists is that the regained strength of the US dollar provides no full explanation for the kyat’s drop, because in this case it might have lost value to the dollar, but have remained stable against other major world currencies — which is not the case. Furthermore, the expectation that all the recent massive foreign investment and capital inflows would rather strengthen the kyat than devalue it has not materialised, which raises even more red flags for investors, in addition to the comparably low level of Myanmar’s foreign exchange reserves which stood at just $4.55bn at the end of the country’s last fiscal year in March, while the trade deficit has already spiked to $3bn in the first six months of this fiscal year, leaving little to no leeway for currency interventions. The underlying problems of the weakening kyat — besides lackluster government actions and the absence of effective monetary controls — are seen in speculation by domestic banks which are suspected to trade the kyat beyond the government-set legal band, as well as in massive kyat amounts generated from illicit businesses such as gemstone and timber smuggling as well as billions from drug sales (Myanmar is the world’s second largest opium producer after Afghanistan and the largest producer of methamphetamines), a lot of money that is quickly converted into US dollars, weakening the local currency further. For the Myanmar government, a solution to the currency crisis can prove tricky. Myanmar currently does not have active financial markets, making it dependent on foreign investments to obtain foreign currency. This money is, however, quickly spent on imports to satisfy heavy domestic demand as the country recovers from decades of seclusion and economic isolation. Inflation, at 5.8% in the last fiscal year, is expected to rise to 7% this fiscal year and could even reach 10%, a development that the World Bank called the biggest obstacle for Myanmar to maintain its economic growth.
Bangkok