BURMA'S DUAL BANKING CRISES: WHO'S PAYING THE

C O N F I D E N T I A L SECTION 01 OF 02 RANGOON 000236 SIPDIS STATE FOR EAP/BCLTV, EB COMMERCE FOR ITA JEAN KELLY TREASURY FOR OASIA JEFF NEIL USPACOM FOR FPA E.O. 12958: DECL: 02/23/2013 TAGS: EFIN PREL ECON BM SUBJECT: BURMA'S DUAL BANKING CRISES: WHO'S PAYING THE PRICE? REF: A. RANGOON 235 ¶B. RANGOON 225 ¶C. RANGOON 214 ¶D. RANGOON 213 ¶E. RANGOON 30 Classified By: COM CARMEN MARTINEZ FOR REASONS 1.5 (B,D) ¶1. (C) Summary: The simultaneous crash of the formal and informal banking sectors in Burma starting February 14 led many to expect the worst. Although day laborers and small depositors have been hit the hardest, thus far calm has dominated. People are frustrated, but not angry enough to take political action. The reasons for this tranquillity are manifold, but primarily revolve around the relatively small role played by the financial sector here as well as the seemingly endless patience of the Burmese people. End summary. Trust in Private Banks is Weak ¶2. (C) With all the concern about the recent private banking crisis, it is important to remember that out of an IMF estimated 1.3 trillion kyat (M2) sloshing through the white, brown, and black markets of Burma, the twenty private banks estimated that they held only 550 billion kyat when the recent crisis hit on February 14. The rest was on deposit with the informal banking sector, out in circulation as cash in the hands of the public, or in the state-owned banks. The result is that the formal banking system in Burma does not have deep roots. Private banking has been available for less than ten years, and many average Burmese have been slow to understand and trust the system. In addition, the GOB's artificial ceiling on deposit rates (10 percent per year) has been a major disincentive to depositors facing inflation rates of 60 percent and higher. Finally, the steady depreciation of the kyat over the past several years (down 315 percent against the dollar since January 2000) has dissuaded private and corporate customers from keeping many kyat assets. One estimate we heard was that 90 percent of the business community keeps little or no kyat (either in the bank or on hand),preferring to change all kyat immediately into gold or dollars, which can be cashed in as need be. ¶3. (C) Those lining up outside banks over the past week are primarily traders, who keep money in the banks for a short time to facilitate transactions or secure access to credit; some private companies who use banks for handling accounts receivable and payroll; and a few smaller depositors who were too honest to invest their kyat in real assets or the informal banking sector, and too nervous of demonetization to keep money under their pillows. Very few of the elite rely significantly on the banking system, instead keeping their money in real estate, autos, dollars, gold, or other rapidly appreciating assets. Pay Packet Comes With Apologies ¶4. (C) The average Burmese is harder hit by the decline of the formal banking sector as a wage earner than as a depositor. Large construction firms, who feast on cheap credit (lending rates are held to only 15 percent per year) to build high-rise apartments and office towers, have had to stop their projects and thus payment of their day laborers. Likewise, many factories and other firms that had been using the private banks have been unable to pay their day laborers since last Monday the 17th, and are fearing the end of the month's larger payroll obligations. The Meek Shall Inherit One Percent a Month, Maybe ¶5. (C) Though wage earners may suffer if the private banks are not liquid by week's end, many are already under pressure due to the nearly simultaneous crash of the 250 billion kyat informal financial sector. An estimated 100,000-200,000 depositors, many pensioners or other naive investors who were taking advantage of the "too good to be true" rates available at these shadow banks (described in Ref E),lost their shirts when these nineteen institutions crashed. There were rumors that many of the elite, and several of the private banks, were also involved with these informal banks. However, the numbers are not likely high enough for this shady sector's demise to unhinge society here. ¶6. (C) The future is uncertain for the legions of depositors caught up in the informal banking crash. Apparently the GOB has seized the assets of the shadow banks and has formed a "Liquidation Committee" to sell off the properties and ostensibly use the proceeds to repay depositors. However, there has been no public announcement of the Committee's exact intentions or any timeline. One or two of the larger informal banks have also announced that they would continue to add interest (at one percent a month) to their depositors accounts, for a lump payout sometime in late 2003 or early ¶2004. None of the bankers or businessmen with whom we spoke believes this tale, however. 1987 Revisited? ¶7. (C) The jury is still out on who will be hit hardest by the latest economic fiasco. Many businessmen now are effectively whistling past the graveyard, but, with the GOB talking about liquidation proceedings for the real assets accumulated by the informal financial institutions, the prospects for any further speculative gains on real property has to be limited. The private banking crisis might also feed some agitation if workers miss their monthly pay, and day laborers go into their second week without wages. However, widespread unrest still seems unlikely for three reasons. ¶8. (C) First, people are more diversified than they were during the demonetization of 1987 but, more importantly, the demonetization of 1987 destroyed the value of the most commonly held financial asset in Burma -- the kyat. In contrast, this 2003 crisis has actively boosted demand for and the value of kyat, as individuals have built up precautionary and transactions balances in their homes. The government's rescue plan hinges on extending collateralized loans to the troubled private banks. If banks repay these loans, and the government retires the money when it's returned, the long term impact of the crisis may ease inflation and stabilize the kyat primarily through the destruction of the uncontrolled credit creation system run by the informal banking institutions. These played a larger role than initially suspected in the country's recent lurches toward hyper-inflation and the sharp depreciation of the kyat. In short, people may have difficulty gathering access to their deposits now, but there is hope that the kyat they do get will have more lasting value, or at least will depreciate more slowly than in recent years. ¶9. (C) Secondly, who can complain about losing money in blatantly illegal Ponzi schemes (which is effectively what the informal financial institutions were)? The GOB could have acted sooner, and more methodically, to curb the speculation through these companies, but investors knew they were taking awful risks in hopes of awesome gains. ¶10. (C) Finally, the Burmese people are patient. Despite one or two rock-throwing incidents, as the crisis unfolded on February 17 and 18 most customers dispersed peacefully with nothing but assurances from their bankers that at least some money would be available if they came back "next week." For the average Burmese bank customer, so far, that has been enough. Martinez