A bit over five years ago in 2013, I wrote an article about the declining value of kyat vis-à-vis the dollar (Is Myanmar’s currency in crisis? Myanmar Times, July 22, 2013). In July, 2013, the value of USD was close to 1,000 kyats. Considering that kyat was trading for around 820 per dollar in April 2012, that was a significant decline. Following the publication of that article, the exchange rate in fact stabilized at about 1,000 kyats per dollar until 2015. Signs of gradual weakening again showed up in March/April of 2015, and the kyat had sharply depreciated to 1,300 by August 2015. Until June 2018, the kyat traded in the range of 1300s before sharply depreciating to over 1500 by August, 2018.
There are many potential explanations for fluctuations in the kyat exchange rate. Some might argue that it is the strengthening of the dollar (rather than the weakening of the kyat) that caused the t decline in kyat. During the past year, the dollar index has indeed strengthened by about 3% but that does not fully explain the sharp decline of kyat from 1300s to 1500s. On a side note, the value of Chinese Yuan has declined about 7% over the past year due to the ongoing trade dispute between China and the US (Note: Thai baht has changed little over the period). Considering that China is one of Myanmar’s main trading partners, this may explain the sudden sharp decline in the value of kyat over the short run. Others may also argue that hoarding of dollar, speculation, gold prices, and so on, affect the value of kyat. These factors are mainly temporary shocks and are not related to economic fundamentals.
From our understanding of economic theory, it can be argued that currency values decline when faced with adverse macroeconomic conditions. In particular, trade deficits usually lead to currency depreciation/devaluation. Budget deficits and inflation also result in lower currency values. It is not difficult to provide reasons for kyat depreciation during periods of depreciation. For instance, during the 2012-2013 period, several arguments were made for the declining value of kyat. These arguments included high total external debt (23% of GDP), high imports, and high budget deficit. During the 2015-2016 period, trade deficit jumped to 6.8% (from 2.8% in 2014-2015) and inflation increased: these two factors could have been the main drivers behind the decline of the value of kyat from 1000s to 1300s in 2015. How about in 2018? Again, the trade deficit has been cited as a major factor.
Looking at the three major periods of kyat depreciation (i.e., in the years 2013, 2015, and 2018), trade deficit seems to be one persistent factor that has been driving down the value of kyat. It is true that Myanmar has been running trade deficits- which is the difference between imports and exports- since 2011. According to Myanmar Central Statistical Organization’s reports, the deficit amounts were 3.84 billion and 5.26 billion for the 2017-2018 and 2016-2017 periods.
The secular decline of kyat from 2012: A bigger problem
Instead of looking at each episode of kyat depreciation, we should also look at the value of kyat over a longer-term period. Since 2012, the value of kyat has declined by almost 50% (from 820 kyats per dollar in 2012 to 1550 kyats in August, 2018). Could we explain this long-term decline by citing the reasons discussed above? Factors such as strength of the dollar, hoarding, speculation, etc., are temporary and they should not affect the value of kyat in the long run (people sometimes speculate and sometimes hoard. If they are speculating and hoarding dollars all the time, then maybe something is really wrong with kyat). Note that 50% loss of value is a serious issue. Has Myanmar’s economic situation become significantly worse off since 2012 to warrant such a steep currency depreciation? Can economic fundamentals such as trade deficit explain such a long-term sharp decline?
Before analyzing Myanmar’s trade deficits, it should be noted that many other developing countries experienced similar trade deficits but they still managed to maintain stable currencies. From 2005-2008, Vietnam ran large current account deficits (a broader version of trade deficits). However, its Balance of Payment (BOP) position has been significantly positive, indicating that capital inflows mainly outweighed trade deficits. For example, in 2008, Vietnam’s current account deficit was 11.9% of GDP but, in that year, surpluses in capital inflows (as shown in the so-called financial accounts balance) more than offset the deficit in trade. The value of the Vietnamese dong changed little during this period. Cambodia ran current account deficits from 2005-2011. For this whole period, Cambodia’s Balance of Payment account was positive and the exchange rate for Cambodian riel changed little during this period.
Does Myanmar have sufficient capital inflows from FDI and other sources to pay for the deficits resulting from high imports?
According to Myanmar Central Statistical Organization’s reports, for 2017-2018, the amount of Foreign Direct Investment (FDI) approved by Myanmar Investment Commission was U.S $ 6.11 billion and the actual amount was 4.34 billion (DICA News Release, April 27, 2018). The actual amounts were not reported for 2016-2017 and 2015-2016 but the approved amounts were $6.65 billion and $9.5 billion, respectively. The inflows from foreign direct investment seem to be able to roughly cover the trade deficits. This point has also been noted by an IMF report in March, 2018. Myanmar’s overall Balance of Payment (i.e., total inflows vs. total outflows and not just imports vs. exports) has been mostly positive (although small) since 2014 with the exception of the 2015-2016 fiscal year when the country experienced a small deficit. The deficit in the 2015-2016 period also coincides with the decline of the value of kyat from 1000 to 1300. The overall balance has been positive from 2016 onwards and it is also expected to be positive in 2017-2018.
What has gone wrong?
Reviewing the past 6 years’ developments, there have been both positive and negative issues. On the negative side,
– Both the GDP growth rate and the flow of FDI have slowed
– The current account deficit fell in 2016-2017 but is expected to increase in 2017-2018
On the positive side,
– Both fiscal deficits and inflation have been reduced.
– Myanmar has reduced its external debt (14.5% of GDP as of 2018).
While the country experienced reduced FDI inflows and higher deficits, fiscal deficits and inflation have also been reduced. Myanmar’s trade deficits could mainly be financed by inflows from other sources. The strength of the dollar alone also cannot explain this significant long-term decline. Considering both positive and negative developments over the past six years, it is rather difficult to understand why kyat has lost almost half its value. Then what caused this significant decline?
The value of all financial assets is determined not just by the current fundamentals but also by their expected future performance. A sharp decline of Myanmar’s currency over the past few years is not only a result of Myanmar’s previous and current economic performance but also a result of people’s expectations of the future. From my preceding arguments, it is apparent that Myanmar’s recent economic performance, while below expectations, has not been totally dismal. However, a significant decline in the value of kyat indicates that people’s expectation of the future is bleak and that people lack confidence in the future of the currency. Why?
According to the IMF 2018 report, Central Bank of Myanmar held $4.4 billion (2013-2014), $5.13 billion (2014-2015), $4.76 billion (2015-2016), $5.13 (2016-2017), $5.37 billion (2017-2018, projected) as reserves. This number is expected to grow to over $7 billion in 2018-2019. During 2014-2015, the state banks held around additional $4 billion (this money is not included in the CBM reserves). However, over the past few years, the central bank has done little to help stabilize the value of kyat using the reserves. For example, on Jan 1, 2017, the central bank sold a token amount of $100 in the auction market. The demand was over $1m. On August 31, 2018, the central bank sold $70,000. The demand was over $3m. The central bank’s position is recommended by the IMF: IMF recommends ‘exchange rate flexibility.’ This usually means doing nothing when kyat depreciates. Based on this, I do not see the value of kyat improving any time soon.
The intention behind exchange rate flexibility is to let a currency depreciate so that imports are limited and exports are encouraged. This may be true in other countries but this has not been the case in Myanmar. Myanmar’s export industry is not well-developed and depreciation of kyat has not accelerated the exports. Myanmar, as in the case of other developing countries, still need to import many essential products and the lower exchange rate has not been helpful in reducing imports. Therefore, we see that Myanmar’s trade deficits sometimes widen although kyat depreciates. Depreciation of kyat has not helped Myanmar much. I am not arguing that kyat depreciation has been useless but, for a 50% loss of the currency value, should we not expect a much more improved trade position?
In free market economies, it is normal for exchange rates to fluctuate based on the market supply and demand. However, what is worrisome is the sudden sharp fluctuations in currency values. With Myanmar kyat, it has happened three times over the past six years: in 2013, in 2015, and now in 2018. Wide fluctuations in exchange rates erode public and investor confidence. It also makes investment planning difficult and reduces potential investment. In countries that require imports of capital goods (such as machineries), exchange rate volatility reduces imports of much-needed capital goods and this in turn dampens economic growth. As a result, many developing countries like to maintain stable exchange rates. Thailand maintained a much stable exchange rate for many years until 1997 when it faced a currency crisis. China also maintains a much stable exchange rate. I am not suggesting that Myanmar should constantly intervene in the foreign exchange market. However, during times of excessive volatility and sharp declines, the central bank should reconsider its policy of ‘say nothing’ and ‘do nothing.’ This is especially the case when the underlying economic fundamentals are not too negative. Allowing the kyat to fall over the years with large declines (within weeks) every 2 years does not inspire much confidence among investors, local businesses, and ordinary people. And kyat is in a crisis now and that is a crisis of confidence.
Min Thu Maung (PhD)
Myanmar Ivy College of Business and Technology
Min Thu Maung is also an Associate Professor of Finance at the Department of Finance and Management Science, the University of Saskatchewan, Canada