Identifier
Created
Classification
Origin
03RANGOON560
2003-05-08 09:53:00
CONFIDENTIAL
Embassy Rangoon
Cable title:  

BURMA'S BANKS: THE BEATDOWN GOES ON

Tags:  EFIN ECON PGOV BM 
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This record is a partial extract of the original cable. The full text of the original cable is not available.
C O N F I D E N T I A L SECTION 01 OF 02 RANGOON 000560 

SIPDIS

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

E.O. 12958: DECL: 05/07/2013
TAGS: EFIN ECON PGOV BM
SUBJECT: BURMA'S BANKS: THE BEATDOWN GOES ON

REF: RANGOON 430 AND PREVIOUS

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

C O N F I D E N T I A L SECTION 01 OF 02 RANGOON 000560

SIPDIS

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

E.O. 12958: DECL: 05/07/2013
TAGS: EFIN ECON PGOV BM
SUBJECT: BURMA'S BANKS: THE BEATDOWN GOES ON

REF: RANGOON 430 AND PREVIOUS

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


1. (C) Summary: The future is not clear, and certainly not
bright, at end of the second full month of the Burmese
banking crisis. The banks' restrictions on withdrawals are
still in place as are orders that banks recover outstanding
loans. Bankers continue to speculate on mergers and
bankruptcies, though none have yet gone under. Companies'
ability to muddle through, and the resurgence of the
underground financial system, have managed to contain the
economic spillover in the short term. However, the absence
of effective private banks will constrain long-term growth
and may hinder future economic reforms. End summary.

The End is Nigh?


2. (C) Bankers and businessmen are more certain than ever
that the private banking system is finished. During the
month of April the government remained silent on the banks'
problems and made no move to lessen controls on the banks or
use Central Bank funds to improve liquidity. Withdrawal
limits also remained at 100,000 kyat (about $100) per week
per depositor, and new deposits were negligible, because of
low public confidence in the banking system, and the
government's refusal to sanction special treatment for new
depositors. The GOB's Private Bank Management Committee
continues to meet nightly, requiring all private banks to
submit records of that day's withdrawals, deposits, and loan
repayments.


3. (C) For the second month in a row, the private banks,
under order from the Bank Management Committee to bring in as
much as 70 percent of their loans by the end of April, are
leaning on their borrowers (with the help of Military
Intelligence) to repay as much, and as quickly, as possible.
The Committee seems to be focused primarily on the larger
banks, like Yoma Bank, AWB, and KBZ Bank, which had the vast
majority of outstanding (and likely rotten) loans, and which
were recipients of Central Bank advances at the start of the
crisis. However, even the smaller banks are under pressure
from the authorities, and from their own deteriorating bottom

lines, to call in what they can.


4. (C) Despite this pressure, large and small bankers tell us
that they had little success meeting their April objectives.
One banker blamed a continuing slowdown of the economy, plus
the general need for cash around the Burmese New Year
festivities (April 13-17),for the sluggish recouping of
loans. On top of zero deposit growth, the slowing of loan
repayments has led to worsening cash positions in April for
the banks with whom we spoke.

Industry Continues to Limp Along


5. (C) On the bright side, it appears that the majority of
employers met payroll again in April. So far it appears that
banks are willing (with Committee approval) to open their
safes for large corporate customers. The Union of Myanmar
Federation of Chambers of Commerce and Industry (UMFCCI)
reports that none of its members is complaining about an
inability to pay workers. According to one banker, the Bank
Management Committee has been very willing to approve
requests for withdrawals over 100,000 kyat for emergencies
such as payroll and tax payments. However, the Committee
reportedly often authorizes only 50-75 percent of the amount
requested.


6. (C) Though it is too early to make any confident
assertions, there are some signs that the liquidity crisis
may be easing, at least so far as the real economy is
concerned. Apparently, enough cash has returned to
circulation to restart some commerce, raise some asset
prices, and fund a measure of capital flight. In any event,
beginning in mid-April, the price of the dollar and some used
cars started to creep back up (the dollar gaining 8 percent
on the kyat after declining nearly 20 percent in February and
March). We give credit to the already large informal banking
network in Burma, which was able to take over a portion of
private banks' lending, payment, and remittance activities.
Banking, in short, hasn't so much died in Burma as just gone
partially underground.

What's the Plan?


7. (C) Private bankers argue that the GOB's policies seem
designed to bankrupt the private banks or force them into
mergers with their state or military-owned counterparts.
Some even hint that the GOB might move at the end of May,
when 100 percent of outstanding loans are ostensibly due for
repayment to the largest banks. However, an official in one
of the country's larger banks said that at the current rate
his bank could survive another 2-3 months before giving up
the ghost. An official at a smaller private bank said that
his institution could last at least through September.

8. (C) The government itself has been silent on its plans.
Nevertheless, it may view its actions as simply a prudent way
to squeeze speculative excesses out of the economy and hold
bankers accountable for their previous misdeeds. The
relatively quick deflation of asset bubbles, and stable
consumer prices since the regime began its tough-love
strategy are taken as proof by top GOB officials that this
type of approach has been effective in dealing with the
banking problem while protecting the country's economic
situation.

Comment: "Bankers" or "Banking" Crisis?


9. (C) For all the dire predictions of disaster that
accompanied the initial run on the banks and the decision to
limit withdrawals, the Burmese economy seems to be coping.
Trade continues, most retail prices have stabilized, and
payrolls are being met -- though some large construction
projects have stopped. In part this is due to the cash-based
character of the Burmese economy. Few people ever used
banks; the 550 billion kyat in recorded deposits at the
private banks in fact was only one-third to one-quarter of
estimated total money in circulation. The underground honti
exchange system has also been able to step up to provide a
ready substitute for at least a portion of the private banks'
payment services. More expensive and less reliable than
private banks, the honti system is nevertheless available
everywhere in Burma. Finally, the net value added by private
banks to Burma's economy had declined in recent years as the
banks, faced with ever expanding inflation and debilitating
government banking regulations, moved more and more into
speculative investments of doubtful economic value. That has
stopped, hurting speculators -- in many cases bankers
themselves.


10. (C) In short, the longer this episode continues, the more
it appears to be a crisis for the individual banks rather
than Burma's economy as a whole. In the end, some private
banks and some large families may be bankrupted, but to judge
by events to date, the economy will continue to tick along,
albeit at a slower pace. Nevertheless, there will be a price
to pay. Unless government banks can pick up the slack, the
inevitable chill on economic expansion and commerce caused by
the lack of a formal banking sector might limit the potential
for future economic reforms, such as the recent
liberalization of the rice market.
Martinez