Saturday, June 11, 2011

Soaring Kyat, Australian Miracle and New Burma Order

(Burmese Kyat has appreciated from 1200 a US$ to just 750 in last six months.)

President Thein Sein back from China Trip.
There was something very wrong about this photo. Nope, I’d better rephrase it. There was something very right about this photo. If you look carefully you would find the armed forces Commander-in-Chief General Min Aung Hlaing walking obediently behind the civilian President ex-general Thein Sein and the Vice-President ex-general Tin Aung Myint Oo.

There is a new political order being established in Burma. After so-called sham elections last year the so-called sham Constitution (2008) has clearly established a new Burma order and the public and international communities have started showing their confidence in that new political system.

The skyrocketing Kyat, the used-to-be worthless currency of Burma, has confirmed that new confidence by rising so fast from just above 1200 a US$ last December to just below 750 a US$ yesterday. That is massive appreciation of almost 40% in just six months. What the heck is going on in Burma?

Everyone who has taken Economics 101 knows that the price is the function of demand and supply. Kyat to rise that much in that short a period is indicating the massive inflow of US$ into Burma. Too much supply of US$ chasing the limited supply of kyat and the result is soaring US$ price of kyat.

Where are the US Dollars coming from?

Burmese currency, Kyats.
The capital in the form of US$ has to flow in to substantially increase the supply and thus pushed up the US dollar price of kyat. This is what AP (Associated Press) wrote about the capital flow into Burma last year.

“Myanmar received a record $20 billion of foreign investment pledges in the last financial year despite Western sanctions against its military government. The figure from the Ministry of National Planning Development dwarfs the value of foreign direct investment announced by Myanmar in previous years.

FDI commitments in the financial year ended March 2010 totalled just $302 million. They totalled about $16 billion in the previous two decades. Neighboring China with $8.27 billion accounted for 41 percent of the FDI commitments in the financial year that ended in March. Much of that money will be ploughed into hydropower projects.

Other top investors included the Chinese territory of Hong Kong with $5.39 billion followed by Thailand with $2.94 billion, and South Korea with $2.67 billion. The U.S. and European Union have imposed economic sanctions on Myanmar for its poor human rights record and failure to make democratic reforms. Sanctions, including banning U.S. companies from investing in Myanmar and banning Myanmar exports to the United States, started in 1997.

Since Myanmar liberalized its investment code in late 1988, it has attracted large investments in oil and gas, hydroelectric power and mining, mainly from neighbouring countries such as China and Thailand.”

Also there have been massive sales of Jade and other gemstones worth billions of dollars in addition to the large sales of natural gas. And the new civilian government is totally committed to leave the monetary policy firmly in the hands of the Union Bank and the new presidential economic advisers who are tight lipped about whether the money supply will be increased to check the soaring Kyat.

Bundles of Kyats.
Fortunately the black economy or the parallel economy in Burma has allowed the large-scale free-floating of local currency against US$ even though the official exchange rate has been fixed at ridiculously low rate of about seven kyats a US$ since 1960s. The official exchange rate seems to be used only for the government accounts and the official budgets.

That free floating black market exchange rate absorbing the external shocks the way free floating Australian exchange rate has been benefiting the Australian economy is now working perfectly for Burma even in the aftermath of 2008 GFC.

A UNDP (United Nations Development Programme) statement released on last Friday mentioned a six percent poverty reduction in Burma, according to UNDP’s 2009-2010 ‘Household Living Conditions survey’.

The economists have been calling that phenomenon ‘the Australian Miracle’.

The Australian Miracle?

Economist Paul Krugman.
This is what Paul Krugman, the Nobel laureate and Princeton Economics Professor, wrote in his famous book “The Return of Depression Economics” about the Australian Miracle.

“Consider the example of Australia during the Asian crisis. In 1996 an Australian dollar was worth almost eighty cents in U.S. currency. By the late summer of 1998 it had fallen to little more than sixty cents. No surprise there: most of Australia’s exports went either to Japan or to the troubled (Asian) tigers. 

But Australia, except for a brief period in the summer of 1998 when it seemed to be facing a coordinated attack by hedge funds, did not try to prop up its currency, either by buying it on the foreign exchange market or by raising interest rates. 

Instead, the currency’s fall proved self-limiting: when the Aussie dollar fell, investors regarded it as an opportunity to invest cheaply in what they continued to regard as a solid economy. And this confidence appeared justified by the “Australian miracle”: despite its dependence on Asian markets, Australia actually boomed amidst Asia’s crisis.
Aussie$-US$ Chart.
Now the least developed Burma is in the same league as filthy-rich Australia, currency wise in a sense. Similar to Burma’s kyat Aussie dollar has been soaring steadily from well below 90 US cents to almost 1.10 US$ within a year. Political and economic stabilities have kept the strong confidence in Australia by the financial markets while the mining boom has brought in massive investment capital and the net result is soaring Aussie dollar.

Burma now has ongoing investment boom and the rapidly rising currency is also the strong evidence of markets’ confidence in kyat or indirectly in Burma’s new political order.

Shift to the Right: From Socialism to Crony Capitalism

John McCain & Tin Aung Myint Oo.
As a legacy of late General Aung San (ironically the founding father of modern Burmese Army and the biological father of that Army’s nemesis ASSK) and under the thumbs of his left-wing extreme-nationalist comrades Burma had been on the 40 years long Socialist Road to Ruin since the British left Burma and her people to their own devices in 1948.

To save Burma and her people the Socialism and the left-wingers from the society are to be totally routed from Burma and that’s what the military has been doing since 1989.

The Section 35 of the 2008 Constitution of Burma enshrined Capitalism by rigidly stating that “The economic system of the Union is market economy system.” The Section 36-C even stated that “The Union shall not nationalize economic enterprises.” and the 36-D guarantee that “The Union shall not demonetize the currency legally in circulation.”

No other constitution has such a watertight guarantee of Capitalism and free markets, except the new Burmese Constitution.

People of Burma especially the military had learnt their bitter lessons dearly from the economic collapses brought upon by the rampant nationalizations and wanton demonetizations during both U Nu and Ne Win eras. And they will never go back to the left whether it is Socialist or Communist or even a popular Social Democratic one.

New Political Order in Burma?

Than Shwe, Maung Aye and Thein Sein.
This 2008 constitution and last year election is the second serious attempt of Burmese military to politically legitimize their gripping hold on Burma. The first attempt was in 1975 when Ne Win drew a new constitution under his BSPP (Burma Socialist program Party) and turned Burma into a fake Socialist nation, but it didn’t work and Burma became one of the poorest countries on the earth.

By taking a page out of Ne Win’s book Than Shwe has established a new political system. The difference this time is the absence of a dictator like Ne Win. What is now clear is that in order to give the new political system a head start Than Shwe has voluntarily retired and taken along with him many troublesome generals like Maung Aye. He even selected a civilian Dr Sai Mauk Kham as one of the two VPs and left his beloved army in the hands of very young and capable General Min Aung Hlaing.

As long as Min Aung Hlaing keeps his powerful constitutional role as the armed-forces Commander-in-Chief under the new civilian hierarchy and strictly follows the 2008 Constitution to the letter our Burma will have a political stability and economic prosperity for many more years to come.  

General Min Aung Hlaing.
European Union is gradually relaxing the economic sanctions and the United States is now worrying about missing the boat and leaving Burma under too much influence of China. DAS Joseph Yun’s and  Senator John McCain’s recent visits to Burma were the proof of that softening attitude toward Burma.

And IMHO the players in the currency markets see the same situations as I see it and draw the same conclusion as mine and they have sent the kyat soaring high. Here is the real life example.

One of my friends working in Singapore had sold his house in Rangoon for kyats 350,000,000 in September last year. The exchange rate then was almost 1,150 kyats and he would have got just over US$ 300,000 if he converted back then. My advice was to keep his kyats in a Rangoon bank and to wait for better rate and he had done just that.

Now his money is worth more than US$ 450,000 and he’s been sending me so many thank-you emails recently. Some Burmese economists are now even predicting 350-450 kyats per US$ as the probable exchange rate by the year end. That was the pre-sanctions exchange rate in 1997-98, if I still remember correctly.

Unlike mad Ne Win who did not even have a grave General Than Shwe one day might have a grand memorial for turning Burma into a semi-democratic capitalist nation like General Park Chung-Hee had done for South Korea.

I honestly believe Than Shwe has pulled a giant rabbit out of his steel helmet. Maybe he ain't a tyrant at all!