Myanmar Currency Crunch Cripples Exporters, Risks Crisis

Promises of economic development and pro-business reforms from Myanmar's new civilian government ring hollow for entrepreneur Tin Maung, a fisheries exporter whose once-thriving firm is now on the brink of bankruptcy.

Golden Sule Pagoda, Rangoon, Myanmar
Juergen Ritterbach | The Image Bank | Getty Images
Golden Sule Pagoda, Rangoon, Myanmar

Myanmar's kyat currency has appreciated 20 percent in the past year, more than any other Asian currency that Reuters monitors daily, squeezing traders and exporters like Tin Muang, who are struggling to break even as inflation pushes up costs and the new government does nothing to tame the currency's rise.

The strong kyat and high food and fuel prices are a major test for the four-month-old government, not just economically, but politically, and analysts warn its failure to tackle bread and-butter issues may anger the public and lead to its downfall.

The biggest and bloodiest uprisings against military rule, in 1988 and 2007 were sparked by discontent over soaring inflation and fuel prices respectively, and former government officials say more of the same could be on the way.

"It's a political time bomb for the government," said a retired senior government official. "It was livelihood issues, not a thirst for democracy that pushed people onto the street before and things couldn't be worse now."

Dollars are pouring into Myanmar's fragile and largely opaque economy, with foreign investors keen to tap its vast resources and visiting traders buying up gemstones. But most of that money ends up lining the pockets of cronies of the military dictators who controlled the country for decades.

The government's inaction over the kyat's strength and rising food costs is alarming exporters, farmers and employees earning dollar-pegged salaries. Businesses are closing, salaries are cut and jobs are being lost as production costs rise.

Exporters who hoped for better times are hurting badly, with the kyat currently trading at around 785 to the dollar on the black market — which covers nearly all transactions — compared with more than 1,000 a year ago.

"We're in a real dilemma. We're fighting a losing battle because of the soaring costs," said Tin Muang, 42, who reckons more than 20 farms and processing plants in the fisheries sector alone have closed in recent months.

"We've had to sell all we were breeding in the local market at low prices. It will have a very negative impact on our traditional export market."

The government has made no public acknowledgement of its currency crisis and its cut in export tax from 10 to 7 percent, effective this month, is a measure seen as too little, too late.

"I don't think the government is much interested in the worsening situation with the kyat," said a retired commerce ministry official, who requested anonymity.

"They seem complacent and focused on the huge proceeds from gems emporiums and foreign investment."

Private economists point to the dollar's weakness as the main driver of the kyat's appreciation but say many other factors have come into play, including increased inflows from timber and energy exports, mainly to China and Thailand, which is boosting demand for kyat.

Gems such as jade, rubies and sapphires worth $5.7 billion were sold at three emporiums in the past eight months alone.

Dollar inflows also increased with the repatriation of funds held offshore by wealthy Burmese to buy up state assets and property in a mass pre-election sell-off last year.

Sean Turnell, an expert on Myanmar's economy at Australia's Macquarie University, said another major contributor to the kyat's strength was sales of illicit opium and methamphetamine, of which Myanmar is one of the world's biggest producers.

Intervention Unlikely

Drug money was converted into kyat to pay opium growers and workers in illegal drug factories, he said. The rest was laundered through banks and businesses or put into Myanmar's booming real estate market, with transactions paid in kyat.

The lack of reliable data or transparency in Myanmar's economy and banking system allows Burmese tycoons — many of whom are targeted by Western sanctions due to their alliances with former junta leaders — to continue to boost their wealth.

Economists see no signs that policy makers with a history of fiscal mismanagement will take any action to intervene in the currency.

"In other countries, the central banks normally intervene, but we can't expect this sort of thing to happen here," said Maw Than, a retired rector of Yangon's Institute of Economics.

"Unless effective measures are taken immediately, it will have widespread negative impacts on the economy."

Myanmar's government wants to boost exports but that is being inhibited by the kyat's appreciation.

Rice shipments, for example, dropped by almost two-thirds in 2010 despite increased production of the grain, mostly because the strength of the currency made it uncompetitive.

One exporter said 25 percent broken rice fetched $390 per tonne, but after tax and transaction fees his income was just $2 dollars per tonne higher than the local price, so exporters in various sectors were selling off stocks on local wholesale markets to try to keep their businesses afloat.

"It's already had a grave impact on us, from the primary producers and exporters to consumers," said Hla Maung Shwe, a prominent businessmen and vice-chairman of the Myanmar Federation of Chambers of Commerce.

"The more we sell, the more we lose."

Foreign direct investment in Indonesia surged 21 percent in the second quarter of 2011 from a year earlier, as strong commodity prices attracted investors into the mining sector in the world's top exporter of thermal coal and tin.

Heavy morning traffic, Thamrin Street, Jakarta, Indonesia
Heavy morning traffic, Thamrin Street, Jakarta, Indonesia

Direct and portfolio investment has quickened into Southeast Asia's largest economy in recent months, though analysts warn the country needs to overhaul and expand its infrastructure in coming years to keep attracting firms and to overcome the sprawling archipelago's Achilles' heel — inflation.

For now things look rosy: FDI totals $9.6 billion so far this year, on track for its highest ever in 2011, while foreign investment in government bonds and the stock market are both at records.

"I'm very bullish," said Gita Wirjawan, the country's investment chief and a former investment banker. "Traditionally, investment quickens in the third quarter."

Worries over eurozone and U.S. debt and slower growth in China mean Indonesia is now seen as a relative safe haven, though that could change once the West recovers or if runaway inflation returns to erode a rupiah at seven-year highs .

FDI from April to June was 43.1 trillion rupiah ($5 billion), spread across the country. In a quarter when gold and tin prices hit records , mining led the way with $1.5 billion, followed by chemicals, machinery, electronics and transport.

"FDI will continue coming because of strong economic fundamentals and the appreciating rupiah...the main concern with long-term investment is poor infrastructure conditions and inflation," said Eric Sugandi, economist at Standard Chartered in Jakarta.

While inflation is within the central bank's 4-6 percent target now, economists say inflationary pressures will pick up again and lead to interest rate rises by mid-2012 that could slow growth.

Poor infrastructure, from roads to ports, means higher distribution costs that create both a structural inflation problem and cut into companies' profit margins. Previous bouts of high inflation have led to investor outflows.

The government is relying on private investors for two-thirds of its $15 billion infrastructure needs, though Japan, China and India have all made big commitments this year.

Yet progress on the ground in its traffic-logged cities and overwhelmed ports remains to be seen, while corruption is rife.

"This is still Indonesia. Everyone wants something for nothing," said the Australian manager of a road building firm.

Roads Not Supplied

Infrastructure is seen as an investment opportunity if the government can speed up land acquisition in the next year, with many investors forced to build their own roads, rail and ports.

Wirjawan did not mention specific firms, though in recent months officials and executives have said Coal India, Procter & Gamble and Hyundai Motor are planning investments, while dozens of others from Google to Peabody Energy are eyeing the country.

Neighbouring Singapore, a home for many Indonesian tycoons, was the top foreign investor in Q2, followed by former colonial ruler the Netherlands and then the United States, underlining growing interest from Western investors who in recent years lagged Asian firms because of worries over corruption.

South Korea and India are expected to be leading investors in the future, the investment agency said, with LG Electronics eyeing expansion to tap consumer demand from an emerging middle class in the world's fourth largest population.

India's state-run National Aluminium Co Ltd (NALCO) is in talks to invest in an aluminium smelter, the investment agency said on Thursday, joining other Indian firms looking to buy coal mines and develop power or cement plants.

The investment board is targeting 156 trillion rupiah of FDI this year. Last year foreign investment into Indonesia reached a record 148 trillion rupiah.

External Risks

Analysts say the country ticks along at 6 percent annual economic growth despite the government and shabby bureaucracy .

Fitch Ratings said in March it could lift Indonesia's sovereign rating to investment grade within 12 months, though weak infrastructure was the key risk to any upgrade.

"A lack of infrastructure remains one of the biggest constraints to boosting Indonesia's growth potential. Significant improvements to the regulatory framework are needed to support infrastructure spending and public-private projects," said Milan Zavadjil, the IMF's representative in Indonesia, adding it had to overcome inflation from cutting fuel subsidies.

Still, compared to much of the world, Indonesia's financial situation looks strong, with a budget deficit seen at 2.1 percent of GDP this year, and record foreign currency reserves of about $120 billion to stabilise the rupiah currency in the event of any sudden fund outflows.

Economists say this could happen once a global economic recovery leads Western countries to start normalising rates.

"We see fears from investors from the end of the low interest rate era in countries such as the United States, Europe, and Japan. Once the Fed increases its benchmark... a large sudden reversal might occur in the Asia region," said Juniman, an economist at Bank International Indonesia in Jakarta.

"Another risk is the threat from a sovereign debt default in Europe and that it could spread to the U.S. That will cause global economic instability and the world will fall into recession, eventually. FDI would stop, to wait and see."