US embassy cable - 05RANGOON58

C O N F I D E N T I A L SECTION 01 OF 02 RANGOON 000058 
 
SIPDIS 
 
STATE FOR EAP/BCLTV, EB 
COMMERCE FOR ITA JEAN KELLY 
TREASURY FOR OASIA 
USPACOM FOR FPA 
 
E.O. 12958: DECL: 01/12/2015 
TAGS: EFIN, ECON, PGOV, BM, Economy 
SUBJECT: BURMA: VICIOUS CYCLE OF ECONOMIC DESPONDENCY 
 
REF: 04 RANGOON 542 AND PREVIOUS 
 
Classified By: COM Carmen Martinez for Reasons 1.4 (B,D) 
 
1. (C) Summary: One year after the GOB allowed most private 
banks to resume operations, the banking situation has 
improved little.  Stringent regulations cap deposits at 
unreasonably low levels, Burma's chilly economic situation 
has dried up demand for loans, and the GOB still refuses to 
implement thoughtful banking reform.  With banks so weak, and 
the GOB continuing to mismanage economic policy, a second 
crisis for the banks is possible.  End summary. 
 
Deposits are Too High 
 
2. (SBU) The GOB allowed most private banks to resume taking 
deposits in February 2004 -- a year after closing due to a 
massive bank run (reftels).  Before re-opening the banks, the 
GOB imposed several stringent new restrictions aimed at 
preventing future "irresponsible behavior" by bankers, but 
avoided necessary reforms.  For example, bank lending and 
deposit rates are still capped below the rate of inflation 
and private banks still cannot handle foreign exchange.  As 
expected, the impact on Burma's economy has been negligible. 
Three of the four largest pre-crash private banks remain 
shuttered (two, Asia Wealth and Myanmar Mayflower, suspected 
of money laundering and under investigation) and other banks 
are suffering under the new regulations combined with a very 
chilly business climate. 
 
3. (C) According to the new regulations, banks may not have 
total deposits larger than seven times paid-in capital. 
Though confidence in the banking sector is not high, deposits 
have been good over the last year.  Most of the private banks 
are quite small and long-ago exceeded the 7:1 ratio.  One 
private banker said his bank was already at a deposit-capital 
ratio of 14:1 and a colleague's bank was at 28:1.  The larger 
active private banks have kept their deposit ratio at 7:1 by 
periodically refusing to accept deposits from new customers. 
The GOB is taking notice of this cap busting.  At the end of 
December 2004, the GOB's Bank Management Committee (chaired 
by a SPDC member with no economic experience) began once 
again to call in all private bankers for nightly reviews of 
the day's activities and "necessary instructions" for getting 
in line with the regulations.  These all-hands nightly 
sessions had not occurred since March 2004. 
 
Loans are Too Low 
 
4. (SBU) The deposit problem is exacerbated, bankers tell us, 
by the low volume of new loans.  After the banking crisis of 
2003, the GOB forced private banks to call in all of their 
outstanding loans (performing or not).  These borrowers have 
not returned since lending was re-commenced in mid-2004. 
 
5. (C) This is the result of two factors.  First and 
foremost, business confidence is at an all time low.  On top 
of chronic economic mismanagement, over the last two years 
private business have faced several acute problems: a banking 
collapse, new U.S. economic sanctions, a freeze on 
agricultural exports, a hike in the cost of importing, and 
the purge of Prime Minister Khin Nyunt and his economically 
active military intelligence apparatus.  Domestic investment 
is nearly zero as most businesses refuse to make any new 
deals until the future is clearer.  Businesspeople tell us 
they are waiting for signals from the top and are reluctant 
to make any move that could later come back to haunt them. 
Even GOB projects started during Khin Nyunt's era have been 
halted awaiting explicit approval to continue.  None has 
come.  Businesses are expatriating their money or sticking it 
in banks or in the rice barrel hoping for better times. 
 
6. (SBU) A second factor is the regulatory environment. 
Though loans are cheap (a maximum 15 percent interest rate 
with inflation in 2004 running about 20 percent), banks can 
only lend out 35 percent of the "forced-sale" value of a 
borrower's collateral.  Furthermore, businesspeople report 
that as loans above 30 million kyat (about $33,000) require 
special reporting to the GOB, few banks or borrowers want to 
conduct such a deal and draw the attention of the 
authorities.  Even if the loans flowed again, however, 
regulations prohibit total loans of more than 70 percent of 
total deposits (or roughly five times paid-in capital).  Thus 
the volume of lending from the small banks allowed to operate 
will do little to spur the economy as a whole. 
 
Comment: A Vicious Cycle Toward Collapse? 
 
7. (C) A flourishing private banking sector is essential for 
sustainable economic growth in Burma.  However, economic 
growth is dependent on a vibrant banking system.  In this bad 
business climate with banks so poorly regulated, a vicious 
cycle has emerged.  The economy is cold so businesses are 
reluctant to borrow and invest.  Banks are not lending so 
they face difficulties staying profitable with the influx of 
deposits.  Without new lending the economy will have trouble 
reviving.  The GOB authorities do not understand the problem 
or are ignoring it.  While authorities are apparently keen to 
enforce their draconian regulations, they show no signs of 
rationalizing the industry or freeing up or restructuring the 
largest private banks.  All this points to a potential second 
private banking crisis as bank owners and investors lose 
money while being forced by the GOB to raise additional 
paid-in capital (by buying GOB bonds paying 9.5 percent) or 
turn away customers.  End comment. 
Martinez