The opening of Myanmar’s economy along with its floating currency and growing demand for imports has led to a worsening trade deficit and significant weakening of the Myanmar kyat (MMK) against the dollar. Investors have no reason to worry, however, as these are necessary growing pains for the rapidly emerging economy, according to the analysts at Standard Chartered Bank.
On April 2, 2012, Myanmar’s reform government implemented a managed float for the MMK, in place of the “overvalued” peg. The new system is similar to China’s, according to a research note published by Standard Chartered on Monday.
This is a momentous policy shift, considering before the float, the MMK fluctuated very little, usually around 6.40 to 6.45 against the U.S. dollar. In addition, Myanmar had several unofficial exchange rates in the informal market, where the exchange rate could be as high as 830 against the dollar. The MMK was highly overvalued -- 19 percent in the year ending March 2011, according to a study by the IMF, and 40 percent in the year ending March 2012.
The overvalued currency was not supportive of the country’s export competitiveness, or of foreign direct investment (FDI). The decision to switch to a unified, managed float system came against this backdrop, which will also serve to lay the groundwork for establishing a monetary policy framework for the newly opened country, according to Standard Chartered.
Since the float, as international investors look to Myanmar with interest, the depreciation of the MMK against the dollar has received some attention. At the end of 2012, dollar to MMK exchange rate was at 87. By July, the MMK has depreciated by about 14 percent.
The depreciation should not cause concern, according to Standard Chartered, and is merely part of the growing pains Myanmar must endure as its financial markets mature.
In addition to the MMK depreciation, Myanmar’s imports are growing faster than its exports of gas, gems and agricultural products. The IMF said that the country’s trade deficit is likely to widen to 4 percent of its GDP this year.
This too is just a sign of Myanmar’s economic growth, according to Standard Chartered, as the country builds its production capacity.
Imports of machinery and transport equipment recorded a 67 percent year-on-year increase in the first quarter, according to Myanmar customs department, and Standard Chartered expects to see continued strong demand for imports of heavy machinery, construction equipment, infrastructure materials and refined fuel for investment purposes.
Exports-wise, the country will continue to rely on its traditional industries of natural gas, minerals, agricultural/aquacultural products and textiles for a few more years, but the lifting of Western sanctions and increasing FDI should lead to a widening variety of exports soon. Tourism is another flourishing industry that should bring in foreign currencies.
While the widening current account deficit weakens the MMK in the short term, foreign investment, development aid and remittances should more than support the balance of payments and the MMK. In the long-term, however, exports receipts are expected to rise, supported by new gas fields and rising global trade. These receipts will help offset growing demand for imports and balance the MMK, according to Standard Chartered.