The government’s second strategy for macroeconomic stability focuses on the exchange rate, and includes moving forex reserves from state-owned banks to the central bank.
The first action plan is the gradual transfer of forex reserves held at state-owned banks to the national reserves at the central bank. This will reduce net open positions at state-owned banks to “no more than around 20%”.
We note that the CBM issued Directive No. (6/2019) last year, lowering the maximum ceiling for a bank's net open position from 30% of core capital to 20%. As such, this action would seem to simply ask that the state-owned lenders obey the same regulation as the local lenders.
The state-owned banks need to hit this 20% level by Q2. This may take time as, historically, the state-owned lenders have been heavily reluctant to give up forex holdings.
For example, it took several years before state-owned lenders agreed to return dollars it was holding on account for local commercial banks.
The second action plan is that during this planned reduction in net open positions at state-owned lenders, the banks will consider transferring forex reserves among themselves to balance their long and short positions and “enable them to participate more actively in the FE [foreign exchange] interbank market”.
This seems to us slightly optimistic, as the state-owned banks’ record of mutual collaboration and exchange is poor.
The third action plan is to strengthen the CBM’s exchange rate intervention mechanisms to increase the country’s forex reserves, while also “preventing competitiveness-sapping currency overvaluation”.
We note that the CBM has been making large purchases of dollars recently as the kyat strengthens against the dollar. Commentators have noted that the stronger kyat poses an issue for exports.
The fourth action plan will see the regulator “consider” the possibility of currency swap auctions to channel forex through the CBM between banks that have an excess of forex or not enough.
The interbank forex market has improved in recent years, and functioning swap actions would be a useful addition.
The CBM will issue regulations and standard operating procedures on currency swap auctions by Q2.
Finally, the CBM will establish an interest rate corridor where the interest rate it pays banks on excess reserves is the floor and the rate on the existing discount window facility is ceiling.
The CBM will issue regulations and instructions on the interest to be paid on excess reserves issued by Q2.
