Mitigating the Risks of Local Currency Depreciation Against Us Dollars for Petroleum Importing Companiesin Myanmar

...

Myanmar traders imported about 2.3 million barrels between 2010 and 2011, 2.1 million barrels between 2011 and 2012, 2.2 million barrels between 2012 and 2013, 2.4 million barrels between 2013 and 2014, 3.5 million barrels between 2014 and 2015 and 2 million barrels of diesel between 2015 and 2016. Myanmar petroleum importers already imported 1.7 million barrels of diesel from January 2016 to April 2016. The quantity of import of diesel is continuing to increase according to MSR reports.

The gas price changes depend on MOPS MOGAS and Gasoil prices. According to MOPS pricing at 10th March, 2017, one barrel of MOGAS 92 costs USD 61.96, one barrel of MOGAS 95 costs USD 64.6, one barrel of Gasoil 500 ppm (Diesel) costs USD 62.82 and one barrel of Gasoil 50 ppm (Premium Diesel) costs 62.88. One barrel is equal to 48.4848 gallons. 1 gallon is equal to 4.562 Litre. One USD at that time is equal to 1368 MMK. So per Litre cost of MOGAS 92 is 383.21 MMK, MOGAS 95 is 400 MMK, Diesel is 388.53 MMK, Premium is 389 MMK. The import of petroleum is partly affected by the US Dollar exchange rates which is the currency for trading with other countries. The change in government opened up the economy and the implementation of floating currency and increasing demand for imports has led to more trade deficit and weakening of the Myanmar kyat (MMK) significantly against the US dollar. However, investors have nothing to worry about as these are necessary pains that are growing for the rapidly emerging economy, according to the analysts at Standard Chartered Bank.

On April 2, 2012, in place of the “overvalued” currency,Myanmar’s reformed government adopted a managed float for the Myanmar Kyat. The new adopted valuation system is quite similar to China’s, according to a research note published by Standard Chartered.

Before the floating currency valuation, the Myanmar Kyat fluctuated very little, around 6.40 to 6.45 against the U.S. dollar usually. Myanmar had more than a few exchange rates that are unofficial in the exchange market, where the exchange rate is around 830 against the US dollar. The Myanmar kyat was highly overvalued in the year ending March 2011 and 40 percent in the year ending March 2012according to the IMF.

For foreign direct investment (FDI) or for the country’s export competitiveness, the overvalued currency was not very supportive. The change of currency system into a float system came against this problem that will help establish the background for establishing a monetary policy framework for the country, according to Standard Chartered.

Since the float, the depreciation of the Myanmar Kyat against US dollar has received attention from the foreign companies. Dollar to MMK exchange rate was at 1187 at the end of 2012. The depreciation of Myanmar Kyat is not to be concerned about and is only a part of the growing pains Myanmar have to endure as the country’s financial system is developing.

Myanmar’s import quantities are continuing to increasemainly constructional materials, energy, telecommunication related materials and vehicles that are main commodities for developing infrastructure. These are the signs of Myanmar’s growth in economy, according to Standard Chartered. According to Myanmar customs department, the quantity of importation of machinery and transport equipment recorded a 67 percent year-on-year increase in the first quarter of 2013 and is still expected to continue to increase the demand for imports of heavy machinery, construction equipment, infrastructure materials and refined fuel for investment purposes.

The depreciation of currency will continue to increase together with the increase in imports. To offset the depreciation which is effected by trade deficit, Myanmar has to increase the export of its main products, jewellery, natural gas and agricultural products. Still it will take some time to offset the trade deficit and as the imports will sure to be increased significantly in the future, there is no way for the Myanmar currency to appreciate in the future. (Sophie Song,23 July, 2013)

- Statement of problem

The government has introduced macroeconomic and industrial reforms to be in accordance with international practices, making Myanmar one of the most reliable, and vibrant and promising business hub in Asia. Many foreign direct investments are coming into the country and many companies are importing commodities required for the improvements of the infrastructure. Petroleum is one of the commodities required for every developing country in the world. As selling petroleum in gas stations as regarded as the retail, the commodity to sell, Octane and Diesel in this case, has to be bought before selling.

The companies have to have a position before selling in retail gas stations. Depending on the sourcing, the duration of the shipment periods vary from less than one week to 2-3 months. The companies have to pay the shipper depending on the payment terms. These payment terms depend on the stature of the company, the financial history and the credit rating of the companies. Some companies have to pay as soon as the signing of the sales contract and some has to pay cash against the delivery of the documents that are necessary for customs clearance. Some financially healthy companies even get offered with particular financial facilities.

No matter what the terms of payments are given, the payment has to be made before selling in retails for having a position. As the products are imported from other countries, the payments are usually made with international currency, United States Dollar. The problem is that the trend of the MMK against the USD is continuing in go up trend. The petroleum stations sell the petroleum with MMK. Thus, after selling the commodity and buy back USD in exchange for MMK they got after selling locally, they get less USD if compared with the exchange rate they had to buy USD with when they bought the particular commodity. This results in exchange loss which in turn results in reduction of the net profits from income.

- Objectives of the study

The purpose of this paper is for two of these following:

- To identify the factors effecting the depreciation of Myanmar Kyat in Myanmar

- To find the effective solutions for mitigating the exchange loss for petroleum station owned private companies

- Significance of the study

"Petroleum is the most important fossil fuel in the modern industrial world” (Craig, 2001). Petroleum, a base for many types of fuel and lubricants, is