The opening of Myanmar’s economy along with its floating currency and
growing demand for imports has led to a worsening trade deficit and
significant weakening of the Myanmar kyat (MMK) against the dollar.
Investors have no reason to worry, however, as these are necessary
growing pains for the rapidly emerging economy, according to the
analysts at Standard Chartered Bank.
On April 2, 2012, Myanmar’s reform government implemented a managed
float for the MMK, in place of the “overvalued” peg. The new system is
similar to China’s, according to a research note published by Standard
Chartered on Monday.
This is a momentous policy shift, considering before the float, the
MMK fluctuated very little, usually around 6.40 to 6.45 against the U.S.
dollar. In addition, Myanmar had several unofficial exchange rates in
the informal market, where the exchange rate could be as high as 830
against the dollar. The MMK was highly overvalued -- 19 percent in the
year ending March 2011, according to a study by the IMF, and 40 percent
in the year ending March 2012.
The overvalued currency was not supportive of the country’s export
competitiveness, or of foreign direct investment (FDI). The decision to
switch to a unified, managed float system came against this backdrop,
which will also serve to lay the groundwork for establishing a monetary
policy framework for the newly opened country, according to Standard
Chartered.
Since the float, as international investors look to Myanmar with
interest, the depreciation of the MMK against the dollar has received
some attention. At the end of 2012, dollar to MMK exchange rate was at
87. By July, the MMK has depreciated by about 14 percent.
The depreciation should not cause concern, according to Standard
Chartered, and is merely part of the growing pains Myanmar must endure
as its financial markets mature.
In addition to the MMK depreciation, Myanmar’s imports are growing
faster than its exports of gas, gems and agricultural products. The IMF
said that the country’s trade deficit is likely to widen to 4 percent of
its GDP this year.
This too is just a sign of Myanmar’s economic growth, according to
Standard Chartered, as the country builds its production capacity.
Imports of machinery and transport equipment recorded a 67 percent
year-on-year increase in the first quarter, according to Myanmar customs
department, and Standard Chartered expects to see continued strong
demand for imports of heavy machinery, construction equipment,
infrastructure materials and refined fuel for investment purposes.
Exports-wise, the country will continue to rely on its traditional
industries of natural gas, minerals, agricultural/aquacultural products
and textiles for a few more years, but the lifting of Western sanctions
and increasing FDI should lead to a widening variety of exports soon.
Tourism is another flourishing industry that should bring in foreign
currencies.
While the widening current account deficit weakens the MMK in the
short term, foreign investment, development aid and remittances should
more than support the balance of payments and the MMK. In the long-term,
however, exports receipts are expected to rise, supported by new gas
fields and rising global trade. These receipts will help offset growing
demand for imports and balance the MMK, according to Standard
Chartered.
source: International Business Times
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