VZCZCXRO9050
RR RUEHCHI RUEHDT RUEHHM RUEHNH RUEHTRO
DE RUEHGO #0210/01 0790958
ZNR UUUUU ZZH
R 190958Z MAR 08
FM AMEMBASSY RANGOON
TO RUEHC/SECSTATE WASHDC 7319
RUCNASE/ASEAN MEMBER COLLECTIVE
RUEHGG/UN SECURITY COUNCIL COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 1791
RUEHBY/AMEMBASSY CANBERRA 1010
RUEHKA/AMEMBASSY DHAKA 4802
RUEHNE/AMEMBASSY NEW DELHI 4561
RUEHUL/AMEMBASSY SEOUL 8101
RUEHKO/AMEMBASSY TOKYO 5662
RUEHCN/AMCONSUL CHENGDU 1396
RUEHCHI/AMCONSUL CHIANG MAI 1470
RUEHCI/AMCONSUL KOLKATA 0254
RUEATRS/DEPT OF TREASURY WASHDC
RHHMUNA/CDR USPACOM HONOLULU HI
RUEHGV/USMISSION GENEVA 3579
RHEHNSC/NSC WASHDC
RUCNDT/USMISSION USUN NEW YORK 1421
RUEKJCS/SECDEF WASHDC
RUEHBS/USEU BRUSSELS
RUEKJCS/JOINT STAFF WASHDC

UNCLAS SECTION 01 OF 03 RANGOON 000210 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/MLS, EEB/IFD/ODF 
PACOM FOR FPA 
TREASURY FOR OASIA:SCHUN 
 
E.O. 12958:N/A 
TAGS: ECON EFIN PREL BM
SUBJECT: BURMA - WHY THE KYAT IS APPRECIATING AGAINST THE DOLLAR 
 
REF:  A) Rangoon 198 B) Rangoon 137 
 
RANGOON 00000210  001.2 OF 003 
 
 
¶1. (SBU) Summary.  The Burmese kyat, traditionally one of the 
weakest currencies in Southeast Asia, continues to appreciate 
against the declining U.S. dollar.  Since September 2007, the market 
rate of the kyat has risen by 19 percent.  Burmese economists see 
the kyat's appreciation as primarily due to lower demand for 
dollars, although they acknowledge that the Burmese supply of 
dollars has increased as businessmen close Singaporean bank accounts 
and smuggle U.S. dollars into the country.  The uncertain political 
climate surrounding the upcoming May referendum is discouraging 
companies from doing business in Burma, and the regime is processing 
business permits even slower than usual, reducing transaction demand 
for U.S. dollars.  Additionally, as the speculative value of the 
dollar continues to fall, Burmese businesses look to other 
currencies for financial transactions, further reducing the need for 
U.S. dollars.  While the appreciation of the kyat has resulted in 
lower inflation, down from 53 percent in September to 29 percent in 
February, many Burmese find that their purchasing power has not 
increased.  Low salaries and high production and transportation 
costs continue to push up prices, making it difficult for the 
majority of Burmese to survive on $1 a day.  End Summary. 
 
Kyat Up, Dollar Down 
-------------------- 
 
¶2.  (SBU)  Burma is one of the poorest countries in Southeast Asia, 
ranked 132nd on the UN's 2007 Development Index.  Most Burmese earn 
an average income of $30/month, and survive on $1 a day, spending 
most of their income on food.  Since the August 2007 fuel price 
hike, prices of locally-produced food and commodities, as well as 
imported goods, have skyrocketed due to higher production and 
transportation costs.  Although Burma's economy continues to 
deteriorate due to government mismanagement, we have observed an 
economic phenomenon that makes little sense given Burma's weak 
economy:  the significant appreciation of the kyat against the U.S. 
dollar since September 2007. 
 
--------------------------------------------- ------- 
            Kyat - U.S. Dollar Exchange Rates 
                     2007-2008* 
--------------------------------------------- ------- 
Month/Year            Average Kyat         Percent 
                      Rate/$1              Change** 
--------------------------------------------- ------- 
January 2007             1284               2.23 
February 2007            1268             - 1.25 
March 2007               1263             - 0.39 
April 2007               1265               0.16 
May 2007                 1263             - 0.16 
June 2007                1272               0.71 
July 2007                1292               1.57 
August 2007              1314               1.70 
September 2007           1368               4.11 
October 2007             1345             - 1.68 
November 2007            1290             - 4.09 
December 2007            1280             - 0.78 
January 2008             1249             - 2.42 
February 2008            1192             - 4.56 
March 2008*              1107             - 7.13 
--------------------------------------------- ------- 
*Through March 14, 2008 
**Negative percent change depicts appreciation of the kyat against 
the U.S. dollar. 
 
¶3.  (SBU)  Although the market exchange rate for the kyat against 
the U.S. dollar has remained fairly constant over the past five 
years, averaging 1300 kyat/$1 for the entire year, the kyat has 
 
RANGOON 00000210  002.2 OF 003 
 
 
appreciated 19 percent against the dollar in the past six months. 
As of March 14, the market rate of the kyat was 1107 kyat/$1 
compared to 1368 kyat/$1 in September.  While the kyat tends to be 
stronger vis-a-vis the U.S. dollar during the dry season 
(November-April) because of the influx of dollars from foreign 
tourists and relatively high export levels compared to the rest of 
the year, the kyat only appreciated an average of six percent 
between September and March during the past three years.  This year 
is the outlier, with no obvious reason why, Kanbawza Bank Consultant 
U Than Lwin told us. 
 
¶4.  (SBU)  The kyat's sudden appreciation surprised Burmese bankers, 
economists, businessmen, and money traders, who pointed out that the 
kyat value is more in line with the strong world currencies - the 
Euro, yen, and Swiss franc - than with regional currencies.  It 
makes sense that the Euro and the yen are appreciating by 12 percent 
against the dollar, U Than Lwin commented.  But that the kyat is 
outperforming the Singapore dollar or the Thai baht, traditionally 
stronger regional currencies, defies logic, he stated. 
 
--------------------------------------------- ------- 
            Foreign Currency Appreciation 
                Against the US Dollar 
               09/01/2007 - 03/14/2008 
--------------------------------------------- ------- 
Currency      Sept Rate       March Rate     Percent 
              Vs. $1          Vs. $1         Change 
--------------------------------------------- ------- 
Spore Dollar      1.526        1.383        - 9.37 
Thai Baht        34.28        31.35         - 8.55 
Euro              0.64         0.74         -12.52 
Japanese Yen    116.17       100.58         -13.42 
Swiss Franc       1.21         1.01         -19.80 
Burmese Kyat   1368.00      1107.00         -19.08 
--------------------------------------------- ------- 
 
Basic Economics: Supply and Demand 
---------------------------------- 
 
¶5.  (SBU) Why is the kyat appreciating at a substantially higher 
rate against the dollar in 2007-2008 compared to previous years? 
While several bankers and money changers told us that it is due to 
an increased supply of dollars in Burma, local Burmese economist U 
Myint disagreed, emphasizing that the issue is one of demand rather 
than supply.  According to U Myint, Burma's current political 
situation and the uncertainty surrounding the upcoming May 
referendum creates a toxic environment for doing business.  Indeed, 
businessmen have complained to us in recent months that it has 
become more difficult to secure import and export licenses.  Several 
traders told us that the GOB does not process license requests as 
quickly as in the past; now it takes up to a month for license 
approvals.  Several garment manufacturers told us that foreign 
companies are also hesitant to enter into business deals with 
Burmese companies, afraid that the upcoming referendum could cause 
instability and undermine business opportunities.  Transaction 
demand for U.S. dollars has declined since September, U Myint 
declared.  While part of the kyat appreciation is due to the 
cyclical nature of exchange rates, the low demand for U.S. dollars 
allows the kyat to appreciate further against the dollar. 
 
¶6.  (SBU)  Additionally, U Myint noted that the dollar continues to 
weaken on the world market, further driving down the value locally. 
In the past, Burmese held on to U.S. dollars for speculative 
reasons; through arbitrage, they could sell dollars for profit.  As 
the value of the dollar continues to fall, people are less willing 
to save money by holding U.S. dollars, he stated.  Increasingly, 
businessmen are looking toward alterative currencies, such as the 
Singapore dollar (ref A), for business transactions and savings, 
 
RANGOON 00000210  003.2 OF 003 
 
 
relying less on the U.S. dollar.  Following the trend of using 
alterative currencies, business contacts explained that exporters, 
particularly in the rice sector, have been selling their export 
letters of credit in advance for kyat, enabling them to purchase 
products that they will then export.  This practice, condoned by the 
government, further decreases the use of dollars. 
 
¶7.  (SBU) While U Myint emphasized that low demand for dollars was 
the driving force behind the kyat's recent appreciation, he 
acknowledged that an increased supply of U.S. dollars played a small 
role.  Dollars are not entering Burma because tourist season (the 
number of tourists has been down substantially this year) or 
increased exports, he stated.  Instead, many Burmese businessmen, 
who are having problems with their banks in Singapore, are closing 
their accounts.  If businessmen are unable to open new accounts in 
Singapore, they withdraw their money in U.S. dollars and smuggle the 
money into Burma, raising the supply of dollars in the country. 
Because most Burmese do not declare how much foreign currency they 
bring into Burma, there is no way to determine how many U.S. dollars 
are actually in Burma's money supply, U Myint noted. 
 
A Paradox: Lower Inflation, Less Purchasing Power 
--------------------------------------------- ---- 
 
¶8.  (SBU) Generally, as a currency appreciates, purchasing power 
also increases, lowering inflationary pressure.  In the Burmese 
case, we have found that only part of the equation rings true. 
Inflation levels have declined sharply since September, from 53 
percent to 29 percent by the end of February.  (Note:  The Burmese 
Central Statistical Office has not released inflation data since 
July 2007.  Embassy Rangoon monitors inflation by observing prices 
of a basket of 37 domestic and imported products.  End note.) 
Prices of goods have remained relatively stable since September, 
although they have risen somewhat from pre-September levels.  Win 
Win Tint, owner of Burma's largest supermarket City Mart, which 
predominantly sells imported products, told us that while business 
has picked up in 2008, the purchasing power of the kyat has not 
risen as much as it should have.  Because salaries have not risen to 
match inflation, people cannot afford to purchase luxury items, such 
as imported groceries, and can barely purchase basic foodstuffs. 
The high costs of production and transportation in Burma translates 
into high prices of food and commodities, something that will not 
likely change in the future. 
 
Comment 
------- 
 
¶9.  (SBU)  Economists are baffled by the kyat's high rate of 
appreciation in recent months, noting that the rate should be closer 
to 7 or 8 percent rather than 19 percent.  Outside forces, such as 
the effect of financial sanctions on Burmese bank accounts in 
Singapore and the government's promotion of the use of Singapore 
dollars, may further explain why Burma's weak currency has 
appreciated against the dollar.  Despite the higher value of the 
kyat vis-a-vis the dollar and the lower inflation rate throughout 
the country, most Burmese continue to struggle to make ends meet. 
The foreign exchange rate matters little to most Burmese just trying 
to survive.  While the kyat on paper looks strong, the purchasing 
power of the currency remains low compared to the still-high prices 
of food and other products in Burma.  Until salaries increase to 
meet inflation or the costs of production and transportation drop, 
the Burmese kyat will remain a relatively weak currency and the 
Burmese will continue to spend more than 70 percent of their salary 
on basic commodities.  Only political change will result in leaders 
willing to seriously correct the dysfunctional Burmese economy. 
 
VILLAROSA