C O N F I D E N T I A L SECTION 01 OF 02 RANGOON 000430

SIPDIS

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

E.O. 12958: DECL: 04/06/2013
TAGS: EFIN ECON PGOV BM
SUBJECT: WILL BURMA'S BANKS SURVIVE? SIGNS POINT TO NO

REF: RANGOON 365 AND PREVIOUS

Classified By: COM Carmen Martinez for Reasons 1.5 (B,D)


1. (C) Summary: Another payday passed without incident on
March 31, but that does not mean that all is well in Burma.
The banking crisis continues grimly on, with increasing
negative spillover into the general economy. Though bankers,
borrowers, and businesses are begging for mercy, government
policies have thus far only exacerbated the pain. The GOB's
objective is uncertain; it may simply want to clear out some
bad banking operations. Alternatively, it may be aiming for
some more general government takeover of the private banking
sector. End summary.

All Quiet on the Industrial Front


2. (C) Another payday came and went on March 31 without
disturbance. Industrialists and bankers with whom we spoke
said that for the most part workers were paid at least part
of their salary through a patchwork of short term measures.
Those with a steady income (such as garment exporters) had no
problem, others continued selling off dollars or other assets
(at depressed prices) and/or borrowing privately from
cash-rich firms to make ends meet. In other cases factory
owners had to beg forbearance from workers, extending only
25-50 percent of employee salaries. Some bankers reportedly
tried to open their coffers to large private corporate
customers to help them meet their responsibilities, but were
rejected by the GOB's banking "oversight" committee, the
Private Bank Management Committee.


3. (C) All were adamant, though, that another peaceful payday
is no indication that the banking crisis is resolved or that
the economy is back on track. Private banks are still
restricted by fiat from offering more than 100,000 kyat
(about $110 at current rates) per week to each depositor. As
a result, kyats remain in short supply as businesses and
others hoard whatever kyat they have pending a return of
economic confidence and liquidity to the market. Reflecting
this, the kyat/dollar rate has settled at about 900, despite
a brief uptick in dol

lar value in the week ending March 21st
due to the government's biannual international gem auction.

Bankers or Victims?


4. (C) The regime's major policy thrust continues to be
forcing borrowers to repay 40 percent of their outstanding
loans by April 30. In only the second GOB statement on the
banking situation since it began, Secretary One, General Khin
Nyunt, told the Union of Myanmar Chamber of Commerce and
Industry on March 29, "in consideration of those who had
deposited money in the banks, in the long-term interests of
the banks, and to strengthen the national economy, those who
have taken loans from the banks should try to repay the debts
speedily." Bankers report that they, with assistance from
Military Intelligence, have been somewhat successful in
getting borrowers to return money, but that not all companies
are able to meet the requirement. However, bankers assert,
this approach is killing their customers. It may help settle
their obligations to depositors, but in the end, banks,
businesses and individuals will all go under collectively.
Corporate borrowers complain that the demand for loan
repayment, the lack of new credit, and the general economic
doldrums, have frozen their production and eroded profits.


5. (C) On top of this, according to several bankers, some of
the private banks are no longer accepting new deposits. It
is unclear whether this is due to a new directive from the
Committee, or whether private banks are interpreting broadly
a previous order to cease offering so-called "special
deposits" (deposits whose total value the banks would
guarantee). Whatever the case, while loan repayments will
keep up with demand for withdrawals for now, a cut-off of new
deposits, combined with existing prohibitions on extending
new credit, will slowly starve the banks to death.


6. (C) Though the origin of this new policy is debatable,
bankers and economists are predictably blaming the
government. They argue that the SPDC is intentionally
softening up the largest private banks for future liquidation
or merger with either a government bank (namely Myanmar
Economic Bank) or one of the two military-run banks (Innwa
Bank and Myawaddy Bank). The rumor mill's money is on the
relatively young and agile Innwa Bank (run by the Myanmar
Economic Corporation (MEC)) as MEC's Chairman, Quartermaster
General Lieutenant General Tin Aung Myint Oo, is now in
charge of the Private Bank Management Committee. Experts
estimate that at current rates of repayment and withdrawals,
private banks can last another one to six months before they
go under.

GOB's Rose-Tinted Glasses

7. (C) Though the current economic problems are clear to
economists, bankers, and businesspeople, the GOB sees it
differently. The new Minister of Finance (a general whose
previous area of concern was ordnance production) recently
told one highly placed source that the strengthening kyat,
deflation of the asset bubbles, and the stabilization or
decline of prices of many consumer goods prove that the GOB's
response to the banking situation has been just what the
doctor ordered. Bankers tell us that this same "tough love"
sentiment pervades nightly Private Bank Management Committee
sessions.

The Blame Game Continues


8. (C) The government's position has always been that private
bankers got themselves into this mess and can damn well get
themselves back out by calling in the speculative investments
and insider loans that seem to have characterized private
banking in Burma. In econspeak, one might say that the
government is sensitive to the moral hazard that would emerge
from too precipitous a bailout of some of the larger private
banks. Bankers themselves, of course, see things
differently. They point to the antecedent conditions under
which they were obliged to operate, while implicitly asking
whether there was any other way to make money in banking when
deposit and lending rates were capped at levels 5000 basis
points below inflation. Both sides are of course right, just
as both sides were originally wrong in their behavior. Right
now, however, sorting out who was right and who was wrong is
not nearly as important as containing the crisis' infection
of the rest of the economy.


9. (C) The fact is, however, that the government's approach
has thus far only worsened the liquidity crunch. While the
regime's actions have produced some unintended benefits in
reducing general inflation and popping the asset price
bubbles that had grown up in recent years, it has also placed
most businesses under extraordinary pressures. So far, the
government seems to believe that only a few of the largest
private banks will go down, when all is said and done, and
that state and military-owned banks will be able to pick up
the slack. However, there are no firewalls between the
private banks and the government-run institutions. Moreover,
government-owned banks will almost certainly be far less
inclined than their private sector competitors to seek out
non-government borrowers, depositors, and business
opportunities. While the economy could undoubtedly do with a
more restrained credit-generation machine, an expansion of
the government banking sector will most certainly chill the
overall economic environment, push more of the economy
underground, and set back Burma's meager economic development.


10. (C) In short, the government here is playing a high-risk
game. It may be right. We haven't seen the loan books of
any of these banks, and can't really say if the GOB is
justified in coming down on them so hard. However, we can be
certain that if the regime is wrong, the entire Burmese
economy will pay a heavy price for the SPDC's mistakes.
Martinez