US embassy cable - 03RANGOON560

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, Economy 
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