Yangon, Myanmar
Mar 5, 2020
By Dr. Alexis Antoniades
After 17 years of inaction, the time has come for the Central Bank of Myanmar (CBM) to cut the deposit rate, and it must do so immediately and decisively.
The coronavirus poses a monumental threat to the economies of all countries, developed or developing, as it disrupts supply chain channels, puts transportation of people, goods, and services on hold, and pushes health care systems, government budgets, and markets order to the brink of failure.
For Myanmar, the adversity of the coronavirus virus is further exacerbated by an already weak financial system and high deposit and lending rates, currently standing at 8% and 13%, respectively.
Why the rates are so high, why they have led to a collapse of credit, a weakening of the banking sector, and a slowdown in economic activity, and why the authorities may have been slow to act is important to analyze, but perhaps at a later time.
What matters now is that the deposit rate in Myanmar is at 8% while the Fed and major other economies are slashing rates.
The CBM must act immediately and cut rates in order to: (i) stimulate the economy; (ii) signal to the markets that they are actively monitoring the situation and they are ready and able to act; and most importantly, (iii) prevent non-resident deposits - also known as hot money -- from entering.
Yes, Myanmar does not want such hot money flying into the country now. They add substantial burden to an already fragile financial system that has to service those deposits with an 8% interest (when there is absolutely no way for any bank in the world, let alone local banks, to make anywhere near that return) and they will destabilize the country later as they exit as fast as they came in.
Indeed, the recent appreciation of the Myanmar Kyat is evidence to this direction. Over the past month the Kyat appreciated by 4% versus the US dollar. Over the past six months it has appreciated by 10%, a period when other emerging countries’ currencies have depreciated.
And as the figure above show, movements in the Fed Funds Rate (FFR) provide a very good indicator for how the MMK moves as it captures the flow of non-resident deposits in and out of the country. When the FFR falls, the case for depositing money with local banks increases, financial inflows accelerate, the demand for the MMK rises, and the currency appreciates.
The 2003 banking crisis has provided both the reason and the excuse for interest rates to be high and constant over the past 17 years. But now, times have changed. High interest rates suppress investment and growth, they lead to higher dependency on foreign imports, and they make it harder for the country to meet the goals set in the Myanmar Sustainable Development Plan.
Unfortunately, the accelerated flow of hot money into the country as we speak provides little time for policy makers, the IMF, and economists to sit back and contemplate what the long-term monetary strategy of the country should be. The banking system is fragile and the Central Bank must act now. An immediate cut of the deposit rate is necessary (but unfortunately not sufficient). Act now before it is too late.
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About the author
Dr. Alexis Antoniades is an Associate Professor, Director and Chair of International Economics at Georgetown University in Qatar. His research focuses on big data, prices, and exchange rates.