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

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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

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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).

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Kyat-U.S. Dollar Exchange Rates

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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

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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