CBM intervenes in forex market, considers liquidity measures

Despite attempts to inject liquidity into the foreign exchange market and stabilise the dollar-kyat exchange rate by the Central Bank of Myanmar (CBM), the dollar has continued to appreciate against the kyat. On August 14, the CBM set its reference at a high of K1,460 to the dollar.

Since May, the dollar has risen by almost 10 percent against the Myanmar kyat. That is partly due to a global flight to dollar-denominated assets due to rising US-China trade tensions and a hawkish Federal Reserve. Meanwhile, a shortage of foreign currency to facilitate imports in the domestic market is also driving up the value of the dollar versus the kyat.

For local traders, that implies pricier imports, which, in turn, translates into rising costs of a range of goods from petrol, food, construction materials, car parts and industrial machinery. Exporters have also seen a drop in earnings. For example, Myanmar’s border trade earnings with China has fallen due to a steep depreciation in the yuan.

CBM support

During a series of meetings earlier this month, the CBM urged local private banks to sell more foreign currency to help importers meet their forex obligations. Between July 27 and August 1, it pumped a total of US$1.2 million into the local economy via auctions to local private banks and plans to continue doing so, said Daw May Toe Win, director general at Foreign Exchange Management Department of CBM.

U Than Lwin, an advisor of Kanbawza Bank (KBZ) and former CBM vice governor, told The Myanmar Times it is the first time the CBM has intervened to stabilise the exchange rate, which is a “good move” for the economy.

Yet, those efforts have done little to contain the kyat’s depreciation. Since the CBM began selling dollars to private banks on July 27, the dollar has actually risen by more than 2pc.

“There will always be a shortage of dollars to meet domestic needs as Myanmar currently imports more than it exports,” said U Than Lwin.

The way he sees it, “the CBM’s move to sell dollars is just a means of helping businesses manage volatility. It is a good sign that it is willing to support the exchange rate, but over the long term, the value of the dollar will continue to appreciate against the kyat as well as other foreign currencies, resulting in heightened volatility in the forex market in the future,” said U Than Lwin.

In that light, “banks will always need to sell foreign currencies and KBZ is meeting those requirements via trade financing and loans from foreign banks,” U Than Lwin said.

More liquidity

For its part, the CBM appears to be gradually allowing private banks more headroom to generate greater market liquidity, which could help to stabilise the exchange rate over the longer term. On August 13, for example, it agreed to remove the 0.8pc trading band above or below the CBM’s reference rate within which banks and money changers are allowed to conduct forex transactions, according to a statement released by the CBM.

The Central Bank sets its reference rate based mainly on demand at its daily dollar auctions. But bankers and analysts have pointed out that the CBM’s reference rate regularly fails to reflect actual demand for US dollars in the economy.

That has encouraged individuals and firms to either use the black market for dollars or transact between themselves, which, in turn, saps the official financial sector of foreign currency, leading to more volatility in the kyat.

Following its meetings with local banks, the CBM has also agreed to finally consider permitting banks to trade derivatives such as forwards and swaps, which should help deepen the capital market and lead to greater liquidity over the longer term, according to Azeem Azimuddin, CFO and advisor to the Chair at Ayeyarwady Bank.

In Myanmar, the secondary market for financial instruments is not yet developed. Meanwhile, interest rates are at a level where the Central Bank rate of 10pc is higher than maximum sovereign bond yields of just over 9pc, which deters investments in government debt.

In the meantime, the Union of Myanmar Federation of Chambers of Commerce and Industry (UMFCCI) and economists have been holding discussions to help businesses manage forex volatility. The chamber plans to submit its recommendations to the government soon.


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