UPDATE 2-Myanmar's central bank aims for weaker currency
* Managed float was introduced in April
* Currency has surged as resources investment has come in
* Much more foreign investment coming as sanctions eased
* Foreign banks to be allowed to form joint ventures
By Jason Szep and Aung Hla Tun
NAYPYITAW, Myanmar, May 18 (Reuters) - Myanmar's central bank wants to weaken its newly floated currency and prevent further rises that could derail reforms to its economy, a deputy central bank governor said.
Nay Aye, one of two deputy governors, added that foreign banks will be able to form joint ventures in Myanmar by 2014, a year earlier than expected, as foreign investors begin to size up one of Asia's most promising frontier markets following the suspension of U.S. and European sanctions.
April's floating of the currency, the kyat, was the biggest economic policy step in a year of dramatic change. Managing the kyat poses an extraordinary challenge for reformers struggling to rebuild an economy blighted by decades of mismanagement and hurt by trade-crippling sanctions.
The International Monetary Fund cautioned in a report this month that the kyat had been overvalued by as much as 40 percent this year, and that any further rise could hurt the economy.
Asked if he would like to bring down the currency's value, Nay Aye said "yes", noting the central bank was developing a fund for carrying out open-market operations and stabilising the currency.
"In the near future there will be a massive inflow of foreign direct investment, and as a result Myanmar's kyat is expected to appreciate. We will do our best to prevent this," he told Reuters in an interview.
Currency reform is a delicate task in Myanmar. In 1987, the sudden cancellation of certain banknote denominations by late dictator General Ne Win wiped out many people's savings and helped trigger a pro-democracy uprising the following year crushed by the military, killing thousands.
But much has changed since then, signified by this month's swearing-in of pro-democracy leader Aung San Suu Kyi in a parliament stacked with some of the same generals who locked up the Nobel Peace Prize winner for much of the past two decades.
President Thein Sein, a reformist former general, has urged parliament and his cabinet to pursue the most breathtaking reforms in the former British colony since a 1962 military coup when it was known as Burma.
These include the freeing of hundreds of political prisoners, an easing in media controls and peace deals with groups of armed ethnic minorities.
Nay Aye said a new foreign currency management law that would further lift trading restrictions on the currency had been approved by parliament and would be enacted soon, making it more freely traded and further curbing the black market.
The managed float of the kyat was intended to unify a chaotic array of informal exchange rates that had surged in value from more than 1,000 per dollar in 2009 as money flowed into the timber, energy and gem industries, mostly from China.
The central bank now sets a reference rate after a daily currency auction involving 17 dealer banks, a first step towards developing a formal interbank market. The reference rate was 835 kyat per dollar on Friday, compared with 818 on April 2, the first day of the managed float.
Exporters say those levels make their goods uncompetitive.
ACCELERATING BANK REFORM
Speaking at the central bank's headquarters in the capital, Naypyitaw, Nay Aye added that foreign banks would be allowed to form joint ventures in Myanmar from 2014, a year before Southeast Asian countries are expected to formally integrate their economies.
Despite a year of wide-ranging political reforms, Myanmar's government has been slow to revise laws on the growing number of foreign banks clamouring to tap the country of 60 million people, whose natural gas, minerals and other resources make it one of Asia's most tantalising new markets.
As the United States and European Union lift economic sanctions, foreign banks remain limited to representative offices that can do little more than conduct research.
Nay Aye said in 2014, banks from countries in the 10-member Association of Southeast Asian Nations (ASEAN) will be allowed in, with banks from other countries following afterwards. But the central bank is seeking to change regulations to allow foreign banks from elsewhere to form joint ventures in 2014.
"The ASEAN integration process requires allowing qualified banks from ASEAN to open branches in the country with effect from 2014. We are doing our best to be able to fulfil this requirement," Nay Aye said. "Especially we are thinking of allowing joint-ventures with foreign banks and branches of foreign banks."
"This is something we have to carry out after laying down firm rules, regulations and procedures," he added. "At the first stage, ASEAN banks will be allowed under ASEAN financial integration process and at the second stage banks from other regions beyond ASEAN."
Myanmar is a member of ASEAN. In 2015, the group is scheduled to form an EU-style economic bloc to lower barriers to the flow of people, products and, to some extent, capital across its borders.
In its report this month, the IMF said accelerating the modernisation of the financial sector was essential to prepare for economic integration in 2015.
But it also noted the authorities' worries about capacity constraints, in particular a lack of experienced local bankers: "They preferred a gradual liberalisation, indicating that many domestic banks are not ready for price competition, notwithstanding the need to prepare for ASEAN integration."
Dozens of local and foreign banks thrived in the 1950s. But the industry withered after a 1962 coup introduced a disastrous "Burmese Way to Socialism" and sweeping nationalisation.
In 1988, the country's former military rulers reintroduced a market economy. Soon after, in 1992, private banks were allowed and foreign banks began opening representative offices. There were over 40 at one point but only 18 are open now.
Decades of dictatorship and the brutal suppression of pro-democracy activists brought layers of U.S. and European economic sanctions. Concerns over money laundering from the drug trade - Myanmar is the world's second-largest opium producer - eventually quarantined the financial system.
In 2003, shady money-lending practices caught up with the sector, sparking a crisis exacerbated by inept decision-making at the central bank. Three banks collapsed.
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