Home Insider Potential Liquidity Crunch in the many economy

Potential Liquidity Crunch in the many economy

There are number of measures which have been introduced and/or are being considered by authorities in the country which all need to be monitored by the Myanmar authorities as they could have serious unintended consequences on the economy. The first is the renewed vigor in requiring property purchasers and investors (initially it was only the former) to show proof of “white money.” Another mea- sure is that a “list price” for property trans- actions, which is used for tax purposes, has been introduced.

Economic decision making across coun- tries and throughout history has often been complicated by what is “right” versus what is economically efficient and practical. An example of the former is that big global banks which committed serious breaches in lending and speculation should be allowed to fail. But, we see governments bailing out many such banks time and time again, and the reason is that if these banks go belly up, their economies would suffer even more.

In a similar way, the Myanmar authori- ties’ posture on “white money” is laudable from the angle that it is intended to prevent ill-gotten money from being recycled and compelling individuals and companies to pay the right amount of taxes. However, if these measures are pursued in an unbend- ing way, they will likely only encumber the circulation of the stock of accumulated saving in the economy and lead to many unintended consequences.

In the past , the population in general had used gold, US dollars, cars and property as stores of value. As we know, no one is now using cars as a store of value as prices have collapsed with the increase in the supply of import licenses. Gold is still used, but with gold prices having fallen by 30% from its peak, there is less enthusiasm for saving it in this form. Individuals now find it chal- lenging to use their accumulated savings to purchase property as they will not be able to prove that their accumulated savings consti- tute “white money,” (indeed, how many have paid taxes in the last 30 or more years?) as many of them stashed their US dollars and gold under the mattress given that they did not have much faith in banks. Furthermore, if the list price by the tax department for apartments and condominiums is imple- mented, the general population (and this excludes the well-off) will be reluctant to forfeit a huge proportion of this hard-earned savings from the tax incurred.

In short, the US dollar is becoming the only medium of savings and wealth preservation. First, this will lead to a dangerous weaken- ing of the Myanmar Kyat, and this has al- ready started to happen. The weakening of the Kyat will mean that the cost of living and inflation will rise and exacerbate the income gap within the population. This is not some- thing that the government would want in an election year. Second, there is the risk of an acceleration of capital flight from the Kyat. Once this happens, it will become extremely difficult for the central bank to regain con- trol of the Kyat exchange rate. One possible response would be to raise interest rates to punishingly high levels to attract people to hold onto the Kyat. This would basically devastate the economy. Another would be to impose capital controls, but this would have a damage investor confidence at this crucial point of Myanmar’s reintegration with the global economy.

Third, as traders and consumers gravitate more to the US dollar as a benchmark to buy or sell goods, the economy will steer away from a Kyat-based economy to a US dollar one (witness Cambodia) in the medi- um term. This leads to a long term damage to the ability of the central bank to control the interest rates and exchange rates of the economy, and leaves the country vulnerable to the winds of US Federal Reserve policy making.

Aside from the above, there is something else that is even more ominous in the short to medium term — the circulation of money in the economy will slow sharply, and the cash flow of many businesses will deteri- orate. This is especially true in the area of property development. Property developers, especially the smaller ones, will see a sharp fall in sales of their units. This will result in serious cash flow problems, and they will not have the funds to complete their proj- ects. Purchasers of the units in these devel- opments will have the money stuck in these projects. Ironically, the “white money” and property list price policies will not help to bring down property prices. As small prop- erty developers go bankrupt, the net supply of condominiums and apartments will fall. Furthermore, those people who are still able and wiling to buy apartments will only seek completed or nearly completed units, and because there is scarce supply of these, the prices of these will rise even more.

Lastly, and perhaps this is the most ineq- uitable consequence, is that the small local investors, developers and property purchas- ers will be the ones who will be most disad- vantaged. Foreign investors, by and large, will not be burdened by “white money” issues. The biggest local investors will also have avenues to “round-trip” their invest- ments back into Myanmar through vehicles and companies set up offshore.

In sum, there could be many unintended consequences from the measures that the

Myanmar authorities are implementing and seriously considering. If the problems alluded to emerge, the Myanmar economy could face a severe liquidity crunch. Money circulation basically oils the wheels of the economy. With a slowdown of funds being recycled and circulated, the central bank will also find it difficult to inject liquidity into the economy as the banking sector is not ready to gear up lending. There is there- fore the risk that the economy will slow- down visibly.

Date: 9h Jan 2015

(Dr Wong Yit Fan was a senior economist for the central bank in Singapore in his earlier career. He was also the Chief Econ- omist for South East Asia and Indochina for Standard Chartered Bank for 10 years in the 1990s. His last post, which ended in March last year, was Chief Representative for Jardine Matheson in Myanmar.)