BURMA - WHY THE KYAT IS APPRECIATING AGAINST THE DOLLAR

UNCLAS SECTION 01 OF 03 RANGOON 000210

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EAP/MLS, EEB/IFD/ODF
PACOM FOR FPA
TREASURY FOR OASIA:SCHUN

E.O. 12958:N/A
TAGS: ECON EFIN PREL BM
SUBJECT: BURMA - WHY THE KYAT IS APPRECIATING AGAINST THE DOLLAR

REF: A) Rangoon 198 B) Rangoon 137

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1. (SBU) Summary. The Burmese kyat, traditionally one of the
weakest currencies in Southeast Asia, continues to appreciate
against the declining U.S. dollar. Since September 2007, the market
rate of the kyat has risen by 19 percent. Burmese economists see
the kyat's appreciation as primarily due to lower demand for
dollars, although they acknowledge that the Burmese supply of
dollars has increased as businessmen close Singaporean bank accounts
and smuggle U.S. dollars into the country. The uncertain political
climate surrounding the upcoming May referendum is discouraging
companies from doing business in Burma, and the regime is processing
business permits even slower than usual, reducing transaction demand
for U.S. dollars. Additionally, as the speculative value of the
dollar continues to fall, Burmese businesses look to other
currencies for financial transactions, further reducing the need for
U.S. dollars. While the appreciation of the kyat has resulted in
lower inflation, down from 53 percent in September to 29 percent in
February, many Burmese find that their purchasing power has not
increased. Low salaries and high production and transportation
costs continue to push up prices, making it difficult for the
majority of Burmese to survive on $1 a day. End Summary.

Kyat Up, Dollar Down
--------------


2. (SBU) Burma is one of the poorest countries in Southeast Asia,
ranked 132nd on the UN's 2007 Development Index. Most Burmese earn
an average income of $30/month, and survive on $1 a day, spending
most of their income on food. Since the August 2007 fuel price
hike, prices of locally-produced food and commodities, as well as
imported goods, have skyrocketed due to higher production and
transportation costs. Although Burma's economy continues to
deteriorate due to government mismanagement, we have observed an
economic phenomenon that makes little sense given Burma's weak
economy: the significant appreciation of the kyat against the U.S.
dollar since September 2007.

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Kyat - U.S. Dollar Exchange Rates
2007-2008*
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Month/Year Average Kyat Percent
Rate/$1 Change**
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January 2007 1284 2.23
February 2007 1268 - 1.25
March 2007 1263 - 0.39
April 2007 1265 0.16
May 2007 1263 - 0.16
June 2007 1272 0.71
July 2007 1292 1.57
August 2007 1314 1.70
September 2007 1368 4.11
October 2007 1345 - 1.68
November 2007 1290 - 4.09
December 2007 1280 - 0.78
January 2008 1249 - 2.42
February 2008 1192 - 4.56
March 2008* 1107 - 7.13
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*Through March 14, 2008
**Negative percent change depicts appreciation of the kyat against
the U.S. dollar.


3. (SBU) Although the market exchange rate for the kyat against
the U.S. dollar has remained fairly constant over the past five
years, averaging 1300 kyat/$1 for the entire year, the kyat has

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appreciated 19 percent against the dollar in the past six months.
As of March 14, the market rate of the kyat was 1107 kyat/$1
compared to 1368 kyat/$1 in September. While the kyat tends to be
stronger vis-a-vis the U.S. dollar during the dry season
(November-April) because of the influx of dollars from foreign
tourists and relatively high export levels compared to the rest of
the year, the kyat only appreciated an average of six percent
between September and March during the past three years. This year
is the outlier, with no obvious reason why, Kanbawza Bank Consultant
U Than Lwin told us.


4. (SBU) The kyat's sudden appreciation surprised Burmese bankers,
economists, businessmen, and money traders, who pointed out that the
kyat value is more in line with the strong world currencies - the
Euro, yen, and Swiss franc - than with regional currencies. It
makes sense that the Euro and the yen are appreciating by 12 percent
against the dollar, U Than Lwin commented. But that the kyat is
outperforming the Singapore dollar or the Thai baht, traditionally
stronger regional currencies, defies logic, he stated.

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Foreign Currency Appreciation
Against the US Dollar
09/01/2007 - 03/14/2008
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Currency Sept Rate March Rate Percent
Vs. $1 Vs. $1 Change
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Spore Dollar 1.526 1.383 - 9.37
Thai Baht 34.28 31.35 - 8.55
Euro 0.64 0.74 -12.52
Japanese Yen 116.17 100.58 -13.42
Swiss Franc 1.21 1.01 -19.80
Burmese Kyat 1368.00 1107.00 -19.08
-------------- --------------

Basic Economics: Supply and Demand
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5. (SBU) Why is the kyat appreciating at a substantially higher
rate against the dollar in 2007-2008 compared to previous years?
While several bankers and money changers told us that it is due to
an increased supply of dollars in Burma, local Burmese economist U
Myint disagreed, emphasizing that the issue is one of demand rather
than supply. According to U Myint, Burma's current political
situation and the uncertainty surrounding the upcoming May
referendum creates a toxic environment for doing business. Indeed,
businessmen have complained to us in recent months that it has
become more difficult to secure import and export licenses. Several
traders told us that the GOB does not process license requests as
quickly as in the past; now it takes up to a month for license
approvals. Several garment manufacturers told us that foreign
companies are also hesitant to enter into business deals with
Burmese companies, afraid that the upcoming referendum could cause
instability and undermine business opportunities. Transaction
demand for U.S. dollars has declined since September, U Myint
declared. While part of the kyat appreciation is due to the
cyclical nature of exchange rates, the low demand for U.S. dollars
allows the kyat to appreciate further against the dollar.


6. (SBU) Additionally, U Myint noted that the dollar continues to
weaken on the world market, further driving down the value locally.
In the past, Burmese held on to U.S. dollars for speculative
reasons; through arbitrage, they could sell dollars for profit. As
the value of the dollar continues to fall, people are less willing
to save money by holding U.S. dollars, he stated. Increasingly,
businessmen are looking toward alterative currencies, such as the
Singapore dollar (ref A),for business transactions and savings,

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relying less on the U.S. dollar. Following the trend of using
alterative currencies, business contacts explained that exporters,
particularly in the rice sector, have been selling their export
letters of credit in advance for kyat, enabling them to purchase
products that they will then export. This practice, condoned by the
government, further decreases the use of dollars.


7. (SBU) While U Myint emphasized that low demand for dollars was
the driving force behind the kyat's recent appreciation, he
acknowledged that an increased supply of U.S. dollars played a small
role. Dollars are not entering Burma because tourist season (the
number of tourists has been down substantially this year) or
increased exports, he stated. Instead, many Burmese businessmen,
who are having problems with their banks in Singapore, are closing
their accounts. If businessmen are unable to open new accounts in
Singapore, they withdraw their money in U.S. dollars and smuggle the
money into Burma, raising the supply of dollars in the country.
Because most Burmese do not declare how much foreign currency they
bring into Burma, there is no way to determine how many U.S. dollars
are actually in Burma's money supply, U Myint noted.

A Paradox: Lower Inflation, Less Purchasing Power
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8. (SBU) Generally, as a currency appreciates, purchasing power
also increases, lowering inflationary pressure. In the Burmese
case, we have found that only part of the equation rings true.
Inflation levels have declined sharply since September, from 53
percent to 29 percent by the end of February. (Note: The Burmese
Central Statistical Office has not released inflation data since
July 2007. Embassy Rangoon monitors inflation by observing prices
of a basket of 37 domestic and imported products. End note.)
Prices of goods have remained relatively stable since September,
although they have risen somewhat from pre-September levels. Win
Win Tint, owner of Burma's largest supermarket City Mart, which
predominantly sells imported products, told us that while business
has picked up in 2008, the purchasing power of the kyat has not
risen as much as it should have. Because salaries have not risen to
match inflation, people cannot afford to purchase luxury items, such
as imported groceries, and can barely purchase basic foodstuffs.
The high costs of production and transportation in Burma translates
into high prices of food and commodities, something that will not
likely change in the future.

Comment
--------------


9. (SBU) Economists are baffled by the kyat's high rate of
appreciation in recent months, noting that the rate should be closer
to 7 or 8 percent rather than 19 percent. Outside forces, such as
the effect of financial sanctions on Burmese bank accounts in
Singapore and the government's promotion of the use of Singapore
dollars, may further explain why Burma's weak currency has
appreciated against the dollar. Despite the higher value of the
kyat vis-a-vis the dollar and the lower inflation rate throughout
the country, most Burmese continue to struggle to make ends meet.
The foreign exchange rate matters little to most Burmese just trying
to survive. While the kyat on paper looks strong, the purchasing
power of the currency remains low compared to the still-high prices
of food and other products in Burma. Until salaries increase to
meet inflation or the costs of production and transportation drop,
the Burmese kyat will remain a relatively weak currency and the
Burmese will continue to spend more than 70 percent of their salary
on basic commodities. Only political change will result in leaders
willing to seriously correct the dysfunctional Burmese economy.

VILLAROSA