No end in sight for the kyat’s woes
Written by Carl Turner on December 05, 2015.
The kyat has plummeted in value since the Central Bank of Myanmar implemented a managed float in April 2012. In the interim it has lost one third of its value, including a drop of 19% against the dollar over the course of 2015, with no change of trajectory expected in the wake of Sunday’s election. Having reached 1.290 against the dollar on Monday, the kyat has since fallen and is currently at 1.287 with experts predicting further falls.
James Bennett at Aston Currency Management explains ‘"The Kyat vs USD is a one-way bet for the foreseeable future, I’m afraid, until the point that the government decide to re-base the currency. Whilst there is the threat of a rate hike by the US Federal Reserve all emerging market currencies, especially those that are resource-based, will be subject to one way traffic.’
A sudden and high demand for raw materials and machinery has been a major factor in the kyat’s slide. The end of military rule in 2011 opened the floodgates to a tidal wave of foreign investment in the country as the years of isolation came to an end and certain economic sectors were opened up including telecommunications, banking and energy. This investment boom led to surging imports which has devalued the kyat. The situation has not been helped by the fact that the official reference rate of the kyat has been kept below the market rate.
Now a protectionist policy aimed at halting dollarisation in Myanmar has been initiated by the government, which is revoking licences granted to certain tourist industries in 2012, including hotels, travel agents and airlines, which have allowed them to carry out transactions in US dollars. By the end of November, all businesses must relinquish licences enabling them to trade in dollars as well as local currencies, although many are reticent to do so. From 1st December, all foreign exchange transactions will have to be carried out in banks or licensed exchange companies. In addition, limits have also been imposed on dollar withdrawals by individuals from banks and it is rumoured that all government business must now be conducted in kyat.
These measures are an attempt to promote the use of the local currency and halt its decline by encouraging the use of domestic debit and credit cards however, according to James Bennett, this will only serve to exacerbate the situation in the short term. He says ‘Throw in a combination of drastic moves by central banks to try and shore up their currency and protect themselves and you’ll see a rout, as is clearly evident in the current price. Once these protectionist policies are in place it pushes a lot of exchange transactions into the black market or forces international companies with a presence to simply hold onto a dwindling asset with little to no fresh injections of USD into the system.’
Other analysts, including BMI Research and the Australia & New Zealand Banking Group Ltd, agree that the only way is down for the kyat for the rest of the year and throughout 2016, although the long term outlook may be better. James explains ‘Eventually of course, this cycle reaches the bottom and the price of the assets in the country are so attractive that it brings in foreign investment and increases exports, adding further value to the economy. However, whilst oil prices are low and many of Myanmar’s closest trading partners are suffering economically themselves, this bite point is a little way off.’
Currency volatility can seriously impact anyone who earns in kyat but has assets and financial obligations elsewhere. James explains ‘My advice, as always, is that, if you are being posted overseas to a location such as Myanmar, you talk to your IFA about suitable international banking set ups and if you are being paid in a currency different to that of your home country or overheads, that you put a strategy in place to protect yourself from this pairing. Holding lots of local currency in a local account puts you in great danger of changes in exchange rates and local legislation.’
I couldn’t agree more. We all work hard to build up our savings and investments, it is only natural that we want to safeguard them as best we can and there are ways and means to do that. I have assisted many of my clients with setting up international offshore accounts and protecting their wealth with other strategies to minimise the impact of the kyat’s devaluation on their own finances. The kyat’s story may be a tale of woe but that doesn’t mean that you can’t find a financial happy ending.
This article by Carl originally appeared in Myanmar Business Today , a publication for which Carl is a regular contributor.