BURMA: BANKS AND CONSTRUCTION BOOMS, A BAD MIX

C O N F I D E N T I A L SECTION 01 OF 02 RANGOON 001557

SIPDIS

STATE FOR EAP/BCLTV, EB/IFD
COMMERCE FOR ITA JEAN KELLY
TREASURY FOR OASIA JEFF NEIL
CINCPAC FOR FPA

E.O. 12958: DECL: 12/05/2012
TAGS: EFIN EIND ECON BM
SUBJECT: BURMA: BANKS AND CONSTRUCTION BOOMS, A BAD MIX


Classified By: COM CARMEN MARTINEZ FOR REASONS 1.5 (B,D)


1. (C) Summary: The puzzling construction boom, continuing in
Rangoon despite the dismal economy and an unclear demand, is
being fueled by speculation by builders and investors.
Unfortunately for the economy, private banks have not learned
the lessons of Japan and are throwing caution to the wind in
their financing of economically questionable construction
projects. With their loan portfolios already grim, many of
these private banks could be wiped from the map if and when
the Central Bank ever takes steps to bring credit under
control. End summary.

Paving Paradise


2. (SBU) Even in the midst of the country's economic crisis,
the construction industry in Rangoon is still relatively
active. The newspapers regularly report on shining new
office or apartment complexes, and bamboo scaffolding is
evident on every block. Part of the SPDC's drive to have a
"modern and developed" city is to make prime land readily
available for development. These plots, owned either by the
Office of the Prime Minister's Yangon City Development
Council (YCDC) or the Department of Construction's Human
Settlement and Housing Development department, are put out
for bid. Interested construction companies (or consortia)
negotiate with the owner for the right to build. The firms
offer the respective government agency an equity share
(usually 30-50 percent of the space) in exchange for a
renewable 60-year lease. The winning firm need not make any
official payments to the government in exchange for the
construction rights. However, informal payments and close
connections with key government officials, especially
Secretary-1 General Khin Nyunt, are invaluable.

SIPDIS


3. (SBU) Many of the largest construction firms are part of
keiretsu-style integrated holding companies that include a
major private bank. In addition, lending rates, set
nationally by the Central Bank of Myanmar are about 15
percent -- well below annual inflation rates. Thus it is not
surprising that construction firms rely largely on bank
financing for their projects. Financing is possible through
the pre-sale of apartments and office space. Banks assist in
this as well by offering generous loans to potential
renters/buyers.

If You Build It, Will They Come?


4. (SBU) Members of the country's largest construction
industry association told us that business is good because
demand for new housing and office space continues to be very
high. They asserted that rapid construction of new
apartments is being pushed forward by Rangoon's population
growth. (Note: This seems unlikely as the vast majority of
Rangoonites cannot afford the luxury apartments or offices
constructed by these firms.) The builders said that in
addition, wealthy business people and high-ranking officers
are buying many of the new apartments, condos, and offices as
a hedge against a plummeting kyat.


5. (SBU) There is no question that real estate is now viewed
as the hedge of choice in an economy where anyone who can
afford to keeps their kyat holdings low. However, it seems
unlikely that the minuscule upper class (even purchasing two
or more units as pure investments) could support ongoing and
planned construction. An independent economist following the
construction sector said that construction firms are also
speculating, taking out cheap kyat loans and putting the
money into something more solid, even without reliable demand
projections. Also, he noted, these construction firms were
taking their time in building, trying to whip up demand for
their "exclusive" properties along the way.

Banks Rolling the Dice


6. (SBU) As long as the government is eager to develop prime
downtown locations, construction firms can get unlimited
cheap loans, the kyat continues its decline, and the Rangoon
glitterati view real estate as a solid investment, the
construction bubble should continue to inflate despite the
economy's problems. However, the participation in this boom
of many of the nation's private banks could be edging them
toward a Japan-style banking crisis. All the signs are
there: an industry building excessively expecting the market
to remain high, unfettered bank lending to companies based on
personal connections rather than objective analysis of future
income potential, and collateral in real assets priced at
their inflated value. The private banks here already suffer
from poor management, high reserve requirements, irrational
government-set lending and deposit rates, and high
non-performing loan portfolios. A fall in real estate
prices, or a credit crunch imposed by the Central Bank, could
quickly ruin these banks by dumping on them an immense
additional burden of bad debt.


7. (C) Comment: The question, then, is not whether the
private banks that binged on real estate will collapse, but
what the impact of their collapse will be. The immediate
impact on society will not be great. Certainly the
construction industry and a few other sectors dominated by
private firms will suffer from a reduction in their
free-flowing capital. However, the formal private banking
sector in Burma is still small relative to the entire
economy. Most individuals and most businesses will get by,
as they do now, without significant bank loans or deposits.
Few would suffer if some private banks went bad. Longer
term, though, the effects would be more pronounced,
particularly if the Central Bank bails out failed banks by
essentially printing money. The net result then could be a
de facto mass nationalization of the banks and another huge
setback for hopes of financial and economic reform. End
comment.
Martinez