BURMA: EARLY IMPACTS OF WORLD FINANCIAL CRISIS

C O N F I D E N T I A L SECTION 01 OF 03 RANGOON 000084

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STATE FOR EAP/MLS, INR/EAP
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E.O. 12958: DECL: 02/06/2019
TAGS: ECON EFIN ETRD PREL PINR BM
SUBJECT: BURMA: EARLY IMPACTS OF WORLD FINANCIAL CRISIS

REF: A. RANGOON 057

B. RANGOON 001

C. RANGOON 023

D. RANGOON 054

E. RANGOON 067

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Classified By: Economic Officer Samantha A. Carl-Yoder for Reasons 1.4
(b and d).

Summary
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1. (C) Although the Burmese Government claims the world
financial crisis is having little to no affect on the
country's economy, recent economic trends prove otherwise.
Burma's trading sector has been hardest hit, as export
earnings from key products including agriculture, garments,
and timber have dropped due to lower prices, lack of orders,
and the inability of buyers to secure credit. Many trading
companies -- key intermediaries in domestic and international
commercial transactions -- are struggling to pay their bills,
and five have recently been liquidated by the government.
Access to credit from both the formal and the much larger
informal sector is drying up. Estimates of layoffs vary, but
it is clear many Burmese are losing their jobs. The GOB in
December formed a task force to monitor the affects of the
world financial crisis; however, members confirm GOB
officials remain dismissive of a possible severe economic
downturn. End Summary.

Commodity Prices Affecting Traders and Producers
-------------- ---


2. (C) Burmese businessmen, traders, and economists warn
that the slowdown in trade evident during the fourth quarter
of 2008 (Ref A) will continue into 2009. Already, farmers
and traders are feeling the pinch as commodity prices of
goods such as timber, rice, and beans, which have fallen by
more than 50 percent since June, continue to drop. Many
farmers now find themselves unable to cover production costs,
SGS Consultants Managing Director U Kyaw Tin told us. He
noted that while the GOB has been encouraging farmers to
increase production with the expectation of higher export
volumes in 2009 (Ref B),farmers are not only reluctant to
plant more but cannot afford to do so. Most farmers take out
loans to pay the initial cost of planting, U Kyaw Tin
explained. Only after they sell their harvest can they repay
their debts and perhaps earn a profit. With Burmese rice
currently selling for USD 260/metric ton and beans for less
than USD 320/metric ton, both down from a high of USD
750/metric ton in April, farmers are unlikely to earn enough
to cover costs, he surmised.


3. (C) The drop in commodity prices has already affected
trading companies, many of whom were speculating on
commodities futures. India and Bangladesh, Burma's two main
buyers of beans and pulses, have canceled orders because
Burmese traders are setting prices higher than world market
rates, trader Anwar Hussain said. Private rice exports are
virtually non-existent. U Kyaw Tin confirmed that five
traders, who had bought more than USD 200 million worth of
beans and pulses when prices were at their highest, were
unable to sell their stocks and pay off their debts. The GOB
in December expropriated the companies, confiscating all
assets to pay off the debts. (Note: There was no media
coverage of these developments; agricultural contacts tell us
that journalists are forbidden for writing about examples of

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economic ruin. End note.) Other agricultural traders also
face possible bankruptcy, Hussain warned. When the Charge
raised the issue of speculation in commodities futures with
the Minister of National Planning in January (Ref C),the
Minister shrugged and said it was a "private sector issue."

Difficulty Securing Access to Credit
--------------


4. (C) Businesses in many sectors now find it harder to
secure access to credit. Although the Minister of Planning
told the Charge that the relative isolation of the Burmese
financial system protects it from the world credit crunch
(Ref B),banker U Than Lwin confirmed that both private and
government-owned banks are more hesitant to give loans unless
businessmen can prove substantial assets. This is a
particular problem since many Burmese businessmen are wealthy
on paper but "do not actually have money in the bank (either
in Burma or overseas) or assets to speak of," he lamented.
Hussain confirmed that many Burmese and foreign companies are
unable to secure Letters of Credit, necessary for
import/export transactions. Banks, primarily overseas banks
used by many Burmese, are more selective when making loans,
affecting not only small and medium-sized companies with
fewer assets, but also larger firms.


5. (C) Those who want to borrow money but lack assets must
turn to the informal sector. Economist Winston Set Aung, who
tracks the informal sector, told us that businessmen are
placing increasingly pressure on informal lenders to make
loans, but many are unable to because they lack the necessary
liquidity. No hard numbers are available, but an increasing
number of borrowers are defaulting on their loans.
Consequently, informal lenders have raised interest rates in
pursuit of profitability; many currently charge up to 50
percent a month in interest, depending on the borrower's
assets. (Note: interest on formal bank loans is 17 percent
annually.)

Increasing Un- and Underemployment
--------------


6. (C) Exile news outlets report that more than 100,000
workers have been fired since October due to the closure of
textile factories nationwide. While U Kyaw Win, Secretary of
the Garment Manufacturers Association, did not deny the
reports, he would only confirm that 10 textile factories in
Rangoon closed since November, leaving more than 5,000 people
unemployed. Other manufacturing outlets, including three
Rangoon-based car factories and Tay Za's timber businesses,
have also downsized recently, U Soe Win confirmed. The
tourism and retail sectors have also reported falling
employment (Ref D),although business owners have yet to
determine whether the world financial crisis is to blame.


7. (C) Because Burma lacks unemployment insurance, those
who lose their jobs must rely on their severance package to
survive. In most sectors, severance (if available) totals
one month's salary, the average of which is around 45,000
kyat (USD 40). U Soe Win emphasized that underemployment is
more rampant than direct unemployment, since many people work
in the informal sector or for family-owned small businesses.
As business slows, more people will be underutilized and
underpaid.

Inflation Down, but Still High
--------------

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8. (SBU) Since September, inflation has fallen from 40
percent to approximately 25 percent nationwide, according to
the UN. (Note: The Central Statistical Office has not
published inflation data since July 2007. In December, the
GOB informally announced inflation was only three percent for
the year.) While prices of basic foodstuffs have fallen
along with commodity prices, many Burmese still spend roughly
70 percent of their daily income on food. Salaries also are
likely to drop, so more Burmese will find themselves in
financial dire straits, U Soe Win predicted. The recent
appreciation of the kyat against the U.S. dollar has not
benefitted the Burmese, and instead has made it more
difficult for many to save, particularly those who earn or
save in U.S. dollars (Ref E).

GOB Officials Fail to Acknowledge Any Problems
-------------- -


9. (C) The Burmese Government in December formed a task
force to monitor the impact of the financial crisis on Burma.
Members U Soe Win and U Myint describe the GOB's attitude
toward the current situation as "dismissive," highlighting
that officials continue "to put their heads in the sand." U
Soe Win stated that while the Deputy Director General for
Finance recognizes Burma's economic situation was worsening,
he was loathe to relay bad news to higher officials. When
members of the task force recommended to the Ministers of
Finance, Trade, and Economic Planning, that the GOB increase
public spending to subsidize farmers and reduce interest
rates on loans to make them more affordable, the Planning
Minister told them that Burma's lack of relations with "large
Western countries" acts as a buffer for the economy. Task
force members will continue to make recommendations, but
worry that by the time the GOB recognizes the problem, it
will be too late to take any action.

Comment
--------------


10. (SBU) Despite GOB claims to the contrary, the world
financial crisis is starting to affect Burma's already
downtrodden economy. Key sectors will face substantial
losses, and we expect increased unemployment and private
sector bankruptcies in 2009. If and when the GOB does
acknowledge the impacts of the financial crisis, we suspect
it will try to deflect blame, relying on its threadbare
argument that U.S. and EU sanctions constrain Burma's
economy. We will continue to monitor economic trends,
particularly remittance rates, returns of Burmese workers
from abroad, and trade figures, as other key of the global
crisis' impact on Burma's economy.

VAJDA