Japanese bank tests kyat currency hedge

Sumitomo Mitsubishi Banking Corporation is testing the use of forward exchange rate contracts in Myanmar, in response to clients eager for a way to hedge against kyat volatility.

The Japanese lender is providing a forward contract to one of its Japanese clients, an official at the SMBC’s Yangon offices told The Myanmar Times. He said it was only a test case and not a product SMBC is offering to all its corporate clients.

Under a forward contract, one party secures a set rate for exchanging one currency into another at a date in the future. This protects them against exchange rate volatility in the interim. Importers and exporters make regular use of forward contracts in the international market. By removing the exchange rate risk, forward contracts allow exporters and importers to calculate costs accurately and in advance.

In SMBC’s test case, it has provided a forward contract allowing a client to exchange kyat into dollars at a fixed rate. The amount is relatively small – less than US$100,000 – and the time period is short – only two weeks, according to the official. But a clear thirst for forward contracts among foreign firms operating in Myanmar means there is likely to be demand for larger amounts and for longer periods.

Myanmar’s new Banks and Financial Institutions Law, which has already been submitted to parliament, will allow the use of forward contracts. The country’s old law did not, but rules and regulations are not the problem, said the SMBC official.

“The problem is availability,” he said. “Customers request forward contracts, but we need to find another party to cover the other end of the transaction.”

The demand for forward contracts in Myanmar comes mainly from firms wanting to exchange kyat into dollars. There are many international companies holding kyat and looking to exchange it into dollars, but finding a Myanmar bank willing to part with its dollars is hard, he said.

Kyat volatility has made the dollar popular as a store of value, and there is already a shortage of dollars in the interbank market. The kyat lost over 27 percent of its value against the dollar last year.

In the case of SMBC, it has a partnership with local lender Kanbawza (KBZ) Bank, which took the other side of the deal.

“These are the [kind of] new products we need,” said U Than Lwin, a senior adviser to KBZ Bank. “We need to go along with the international financial system.”

A new proposed banking law specifies that banks can use and offer “currency forward and spot contracts, swaps and exchange and interest-rate instruments”, according to a draft on the Central Bank’s website. Even when the new law is enacted, the Central Bank as regulator will be able to curb to use of such products, U Than Lwin said.

“So we’re moving slowly,” he said, adding that KBZ and SMBC were also working on workshops and training sessions on forward contracts with other firms.

“The next step is to negotiate with other local banks,” the SMBC official said. “We’ll provide other companies with information about how to calculate the forward rate, and hopefully contribute to the banking sector’s growth.”

Source: Myanmar Times

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