BURMA: FIVE THOUSAND KYAT NOTE CREATES BUZZ,

UNCLAS SECTION 01 OF 02 RANGOON 000657 SENSITIVE SIPDIS STATE FOR EAP/MLS, INR/EAP, PACOM FOR FPA E.O. 12958: N/A TAGS: ECON EFIN ETRD PREL PGOV PINR BM SUBJECT: BURMA: FIVE THOUSAND KYAT NOTE CREATES BUZZ, STOKES INFLATION FEARS RANGOON 00000657 001.2 OF 002 Summary -------------- ¶1. (SBU) The GOB used a prime-time TV broadcast to announce the roll-out of a 5,000 kyat(K) note (worth slightly less than USD 5). The highest note currently in circulation is K1,000 (less than USD 1). Rangoon residents are excited about the new bill, seemingly for its novelty and convenience. The GOB has not publicly stated a monetary policy to curb inflation associated with printing the new denomination notes and inflation concerns drove up the price of the dollar against the kyat as well as the price of gold in the hours after the announcement. A New Bill, Large Wallet Still Needed -------------- ¶2. (SBU) The GOB announced September 24 on state-run television that on October 1 the Central Bank will begin issuing K5,000 denomination bills. The broadcast carried color images of a red bill with an elephant on one side and an image of the future parliament building in Nay Pyi Taw on the other. At the September 24 prevailing unofficial exchange rate ($1 = K1,080) the new notes are will be worth approximately $4.63. The largest bill now in circulation is the K1,000, worth about $.93 at the September 24 rate. The official exchange rate of $1 = K6 is widely ignored and black-market money changers conduct most currency exchanges in Burma. Inflation Fears -------------- ¶3. (SBU) In its announcement of the new bills the GOB made clear that existing currency will remain legal tender. The GOB's English language New Light of Myanmar noted "All legal tender currency notes and coins will continue to be in circulation." Presumably that assurance was intended to reassure a public that at least once in the past had seen the government suddenly introduce new denominations of currency coupled with an announcement that all old currency had become valueless. Unfortunately, the GOB did not outline a demonetization policy (in effect to pull out of circulation five old K1,000 notes for each new K5,000 note). Such a policy would curb the inflationary pressure of printing new bills. According to a local journalist, the government planned to call a meeting September 25 to warn leading traders not to increase commodities prices in response to introduction of the new bill. ¶4. (SBU) In the wake of the announcement, Rangoon's streets are abuzz with talk of the new bills. Many seem excited with the novelty and the fact that larger purchases will require smaller bricks of cash. However, shoppers, merchants, and currency traders are worried about inflation. The GOB's infrequently released data on inflation is not credible and foreign organizations have trouble collecting the required inputs to estimate inflation. A January 2009 IMF report estimated annual inflation to be around 30 percent over the last two years. Additional inflationary pressure could have meaningful effects on the average urban consumer. ¶5. (SBU) One embassy private-sector contact estimates the effect of the new bills will be a 20 percent rise in prices. RANGOON 00000657 002.2 OF 002 A business consultant with GOB contacts told us the government will not pull older currency out of circulation as it introduces the new bills. A commercial real estate developer reportedly barred his staff from quoting lease rates in kyat out of fear that a rate quoted today would be worth less in the near future. This apprehension is reflected in rising values of foreign currency and gold in the Rangoon market. The dollar appreciated between five and nine percent against the kyat in trading through mid-afternoon on September 25. Gold prices in kyat also climbed over six percent in the wake of the announcement. A New Political Symbol? -------------- ¶6. (SBU) Some observers went beyond the financial implications to delve into the potential political undertones of the announcement and design of the new bill. The current K1,000 note bears the image of a lion which is also the symbol of the United Solidarity Development Association (USDA),the GOB's mass mobilization organization. Some sources speculate that a future military-backed political party created to run in the 2010 elections will use an elephant as its symbol. Others note that Senior General Than Shwe hails from an area once famous for its elephants. Finally, some wits have suggested a likeness between Than Shwe and the elephant. Contrarian Views -------------- ¶7. (SBU) One expatriate business contact expressed surprise that gold and dollar values have moved significantly but predicted only short-term increases. The same contact expressed doubt that the new bill even exists. He told us a close contact working in the GOB mint has yet to see any new bills even though they are scheduled to debut next week. Two contacts, a retired economist and an active banker, acknowledged the lack of a publicly stated demonetization policy and possible inflation risks but predicted the kyat's devaluation against the dollar is temporary since the decrepit state of Burma's economy limits the total underlying demand for dollars. DINGER