BURMA: KYAT APPRECIATES 12 PERCENT AGAINST US

C O N F I D E N T I A L SECTION 01 OF 03 RANGOON 000067 SIPDIS STATE FOR EAP/MLS, INR/EAP DEPT PASS TO USDA DEPT PASS TO USAID PACOM FOR FPA TREASURY FOR OASIA, OFAC E.O. 12958: DECL: 02/04/2019 TAGS: ECON EFIN PREL PINR BM SUBJECT: BURMA: KYAT APPRECIATES 12 PERCENT AGAINST US DOLLAR IN PAST FOUR MONTHS REF: A. 08 RANGOON 892 ¶B. RANGOON 57 ¶C. RANGOON 54 RANGOON 00000067 001.2 OF 003 Classified By: Economic Officer Samantha A. Carl-Yoder for Reasons 1.4 (b and d). Summary -------------- ¶1. (C) Although the Burmese kyat traditionally appreciates against the U.S. dollar during the dry season (October-April),the kyat has appreciated more than expected -- 12.4 percent -- since October 2008. Burmese economists, emphasizing the importance of supply and demand, speculate that the recent influx of tourists, coupled with U.S. dollar payments for natural gas sales, may have increased the local supply of dollars. They add that the global financial crisis has significantly affected Burma's international trade, resulting in lower demand for U.S. dollars and further depreciation of the U.S. currency against the kyat. End Summary. Kyat Up, Dollar Down -------------- ¶2. (SBU) Burma is one of the poorest countries in Southeast Asia, ranked 135th on the UN's 2008 Development Index. Most Burmese earn an average income of 2,000 kyat (less than USD 2) a day, and spend almost 70 percent on food. Since August 2007, the prices of locally produced food and commodities, as well as imported goods, have risen due to higher production and transportation costs. As Burma's economy continues to deteriorate due to government mismanagement (Ref A),there has been a more-than-expected appreciation of the kyat against the U.S. dollar during the past four months. Economists are seeking an explanation. ¶3. (SBU) The value of the kyat against the U.S. dollar fluctuates throughout the year -- typically appreciating during the dry season (October-April),when there are more tourists bringing dollars into the country and trade is higher, and depreciating during the rainy season due to reduced supply of U.S. dollars. Overall, from 2004 to 2007 the kyat appreciated against the U.S. dollar by an average of three percent annually. However, in 2008 the Burmese currency appreciated by more than twice that amount -- 7.4 percent -- against the dollar. ¶4. (C) The drop in the value of the kyat during the last rainy season, at around 2 percent, was particularly low compared to past years (see chart below for 2008 monthly exchange rates). Economists were surprised given that the country was reeling from the devastation caused by Cyclone Nargis during that period. Several analysts pointed out that natural disasters commonly undermine the strength of the national currency. However, economist U Myint noted that humanitarian assistance contributions to Burma increased the supply of U.S. dollars, weakening that currency vis-a-vis the kyat. The sharp 12 percent rise in the kyat against the U.S. dollar in the past two months stands in contrast to the weakness of other regional and world currencies vis-a-vis the dollar in the same period (see second chart below). -------------- -------------- Kyat-U.S. Dollar Exchange Rates RANGOON 00000067 002.2 OF 003 2008-2009 -------------- -------------- Month/Year Average Kyat Percent Rate/USD 1 Change* -------------- -------------- December 2007 1280 --- January 2008 1249 - 2.42 February 2008 1192 - 4.56 March 2008 1107 - 7.13 April 2008 1112 0.45 May 2008 1134 1.98 June 2008 1162 2.67 July 2008 1183 1.81 August 2008 1211 2.37 September 2008 1256 3.72 October 2008 1233 - 1.83 November 2008 1261 2.27 December 2008 1193 - 5.40 January 2009 1080 - 9.47 -------------- -------------- *Negative figure shows kyat appreciation against USD -------------- -------------- USD-Foreign Currency Values October 1, 2008 - January 21, 2009 -------------- -------------- Currency 10/01/08 01/31/09 Percent Rate Vs. $1 Rate Vs. $1 Change* -------------- -------------- S'pore Dollar 1.43 1.51 5.59 Thai Baht 34.00 34.95 2.79 Euro 0.71 0.78 9.86 Japanese Yen 105.84 89.90 - 15.06 Swiss Franc 1.12 1.16 3.57 Burmese Kyat 1233.00 1080.00 - 12.43 -------------- -------------- *Negative percent change indicates appreciation of currency against U.S. dollar. ¶5. (C) The appreciation of the kyat affects many Burmese, particularly those who are paid or do business in foreign currencies. In the past few months, Embassy local staff, who are paid in FEC (equivalent to the USD),have suffered substantial losses when converting their salaries to kyat since their salaries, fixed to the dollar, buy them fewer kyat. Additionally, the considerable number of Burmese who depend on foreign remittances to make ends meet now receive fewer kyat when they convert their money (septel). The dollar's depreciation -- particularly when combined with continued rising inflation -- is also affecting the Burmese who hold their savings in the U.S. currency (a popular practice among those with the means, even though possessing foreign currency without a license is illegal). Supply and Demand, GOB Intervention, or Both? -------------- ¶6. (SBU) So what is behind the kyat's strong performance against the dollar? Economic data indicate that 2008 was an average year by Burmese standards: growth was 3-4 percent (Ref A),trade increased by 3 percent (Ref B),and inflation remained high at 25 percent. Additionally, Burma continues to recover from the damage Cyclone Nargis afflicted on the country in May 2008. Economists argue that Burma's isolated RANGOON 00000067 003.2 OF 003 economy, the regime's strict foreign currency controls, and the fact that the kyat is not a world currency make the kyat relatively immune to world financial pressures. Therefore, the kyat continues to appreciate cyclically against the U.S. dollar, regardless of how oQer currencies fare. ¶7. (C) According to Burmese economists, bankers, traders, and money changers, one explanation for the kyat strengthening more than seasonally expected in the past four months is that Burma's supply of dollars increased dramatically due to a rebound in fourth quarter tourism versus the same period in 2007 (Ref C). (Note: Tourism dropped dramatically after the September 2007 political crisis.) ¶8. (C) Another possible explanation is government manipulation. Economist U Myint speculates that the GOB, which in December received a late payment for its natural gas sales, may have released some dollars into the market to compensate for the loss in export dollars and to "prove" that the world financial crisis is not affecting Burma. He added that the GOB, which has clear control over the Central Bank, has been known to manipulate the kyat/U.S. dollar ratio for its own benefit. Economist U Maw Than told us officials from the Ministry of Finance and Planning asked him during early January discussions on the financial crisis how to improve the relative strength of the kyat. ¶9. (C) A lower demand for U.S. dollars may be another part of the explanation for the kyat's appreciation. According to U Myint, the demand for dollars may be falling due to difficulties in obtaining import and export licenses necessary for USD-denominated trade. Also, a local business consultant told us that, due to the recent crash of Burma's bean and pulses industry (valued at 230 billion kyat or USD 230 million - see septel),the GOB is forcing traders to pay debts in kyat instead of U.S. dollars (the normal practice). ¶10. (C) Whatever the explanation, it is clear the dollar continues to play an important financial role in Burma, despite both the regime's currency controls and U.S. sanctions. Fluctuations in the dollar-kyat exchange rate have meaningful effects. DINGER