Since the new government led by State counselor Aung San Suu Kyi took power, the Kyat has depreciated by more than 12 per cent against the US dollar. Although a volatile and weak Kyat was a problem for the previous government as well, the currency’s ongoing plunge is affecting confidence in the NLD and the Central Bank of Myanmar’s ability to conduct policy. A number of clumsy attempts to manage the exchange rate in 2016 entrenched such concerns, as these reflected the inability of policymakers to bring the key drivers of kyat instability under control. The announcement in late 2016 that the CBM would begin using transactions in the interbank market to set its reference rate was welcome news. Particularly better communication from the CBM and its committee on currency volatility, are required. Not much can be done to stem the currency’s weakening trend permanently in view of the widening current account shortfall.
The volatility that has plagued the Kyat is a symptom of a number of issues emerging from Myanmar’s economy and the suboptimal conduct of various policies. Myanmar’s policymakers face challenges beyond its control. Like its neighbors, international demand for Myanmar’s exports was particularly weak in 2016, and low global commodity prices hit the value of the country’s shipments. Most currencies of members of the Association of South-East Asian Nations (ASEAN) also experienced sharp drops in value in the final months of last year, owing mostlyto the broad strength seen in the US dollar. At the same time the Kyat has been affected by two key issues that both the government and the CBM can, but have yet to, address more thoroughly. The first is a widening budget deficit stemming in part from a narrow tax base and lower-thanexpected natural resources revenue, as well as a growing trade shortfall. Aware of these challenges, Myanmar’s de facto leader Aung Sang Suu Kyi delivered a frank assessment of an economy that is showing signs of faltering. Despite this acknowledgement, there have been few substantive measures so far to expand the tax base or make exports more competitive. The second challenge is that the bulk of the transactions involving foreign exchange still do not take place within the formal financial system, limiting Myanmar banks’ access and resulting in destabilizing shortages. Although the size of the informal market is impossible to verify, some local traders have estimated that it accounts for 75 per cent of all foreignexchange transactions. In January the CBM stated that the sugar and oil re-export industries are contributing to Kyat weakness. The former involves importing sugar from places like Thailand, before most is sold on to Chinese traders who pay in renminbi. A sizable proportion of the proceeds from these transactions do not enter the formal banking system.
Over the past few months the CBM has announced several steps to stabilize the Kyat. In November it formed a dedicated committee with a mandate to address currency volatility that, importantly, has the right to speak publicly about its objectives and methods. The chair of Myanmar Oriental Bank, Mya Than, said shortly after that it is not that the financial sector needs the CBM to do everything but that the industry is hungry to know what the CBM is doing to combat Kyat volatility. More substantively, the CBM announced late last year that beginning in early 2017 it would no longer base its daily official reference exchange rate on currency auctions. Instead, it would use activity in the interbank market to determine this rate and remove the requirement that commercial banks only trade within 0.8% of the daily reference rate. These moves are likely to improve the reliability of the reference rate as an accurate depiction of actual demand and supply in the foreignexchange market. There is some risk of inducing additional currency volatility via speculation of removing the 0.8% trading band, but overall this new structure is an important step towards a kyat that more accurately reflects market conditions.
The Ministry of Commerce, in collaboration with the CBM, is attempting to identify discrepancies between the freight-on-board value of exports and reported earnings. The goal is to crack down on transactions that occur outside the formal banking system, with a view of formalizing these and reducing uncertainty over the kyat. Although these steps show positive efforts to bring the kyat’s volatility under control, concerns are likely to remain about the capacity of the CBM to manage the currency and the NLD’s economic strategy more broadly. For investors and businesses alike, the currency’s volatility is increasingly seen as an indication of economic mismanagement rather than a natural ebb and flow. Crucially, as the underlying drivers of weakness and volatility remain structural, a truly stable currency is unlikely in the short term.