US embassy cable - 02RANGOON1557

C O N F I D E N T I A L SECTION 01 OF 02 RANGOON 001557 
 
SIPDIS 
 
STATE FOR EAP/BCLTV, EB/IFD 
COMMERCE FOR ITA JEAN KELLY 
TREASURY FOR OASIA JEFF NEIL 
CINCPAC FOR FPA 
 
E.O. 12958: DECL: 12/05/2012 
TAGS: EFIN, EIND, ECON, BM, Economy 
SUBJECT: BURMA: BANKS AND CONSTRUCTION BOOMS, A BAD MIX 
 
 
Classified By: COM CARMEN MARTINEZ FOR REASONS 1.5 (B,D) 
 
1. (C) Summary: The puzzling construction boom, continuing in 
Rangoon despite the dismal economy and an unclear demand, is 
being fueled by speculation by builders and investors. 
Unfortunately for the economy, private banks have not learned 
the lessons of Japan and are throwing caution to the wind in 
their financing of economically questionable construction 
projects.  With their loan portfolios already grim, many of 
these private banks could be wiped from the map if and when 
the Central Bank ever takes steps to bring credit under 
control.  End summary. 
 
Paving Paradise 
 
2. (SBU) Even in the midst of the country's economic crisis, 
the construction industry in Rangoon is still relatively 
active.  The newspapers regularly report on shining new 
office or apartment complexes, and bamboo scaffolding is 
evident on every block.  Part of the SPDC's drive to have a 
"modern and developed" city is to make prime land readily 
available for development.  These plots, owned either by the 
Office of the Prime Minister's Yangon City Development 
Council (YCDC) or the Department of Construction's Human 
Settlement and Housing Development department, are put out 
for bid.  Interested construction companies (or consortia) 
negotiate with the owner for the right to build.  The firms 
offer the respective government agency an equity share 
(usually 30-50 percent of the space) in exchange for a 
renewable 60-year lease.  The winning firm need not make any 
official payments to the government in exchange for the 
construction rights.  However, informal payments and close 
connections with key government officials, especially 
Secretary-1 General Khin Nyunt, are invaluable. 
 
SIPDIS 
 
3. (SBU) Many of the largest construction firms are part of 
keiretsu-style integrated holding companies that include a 
major private bank.  In addition, lending rates, set 
nationally by the Central Bank of Myanmar are about 15 
percent -- well below annual inflation rates.  Thus it is not 
surprising that construction firms rely largely on bank 
financing for their projects.  Financing is possible through 
the pre-sale of apartments and office space.  Banks assist in 
this as well by offering generous loans to potential 
renters/buyers. 
 
If You Build It, Will They Come? 
 
4. (SBU) Members of the country's largest construction 
industry association told us that business is good because 
demand for new housing and office space continues to be very 
high.  They asserted that rapid construction of new 
apartments is being pushed forward by Rangoon's population 
growth.  (Note: This seems unlikely as the vast majority of 
Rangoonites cannot afford the luxury apartments or offices 
constructed by these firms.)  The builders said that in 
addition, wealthy business people and high-ranking officers 
are buying many of the new apartments, condos, and offices as 
a hedge against a plummeting kyat. 
 
5. (SBU) There is no question that real estate is now viewed 
as the hedge of choice in an economy where anyone who can 
afford to keeps their kyat holdings low.  However, it seems 
unlikely that the minuscule upper class (even purchasing two 
or more units as pure investments) could support ongoing and 
planned construction.  An independent economist following the 
construction sector said that construction firms are also 
speculating, taking out cheap kyat loans and putting the 
money into something more solid, even without reliable demand 
projections.  Also, he noted, these construction firms were 
taking their time in building, trying to whip up demand for 
their "exclusive" properties along the way. 
 
Banks Rolling the Dice 
 
6. (SBU) As long as the government is eager to develop prime 
downtown locations, construction firms can get unlimited 
cheap loans, the kyat continues its decline, and the Rangoon 
glitterati view real estate as a solid investment, the 
construction bubble should continue to inflate despite the 
economy's problems.  However, the participation in this boom 
of many of the nation's private banks could be edging them 
toward a Japan-style banking crisis.  All the signs are 
there: an industry building excessively expecting the market 
to remain high, unfettered bank lending to companies based on 
personal connections rather than objective analysis of future 
income potential, and collateral in real assets priced at 
their inflated value.  The private banks here already suffer 
from poor management, high reserve requirements, irrational 
government-set lending and deposit rates, and high 
non-performing loan portfolios.  A fall in real estate 
prices, or a credit crunch imposed by the Central Bank, could 
quickly ruin these banks by dumping on them an immense 
additional burden of bad debt. 
 
7. (C) Comment: The question, then, is not whether the 
private banks that binged on real estate will collapse, but 
what the impact of their collapse will be.  The immediate 
impact on society will not be great.  Certainly the 
construction industry and a few other sectors dominated by 
private firms will suffer from a reduction in their 
free-flowing capital.  However, the formal private banking 
sector in Burma is still small relative to the entire 
economy.  Most individuals and most businesses will get by, 
as they do now, without significant bank loans or deposits. 
Few would suffer if some private banks went bad.  Longer 
term, though, the effects would be more pronounced, 
particularly if the Central Bank bails out failed banks by 
essentially printing money.  The net result then could be a 
de facto mass nationalization of the banks and another huge 
setback for hopes of financial and economic reform.  End 
comment. 
Martinez