CBM buys dollars to ‘reduce panic’

The Central Bank has bought over US$40 million dollars from private lenders in just five days to “reduce panic and prevent volatility”, a Central Bank official told The Myanmar Times, while banks this week once again imposed limits on foreign exchange due to volatility.

Private banks started their sudden net transfer of dollars to the Central Bank through the daily auctions on March 4.

Offers to sell have surged and bids have disappeared, resulting in the net transfer of $44.5 million between March 4 and yesterday. Before this month, there had only been one day this year when private banks were net sellers of dollars.

Banks have also put limits on foreign exchange transactions at their downtown branches, tellers told The Myanmar Times. These limits varied widely across banks and the same banks day-to-day.

A teller at a downtown branch of KBZ Bank said on March 9 there was a $100-per-customer limit for foreign exchange across all Yangon branches. An AYA Bank branch and a Myanma Apex Bank branch were both willing to change $500 and a branch of CB Bank had a limit of $1000. A Myawaddy Bank branch currency exchange desk meanwhile had closed due to the volatility.

The Central Bank has met almost all of the private bank demand to unload dollars – $46 million was offered from March 4 to yesterday. A Central Bank official, who asked not to be named, said the regulator was trying to reduce panic, which would arise if private banks were unable to get rid of dollars through the auctions.

Auctions are one of the two main sources of currency exchange for lenders – the other is the interbank market, which functions poorly.

Dollar purchases are also an effort to control volatility in the kyat’s value, the Central Bank official said. Volatility has been an issue so far this year, but unlike in 2015, when the kyat depreciated by over 25 percent against the dollar, this year’s volatility has manifested itself through rapid rallies rather than slumps.

The official reference rate moved almost 5pc in just over a week in early February, when banks imposed limits on foreign currency exchange or shut their desks completely to avoid losses.

In February, however, banks did not sell dollars in bulk to the Central Bank. Their decision to do so now is unusual as they have almost always been net buyers of dollars from the Central Bank, since the auctions began.

The Central Bank often struggles to meet their appetite from its own modest reserves. Just a few weeks ago banks were asking the Central Bank for as much as $17.8 million at a daily auction, with the Central Bank only able to supply $200,000.

The Central Bank official suggested three main reasons for the sudden spike in dollar selling. The first factor is seasonal, he said. Exporters have to change dollars into kyat to be able to buy the harvest from farmers. This happens every year, he said. Evidence for a seasonal rally in Myanmar’s currency ahead of the harvest season is mixed. The kyat had a similar rally in 2014, but not in 2015.

The second reason he gave was an increase in foreign investment, aid, grants and loans – both public and private – following a positive international response to Myanmar’s election and transition.

Total dollar-denominated foreign capital flows into public and private banks were 10pc higher in the first 10 months of the 2015-16 fiscal year from April to December than they were in the whole of the previous fiscal year, he said.

Daw Ohnmar Kyaw, general manager of AYA Bank’s treasury department, said that her bank sold dollars to the Central Bank on March 9 because its net open position had exceeded 30pc of core capital for more than three days.

She said this was because traders with dollar accounts had yet to make import payments. She was aware of the increase in banks selling dollars at the auction, which she said was neither seasonal nor normal. Myanmar Oriental Bank’s chair U Mya Than said his bank had also sold dollars to the Central Bank, because of a dollar surplus and the stronger kyat exchange rate.

U Soe Thein, deputy managing director of Asia Green Development Bank said private banks are selling US dollars to the Central Bank because it is offering a better rate than the unofficial market – with a difference of around K13 on March 9.

The Central Bank official’s third suggestion was that Myanmar’s banks expect the US dollar to depreciate, and are selling dollars in anticipation of this move. Offers at the auctions first rose on March 4, after three successive days of a stronger kyat.

The kyat has rallied this year on several occasions, putting an end to sentiment that its direction was a one-way bet. It had strengthened to K1219 yesterday, according to the Central Bank’s reference rate, a near nine-month high, while some money changers in downtown Yangon were offering rates as strong as K1180 to the dollar earlier in the week.

The outlook for a longer-term rally is uncertain. Bankers and economists point to Myanmar’s persistent trade deficit – over $3 billion for the coming fiscal year, according to the December budget proposal.

Although the stronger kyat is theoretically good news for importers and bad for exporters, economists said the reality is that the economy in general loses from volatile movements in either direction.


Source: The Myanmar Times


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