US rate hike puts spotlight on importers

The US Federal Reserve raised interest rates for the first time since 2006 yesterday – an event long-feared by developing economies.

Myanmar is better protected from the potential fallout than many, although the country’s reliance on imports leaves it exposed to a strengthening dollar.

The Federal Reserve increased the Federal Funds rate – the rate at which US banks lend to each other overnight – to a range of 0.25 percent to 0.5pc. The Fed had cut the range to 0-0.25pc in December 2008, where it remained unchanged until yesterday. The unprecedented period of low rates pushed many international investors into emerging markets in search of higher yields.

Emerging-market governments, banks and companies in turn took advantage of this appetite to ramp up their borrowing in US dollars, often through bonds and loans.

The prospect of rising US rates has sparked fears that emerging market entities now reliant on dollar debt will face difficulties refinancing higher interest rates. Myanmar, however, has almost no presence in the international capital markets.

“In general, the Myanmar government and companies have almost no exposure to the international loan and bond markets,” said Sardor Koshnazarov, managing director at Silk Road Management in Yangon.

One exception is loans from international financial institutions.

The International Financial Corporation (IFC), for example, provided a US$5 million convertible loan to Yoma Bank in order to help fund small and medium enterprises. The IFC also provided a $5 million trade finance credit line to Myanmar Oriental Bank, and a $2 million loan for Acelda MFI Myanmar.

But across the Myanmar bank and corporate sectors, refinancing dollar debt is unlikely to be a concern. The lack of engagement with the capital markets also means Myanmar does not have to worry about foreign investors removing their money from portfolios of emerging market debt and equity.

“The US rate rise is not likely to have a direct impact on Myanmar, for example through capital outflows,” said Habib Rab, senior country economist for Myanmar at the World Bank.

“But there could be a further general strengthening of the US dollar.”

A stronger dollar has already hit Myanmar’s currency this year. The kyat has lost just over 27pc of its value against the dollar this year, according to Central Bank data.

The kyat is not alone however. Many other emerging market currencies have declined against the dollar. The Malaysian ringgit has dropped almost 19pc against the dollar so far in 2015 – the South African rand and Brazilian real have fared even worse.

A stronger US dollar has implications for Myanmar’s trade balance. Foreign trade totalled $29.1 billion for 2014-15, according to the government’s Central Statistical Organisation (CSO), of which $16.6 billion was imports and $12.5 billion exports. Although the majority of Myanmar’s imports are not from the US, importers typically require letters of credits (LCs) that are denominated in the US dollars.

“If I’m bringing in steel or construction equipment I want my importer in Myanmar to have an LC in dollars,” said Sunil Seth, Myanmar country head for trading and distribution company Tata International.

If the kyat depreciates further, then the demand for dollar-denominated imports, particularly consumer items, may slow down.

“Our buyers will be very conscious of higher costs,” said Mr Seth, adding that a stronger dollar’s impact on trading could be a concern.

Construction contracts are also typically denominated in dollars, and Myanmar “is about to embark on period of significant infrastructure expansion” said one Yangon based finance consultant.

“There’s a broad building program – power, transport, you name it.” The National League for Democracy, which takes power in April, said in its election manifesto that it would “construct effective basic infrastructure, including for transportation, access to electricity, and access to information”.

Much of the concrete used in construction in Myanmar is imported, often from Thailand. Mechanical and electrical equipment also typically comes from other countries in the region, often from China.

“But the point is that the contracts are almost always in dollars,” said John Anderson, managing director at engineering consultancy Meinhardt Myanmar.

On the plus side, the prices of several commodities key to construction – such as steel – are at multi-year lows.

“Given commodity prices it’s really not a bad time to be building,” said the Yangon-based consultant.

There would also be some benefits to a weaker kyat. Natural gas is a key export for Myanmar, and natural gas prices have hit their lowest levels since 1999.

“Kyat-denominated earnings from gas could improve if depreciation helps offset any drop in gas prices,” said Mr Rab.

A weaker kyat could also help improve Myanmar’s external competitiveness, he added, noting that it is important to monitor Myanmar’s real effective exchange rate.

This is the value of its currency relative to those of its trading partners adjusted for inflation and weighted for trade balance. Inflation in Myanmar is high, running at 14-15pc, according to an official at the CSO.

“Since inflation in Myanmar has been high, allowing the kyat to depreciate should help contain real exchange rate appreciation, which is harmful for Myanmar’s external competitiveness,” said Mr Rab.

Source: Myanmar Times

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