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Fall in the Myanmar kyat sparks import-driven inflation
10 September 2018Sian Jones
August PMI signals fastest rise in input prices throughout
series history since December 2015
Selling price inflation also accelerates to series peak,
despite fragile demand conditions
Official data indicate strong rate of CPI inflation
Throughout most of 2018, the Myanmar kyat has depreciated
rapidly against key currencies. Poor inflows of foreign exchange
have led to the removal of the trading band, a move which was
welcomed by many but has increased the volatility in the currency.
However, the decreasing value of the kyat against both the US
dollar and the yuan has led to a sharp rise in prices for imported
items. The weaker currency has been widely mentioned by surveyed
manufacturing firms as having driven up costs, and has had the
knock-on effect of reducing domestic client demand.
Currency problems
Following a period of relative currency stability in 2017, the
value of the kyat against the US dollar has taken a tumble
throughout the year-to-date. The fall in the currency has led the
Ministry of Commerce and the Central Bank of Myanmar to temporarily
suspend re-exporting activity and remove the trading band on the
kyat, all in an effort to remove volatility. However, the removal
of the trading band has created volatility in itself, as the
currency finds its new level.
Many purchases from abroad, such as fuel and sugar, would
previously have been re-exported by some firms to other Asian
economies including China. The Ministry of Commerce felt this
should be stopped on a temporary basis as it had a large impact on
foreign exchange flows. Often the value of re-exported items did
not match that paid initially, exacerbated by struggles in Myanmar
regarding unofficial money transfers due to there being no official
channel for payments. Money made from this form of trade is also
often kept in offshore accounts, which presents another stumbling
block to foreign exchange inflows.
Inflation and the manufacturing sector
In a recent business sentiment survey conducted by the Union of
Myanmar Federation of Chambers of Commerce and Industry (UMFCCI),
the manufacturing sector was highlighted as the hardest hit it by
recent exchange rate movements. Difficulties for goods producers
have come from home and abroad. A weaker exchange rate has made
importing much more expensive, and the sudden nature of such a
depreciation has meant cost burdens have shot up. Notably,
anecdotal evidence from the
August IHS Markit Myanmar Manufacturing PMI stated that higher
fuel prices were a particular cause of concern. The PMI Input
Prices Index rose to a series high in August, with many attributing
the marked increase to exchange rate movements.
Companies often passed higher costs on to customers, reflecting
firms' efforts to protect profit margins, meaning the PMI survey's
Output Prices Index also reached a series peak in August.
Domestically, these higher prices have fed through to consumer
inflation, with the year-on-year change in CPI reaching 7.6% in
July. Greater charges for everyday items for businesses and
consumers have reportedly reduced overall client demand for
Myanmar's manufactured goods.
Reform policies needed to encourage
development
Alongside a strong rise in prices and sharp depreciation in the
kyat, firms operating in Myanmar face other difficulties which have
hampered growth. In a recent economy-wide business sentiment survey
conducted by the UMFCCI, companies highlighted difficulties
accessing bank loans and credit, high taxes, poor infrastructure
and tariffs as barriers to development and growth. Without reform
policies to address fundamental blockades to economic development,
Myanmar will struggle to recover fully from economic shocks.
More immediately, however, the survey data suggest that the
economic focus of the government should be to stabilise the
currency and reassure both companies and consumers across all
sectors of the economy. Positive sentiment has been relatively
subdued over recent months, having the knock-on effect of dampening
client demand. A weaker rise in prices should have the effect of
easing pressure on profit margins and household disposable
income.
Posted 10 September 2018 by Sian Jones, Economist, Economic Indices, IHS Markit
Purchasing Managers' Index™ (PMI™) data are compiled by IHS Markit for more than 40 economies worldwide. The monthly data are derived from surveys of senior executives at private sector companies, and are available only via subscription. The PMI dataset features a headline number, which indicates the overall health of an economy, and sub-indices, which provide insights into other key economic drivers such as GDP, inflation, exports, capacity utilization, employment and inventories. The PMI data are used by financial and corporate professionals to better understand where economies and markets are headed, and to uncover opportunities.
