Volatility likely after govt loosens grip on kyat

Domestic banks say they are ready for the inter-bank foreign exchange trading market that will be launched in August as the government takes another step toward a freely traded kyat.
U Zaw Lin Htut, senior general manager of international banking at Kanbawza Bank, said lenders have already installed the necessary telecom infrastructure, including extra land lines, and have developed backup plans to deal with network failures.
Once the market opens, domestic banks will be able to negotiate
exchange rates with each other. Rates can change in an instant rather than once a day as they do now, U Zaw Lin Htut said, referring to the central bank’s daily auction that sets the exchange rate
between the kyat and the US dollar every weekday at 9am.

He predicted that the market will be “lively and dynamic”, but said that trading should be conducted within a narrow margin so that exchange rates remain stable.
The Yangon Foreign Exchange Market Committee – which comprises the 16 domestic banks given licences last November to conduct foreign-currency transactions – has been drafting regulations and a code of conduct in anticipation of the move to interbank trading. It will make these public in August.
U Win Myint, a spokesperson for the Ministry of Commerce, said the exchange rate between the kyat and the US dollar will be determined by supply and demand. He added, however, that the market could possibly be manipulated by those who hold large reserves of foreign currency, such as banks and exporters, and that this could cause the kyat to depreciate.
“Someone holding or selling a lot of money could have an impact on the currency trade, but the central bank can intervene in [the market] if manipulation is occurring,” U Win Myint said.
The central bank plans to complete the switch from the managed-float system it has used since April 2012 to a free-floating policy within a year, deputy finance minister U Maung Maung Thein said.
“When the market operates under a free-floating policy, we have to think about how far we should go,” said a spokesperson for the central bank’s foreign exchange management department. He said the new system will not be entirely free but it will be freer than the current one. Initial trades will be restricted to transactions between the kyat and the US dollar, he added.
The spokesperson said the transition is being made with help from the International Monetary Fund and the Japan International Cooperation Agency. The former is providing advice while the latter has provided technical training to central bank staff as well as advice.
Sean Turnell, an economics professor at Australia’s Macquarie University, described the move as “good policy”.
“There are risks of course,” he said. “The banks will have to develop hedging and other strategies against exchange-rate movements and other market volatilities. But this is not ‘rocket science’,” he added. “After an initial adjustment period they should be able to cope fine.”
The move could also help curb the black market. “One of the critical issues facing Myanmar is how to gradually absorb black-market and other ‘informal’ economic activity into the formal market economy. This is a step in that direction,” Mr Turnell said. He also advised that Myanmar maintain a managed float, saying that “such a system safeguards against long-term misalignments and diversions from fundamentals”. At the same time, “it gives some policy discretion”, he added.
Mr Turnell also said an exchange rate of about K1000 to the dollar “sounds reasonable”. It helps the government pursue an export-led growth strategy and at the same time allows for the accumulation of foreign reserves. “This strategy and system [has] a good track record in the context of other Southeast Asian countries pursuing export-led growth,” he added.
Meanwhile, the kyat appreciated slightly against the US dollar last week. The central bank reference rate was 977 to the dollar on July 26, compared with K980 the week before. The black-market rate ranged from K978-982 to the dollar.
source: mmtimes

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