Kyat hits 1.5-year high, expected to remain stable
Set at K1,328 per US dollar on February 16, the Myanmar kyat is currently at its strongest level against the dollar in over 1.5 years. A stronger currency makes imported goods more affordable for local consumers. At its trough in July 2016, the kyat traded at around K1,360 per dollar.
Now, experts are optimistic about the local currency stabilising in strength. “The kyat has been remarkably stable over the last year despite concerns of the currency depreciating,” Mr Sean Turnell, Economic Adviser to the State Counsellor, told The Myanmar Times.
“More recently, inflation has fallen and the dollar has weakened, which has led to a stronger kyat,” Mr Turnell said. “With inflation stabilising, there is no need for the kyat to go down now.”
In Myanmar, 90pc of the time inflation is caused by the Central Bank printing money to fund the budget deficit. “When you have more money chasing after the same amount of goods in the economy, inflation goes up,” Mr Turnell said.
“The main reason why the exchange rate was so weak 18 months ago is because inflation has been really high. Inflation and the exchange rate usually move against each other to maintain purchasing power parity,” he said.
But Central Bank money printing has decreased from 60pc of GDP to 40pc of GDP since the current government came into power. As a result, inflation has fallen below 5 percent this year compared to 16pc in 2016.
With a policy in place to eliminate central bank financing of the budget deficit by 2020, expectations for inflation to stabilise at its current level below 5pc are running high. Against that backdrop, the kyat should stay stable, barring any unforeseen events.
“In any case, even if the kyat started to go down again, I would not be at all worried, as that would give the country an advantage against its neighbours. A weak exchange rate is a problem only if the country has a lot of foreign debt, but Myanmar has very little foreign debt,” Mr Turnell said.
“The exchange rate is in a good position now but if it depreciates more, that’s fine too.”
This is because a weaker kyat will also be good for Myanmar’s trade deficit, which currently stands at around K3.5 billion.
So, if inflation spikes in the next few months and drives the kyat lower, the advantage is Myanmar exports will be more competitively priced compared to goods produced elsewhere, which will help to narrow the trade deficit.
A weaker currency is also more favourable for Myanmar given the country’s need to attract foreign direct investments into its labour intensive industries.
“In countries like Myanmar, where there isn’t enough infrastructure to expand, you need an extra element to draw foreign investors and a lower exchange rate is a good pull factor,” Mr Turnell said.