BURMESE KYAT DEPRECIATES TO RECORD LOW

UNCLAS SECTION 01 OF 02 RANGOON 001139

SIPDIS

SENSITIVE

STATE FOR EAP/MLS, EB/TPP
TREASURY FOR OASIA:AJEWELL

E.O. 12958: N/A
TAGS: ECON ETRD PGOV BM
SUBJECT: BURMESE KYAT DEPRECIATES TO RECORD LOW

Refs: Rangoon A)1073, B)0924, C)0542, D)0489


1. (SBU) Summary: The unofficial rate of the Burmese kyat
reached a record low of K.1360/$1 on September 30, beating
the previous record of K.1270/$1 in September 2002. This
depreciation reflects the worsening economic situation, and
may continue until at least Nov/Dec, when the kyat
traditionally appreciates as new crops of opium poppy and
tourists come in. End summary.

Depreciation Momentum Builds
--------------

2. (SBU) One year ago, the rate was K.932/$1. The rapid 46%
decline started after the bomb explosions in Mandalay and
Rangoon on April 26 and May 7 (refs C, D). Shortly
thereafter, at a May 15 press conference, the deputy finance
minister indirectly warned people to handle foreign
currencies only according to official regulations, which
preclude exchanging at the commonly-used unofficial rate.
He also cited the seizure of $90,000 from a local resident
at the Rangoon airport. (Note: It is technically illegal for
Burmese citizens to hold foreign currency without official
permit. End note.) His statements sparked worries about a
possible scarcity of dollars, and pushed the exchange rate
up to K.1010/$1 on May 24. Cyclical forces also affect the
rate: the kyat usually falls from May to November (rainy
season) and appreciates from December to April (tourist and
harvest season).


3. (SBU) The kyat's unofficial rate of K.1360/$1 in
September is the record low in Burma's market exchange rate
history. The official rate remains fixed at K.6/$1, as it
has for the last two decades, but this rate is used only for
recording import/export transactions in the government's
imaginary budget. There are numerous reasons for the recent
plunge, including:

-- The government took control of a private bank, the
Myanmar Universal Bank (MUB),in early August without any
official announcement (Ref B). This prompted widespread
kyat withdrawals from MUB and other private banks, which
were then converted into dollars and gold.

-- Rumors about counterfeit K.1000 notes and reports of
counterfeit currency seizures further reduced confidence in
the kyat.

-- Central Bank financing of the growing budget deficit
(K.680 billion, or over $700 million in 2004-05) creates
inflationary pressure.

-- New unpublished trade regulations controlling exports and
imports that were introduced in August (ref A) slowed trade
and drove some businessmen to increase speculation in local
foreign exchange market.

-- Revaluation of the Chinese yuan weakened the Burmese
kyat. Also, some traders are now purchasing and holding
dollars until they need yuan to counter the daily
depreciation they would suffer by holding kyat.

-- Overall mismanagement of the economy by the government
and the unpredictable political situation.

Prices Reflect New Rates
--------------

4. (U) In the past, when exchange rate and gold prices
increased, Military Intelligence (MI) arrested moneychangers
and gold merchants, basically halting the unofficial trade
for a while. This time there has been no confirmed news of
action against moneychangers or gold merchants, although the
rates are at record highs. Primarily due to the exchange
rate, prices of most imported goods rose from 5% to 20% in
September. Some electronic goods and computer stores are
now selling goods based on the daily dollar exchange rate.


5. (U) Prices of some locally produced items produced with
imported inputs, including detergent powders, coffee mix and
medicines, also increased 15% to 20% last month. Taking
advantage of the situation, and to help cover other costs,
some shopkeepers also raised prices for locally-made goods
(including the staple breakfast fish soup, mohinga).
Consumers are told that the high prices are due to the
dollar exchange rate. To date, there has been no government
reaction.

Comment: Rebound Expected
--------------

6. (SBU) Although some think the exchange rate will
deteriorate even further before turning around, the end of
the rainy season is expected to bring more dollars, and
business, into the country. Opium production is down, so
the seasonal impact of the poppy harvest may be lower than
in previous years. The government is hoping for increased
numbers of tourists this season. Their dollars will be
welcomed by both residents and government alike. End
comment.
Villarosa