US embassy cable - 03RANGOON236

C O N F I D E N T I A L SECTION 01 OF 02 RANGOON 000236 
 
SIPDIS 
 
STATE FOR EAP/BCLTV, EB 
COMMERCE FOR ITA JEAN KELLY 
TREASURY FOR OASIA JEFF NEIL 
USPACOM FOR FPA 
 
E.O. 12958: DECL: 02/23/2013 
TAGS: EFIN, PREL, ECON, BM, Economy 
SUBJECT: BURMA'S DUAL BANKING CRISES: WHO'S PAYING THE 
PRICE? 
 
REF: A. RANGOON 235 
     B. RANGOON 225 
     C. RANGOON 214 
     D. RANGOON 213 
     E. RANGOON 30 
 
Classified By: COM CARMEN MARTINEZ FOR REASONS 1.5 (B,D) 
 
1. (C) Summary: The simultaneous crash of the formal and 
informal banking sectors in Burma starting February 14 led 
many to expect the worst.  Although day laborers and small 
depositors have been hit the hardest, thus far calm has 
dominated.  People are frustrated, but not angry enough to 
take political action.  The reasons for this tranquillity are 
manifold, but primarily revolve around the relatively small 
role played by the financial sector here as well as the 
seemingly endless patience of the Burmese people.  End 
summary. 
 
Trust in Private Banks is Weak 
 
2. (C) With all the concern about the recent private banking 
crisis, it is important to remember that out of an IMF 
estimated 1.3 trillion kyat (M2) sloshing through the white, 
brown, and black markets of Burma, the twenty private banks 
estimated that they held only 550 billion kyat when the 
recent crisis hit on February 14.  The rest was on deposit 
with the informal banking sector, out in circulation as cash 
in the hands of the public, or in the state-owned banks.  The 
result is that the formal banking system in Burma does not 
have deep roots.  Private banking has been available for less 
than ten years, and many average Burmese have been slow to 
understand and trust the system.  In addition, the GOB's 
artificial ceiling on deposit rates (10 percent per year) has 
been a major disincentive to depositors facing inflation 
rates of 60 percent and higher.  Finally, the steady 
depreciation of the kyat over the past several years (down 
315 percent against the dollar since January 2000) has 
dissuaded private and corporate customers from keeping many 
kyat assets.  One estimate we heard was that 90 percent of 
the business community keeps little or no kyat (either in the 
bank or on hand), preferring to change all kyat immediately 
into gold or dollars, which can be cashed in as need be. 
 
3. (C) Those lining up outside banks over the past week are 
primarily traders, who keep money in the banks for a short 
time to facilitate transactions or secure access to credit; 
some private companies who use banks for handling accounts 
receivable and payroll; and a few smaller depositors who were 
too honest to invest their kyat in real assets or the 
informal banking sector, and too nervous of demonetization to 
keep money under their pillows.  Very few of the elite rely 
significantly on the banking system, instead keeping their 
money in real estate, autos, dollars, gold, or other rapidly 
appreciating assets. 
 
Pay Packet Comes With Apologies 
 
4. (C) The average Burmese is harder hit by the decline of 
the formal banking sector as a wage earner than as a 
depositor.  Large construction firms, who feast on cheap 
credit (lending rates are held to only 15 percent per year) 
to build high-rise apartments and office towers, have had to 
stop their projects and thus payment of their day laborers. 
Likewise, many factories and other firms that had been using 
the private banks have been unable to pay their day laborers 
since last Monday the 17th, and are fearing the end of the 
month's larger payroll obligations. 
 
The Meek Shall Inherit One Percent a Month, Maybe 
 
5. (C) Though wage earners may suffer if the private banks 
are not liquid by week's end, many are already under pressure 
due to the nearly simultaneous crash of the 250 billion kyat 
informal financial sector.  An estimated 100,000-200,000 
depositors, many pensioners or other naive investors who were 
taking advantage of the "too good to be true" rates available 
at these shadow banks (described in Ref E), lost their shirts 
when these nineteen institutions crashed.  There were rumors 
that many of the elite, and several of the private banks, 
were also involved with these informal banks.  However, the 
numbers are not likely high enough for this shady sector's 
demise to unhinge society here. 
6. (C) The future is uncertain for the legions of depositors 
caught up in the informal banking crash.  Apparently the GOB 
has seized the assets of the shadow banks and has formed a 
"Liquidation Committee" to sell off the properties and 
ostensibly use the proceeds to repay depositors.  However, 
there has been no public announcement of the Committee's 
exact intentions or any timeline.  One or two of the larger 
informal banks have also announced that they would continue 
to add interest (at one percent a month) to their depositors 
accounts, for a lump payout sometime in late 2003 or early 
2004.  None of the bankers or businessmen with whom we spoke 
believes this tale, however. 
1987 Revisited? 
 
7. (C) The jury is still out on who will be hit hardest by 
the latest economic fiasco.  Many businessmen now are 
effectively whistling past the graveyard, but, with the GOB 
talking about liquidation proceedings for the real assets 
accumulated by the informal financial institutions, the 
prospects for any further speculative gains on real property 
has to be limited.  The private banking crisis might also 
feed some agitation if workers miss their monthly pay, and 
day laborers go into their second week without wages. 
However, widespread unrest still seems unlikely for three 
reasons. 
 
8. (C) First, people are more diversified than they were 
during the demonetization of 1987 but, more importantly, the 
demonetization of 1987 destroyed the value of the most 
commonly held financial asset in Burma -- the kyat.  In 
contrast, this 2003 crisis has actively boosted demand for 
and the value of kyat, as individuals have built up 
precautionary and transactions balances in their homes.  The 
government's rescue plan hinges on extending collateralized 
loans to the troubled private banks.  If banks repay these 
loans, and the government retires the money when it's 
returned, the long term impact of the crisis may ease 
inflation and stabilize the kyat primarily through the 
destruction of the uncontrolled credit creation system run by 
the informal banking institutions.  These played a larger 
role than initially suspected in the country's recent lurches 
toward hyper-inflation and the sharp depreciation of the 
kyat.  In short, people may have difficulty gathering access 
to their deposits now, but there is hope that the kyat they 
do get will have more lasting value, or at least will 
depreciate more slowly than in recent years. 
 
9. (C) Secondly, who can complain about losing money in 
blatantly illegal Ponzi schemes (which is effectively what 
the informal financial institutions were)?  The GOB could 
have acted sooner, and more methodically, to curb the 
speculation through these companies, but investors knew they 
were taking awful risks in hopes of awesome gains. 
 
10. (C) Finally, the Burmese people are patient.  Despite one 
or two rock-throwing incidents, as the crisis unfolded on 
February 17 and 18 most customers dispersed peacefully with 
nothing but assurances from their bankers that at least some 
money would be available if they came back "next week."  For 
the average Burmese bank customer, so far, that has been 
enough. 
Martinez