Inflation worries are on the rise

Inflation worries are on the rise

By Aye Thida Kyaw   |   Monday, 15 July 2013

With the kyat declining and a speculative boom in the property market driving up the cost of living, economists warn inflation could spiral out of control

A motorist fills up his car in Yangon. The price of petrol has risen about K30 a litre since late April and is expected to climb further due to the kyat's decline against the US dollar. A commerce ministry official said the price, about K900 a litre, has yet to shoot up because retailers are selling supplies bought when the kyat was stronger. Photo: Staff

Economists are warning that the kyat's near 10 percent decline against the US dollar this year, coupled with a speculative surge in property prices, could cause inflation to spiral out of control.

A weaker kyat is pushing up the cost of imported goods such as fuel, construction materials and raw materials for agriculture like fertiliser, while a real estate boom is also driving up the cost of living, they said.

Sean Turnell, a Myanmar economy expert at Australia's Macquarie University, warned that "asset price inflation" could create a bubble. "This special category of inflation is mostly a function of investor optimism – in other words, of investors speculating that the prices of these assets will increase in the future," Mr Turnell said.

Asset inflation is characterised by prices reflecting speculation rather than fundamentals.

Mr Turnell said this type of inflation appears to be very high in Myanmar but rising prices of consumer goods – currently at about 6pc a year – are "more or less okay", though he added that the kyat's decline against the US dollar could increase inflationary pressure on consumer goods.

Economist U Khine Htun identified fuel and rental prices as the two major drivers of inflation in Myanmar. Rental prices are rising about 10pc every six months, while fuel prices – especially diesel and octane – are dependent on exchange rates because fuel is imported.

U Khine Htun said the central bank will have a difficult time controlling

inflation.

"I don't think the central bank alone can control inflation and ensure price stability," he said.

U Khine Htun also said the government should be cautious about intervening in the market because markets can correct themselves. He added that skyrocketing prices had cooled demand for property.

An official at the Central Bank of Myanmar said that inflation is being monitored to ensure it remains below the savings rate at banks, which is about 8pc.

He also said the current inflation rate is far lower than it was in the past and that property prices though rising had not reached the "bubble stage". He added that property prices will stop rising when they reach their "proper level", saying the opening of the stock market in 2015 will provide another investment option that may reduce speculation in the property market.

Realtors say that speculators dominate the property market to such an extent that reports of plans for new bridges or industrial zones can incite a buying binge. For example, the price of land across the river from central Yangon in Dala township has tripled over the last three months on reports that a bridge will be built connecting it to downtown. Realtors said plots that sold for K1 million earlier this year are now selling for K3 million.

Speculators, usually bank executives or Chinese nationals buying through local partners, are the main buyers, they said.

Andrea Smurra, a Yangon-based economist with the International Growth Centre, said it is too early to say whether inflation will spiral out of control. He is worried, however, about the impact of inflation on petrol, other energy sources and imported raw materials for agriculture such as fertiliser.

"As the currency depreciates, fuel becomes more expensive and a very large range of commodity prices is affected," Mr Smurra said. "Depreciation will make imported gas more expensive, making the subsidy on electricity even more cumbersome on public finance."

He said rising prices of fuel, electricity and rice could transmit inflation through the entire economy. "Depreciation should be kept under control," he said. "Myanmar still needs to import fuel and capital goods in order to be able to grow. If the currency depreciates further, export incentives will be offset by Myanmar's inability to buy commodities [needed to produce exports]."

As of July 12, the kyat was trading at 980 to the US dollar. In early May it was trading at about 920 to the dollar. It began sliding after the Water Festival, rising above 940 by end of the month. The exchange rate stabilised in early June before beginning to slide again in the middle of last month. By the end of June the kyat was trading near 980 to the US dollar.

Source: http://www.news.myanmaronlinecentre.com/2013/07/15/inflation-worries-are-on-the-rise/