Monday, November 19, 2012

Burma’s Rate Cut Looming as Carry Trades Explode!

Mountain of Burmese Kyats.
Burma’s inflation is only 2.82% but the Union Bank’s benchmark interest rate is 10%. And the businesses and banking experts and economists are calling the Union Bank to reduce the benchmark rate as many businesses are facing tough environment for their long term survival amidst explosively growing carry trades.

According to the banking experts current inflation rate is much less than 3% and Burma desperately needs to reduce the high interest rates. Dr. Khin San Yee, the deputy union minister for the National Planning and Economic Development Ministry, said on November 5 that the inflation rate on 2011-2012 financial year was only 2.82%.

At present the benchmark interest rate by the Union Bank of Burma is 10% and the rates used by the commercial banks are 8% deposit rate and 13% lending rate.

Foreign Investment & Exploding Carry Trades

Since foreign investment law was passed by the Burma’s Parliament recently many foreign investors are preparing to enter Burma and the local businesses need more capitals at lower interest rate so that they can effectively compete with the foreign investors.

Carry Trade Explained?
At the same time many businessmen from countries like Singapore and Thailand are happily exploiting the relatively higher interest rate of Burma compared to their home countries.

They borrow huge amount of money from their home banks at lower rates and deposit into Burmese banks at higher rates. And they have been pocketing the interest rate differential from these money shifting trades widely known as the Carry Trade.

“The businessmen coming here from the countries with lower interest rates are massively profiting from their carry trades without lifting a finger. They borrow money from their banks and deposit that money at our banks and make money from the rate differential between two countries.

And it has been going on for ten - fifteen years since well before we have democracy. Our interest rate has been always higher than the neighbouring nations. We really need to bravely cut our rates. Why are we still giving free money to the foreigners?” said frustrated U Than Lwin the advisor for the Finance and Revenue Ministry.   

Exploding carry trades due to near-zero
US interest rates.
According to the banking experts foreign investors have many advantages over the local businesses as the foreigners already have long-term tax-exemptions, modern infrastructure and manufacturing processes, ready access to international markets for their products, and the Carry Trade opportunities, and all these unfair advantages could easily cause the wholesale collapse of local manufacturers.

Retired professor Dr. Yee Yee Myint from the Institute of Economics also concluded that despite the good economic transformations going on in Burma because of the economic reforms carried out by the present government there still are weaknesses in exchange rate stability and economic development management.

She also added that it is extremely important to give the central bank, the Union Bank of Myanmar, a fundamental independence so that it can effectively manage the nation’s monetary policy which primarily constitutes managing interest rates, selling bonds, managing total public debts, and managing foreign exchange rates.

Present government did cut interest rate twice on September 1, 2011 and January 1, 2012. Basically interest rates are cut during the time of lower inflation and economic downturns, and raised during higher inflation and economic upturns.

And the interest rate plays by the governments or the central banks always have beneficial effects on the direct investment, employment, and national income (GDP).

“In last 2010-2011 financial year the inflation was more than 8%, but the inflation this year is only around 3% and the rates should be reduced. Interest rate should not be too much more then the inflation rate. There is enough room to cut the rates drastically. In my opinion the deposit rate should be 6% and the lending rate should be 10%,” said clearly a banking-expert member of the Advisory Council for National Economic and Social Welfare.

A Carry Trade involving selling US$ and buying AU$.

But Maung Maung Win, then the vice-chairman of Burma’s central bank and now the director-general of the National Budget Department, said at the Financial Services Workshop held in last September that the inflation was still around 5% and the interest rate should not be lowered.

According to Aye Aye Win, an assistant-director from the Small and Medium-sized Industrial Development Department of Industry Ministry, they were preparing to lower the lending rate from current 13% down to 8.5% so that the domestic producers could be competitive among the ASEAN nations in the export markets.

Followings are the comparative rates (central bank’s benchmark rate – deposit rate – lending rate) of Burma and other countries.

Malaysia:         3%, 2.97%, 4.77%
Singapore:       0.17%, 0.14%, 5.38%
Philippines:      4%. 3.07%. 5.95%
Thailand:         3%, 2.63%, 7.13%
Indonesia:       5.75%, 5.89%, 11.78%
Vietnam:         13%, 12%, 14.7%
Cambodia:       5.25%, 6.1%, 17%
Laos:               5%, 3%, 22%
Korea:             1.5%, 4.01%, 5.71%
China:              6%, 3%, 6%
Japan:              0.3%, 0.49%, 1.42%
Bangladesh:     5%, 10.03%, 13%
India:               9%, 8%, 10%
USA:               0.125%, 0.0%, 3.25%
UK:                 0.5%, 0.0%, 0.5%
EU:                  0.75%, 0.00%, 1.5%
Russia:             8%, 5.2%, 8.9%
Burma:             10%, 8%, 13%

Following is the historical timeline for Burma’s interest rate changes.

1-9-1989:         11%, 8%, 17%
1-1-1995:         12.5%, 10%, 16.5%
1-4-1996:         15%, 12%, 21%
1-4-1999:         12%, 12%, 17%
1-4-2000:         10%, 10%, 15%
1-4-2006:         12%, 12%, 17%
1-9-2011:         12%, 10%, 15%
1-1-2012:         10%, 8%, 13%

(Source: Union Bank of Myanmar)