Asian Crisis Watch: Myanmar Central Bank Denies Bank Run. When there’s Smoke…

When there’s smoke there’s fire? 

Myanmar’s central bank goes on air to deny a bank run.

From Myanmar Times:

Rumours of a run on several major banks are untrue, said the Central Bank of Myanmar in a television statement late on August 17.

Rumours had spread on social media that Asia Green Development (AGD) Bank, part of Htoo Group of Companies, and Kanbawza Bank (KBZ) would close.

The reports started after Htoo Group’s airline Air Bagan temporarily suspended flights at the weekend. A company spokesperson has said flights will resume in October.

Throughout August 17, comments on social media suggested that depositors were withdrawing funds from accounts at several banks including AGD Bank, AYA Bank, CB Bank and KBZ.

Frequent bank run tremors (or the boy who cried wolf?): 

The Central Bank has helped financial institutions in times of need since the 2003 banking crisis – a major run on the country’s private banks, said U Thura, former manager of Myanma Economic Bank (MEB). At that time, the Central Bank assigned state-owned MEB to provide funding to commercial banks, he said.

U Thura is now chief Yangon representative for South Korea’s Woori Bank, which has had a representative office in Yangon since 2012.

“The Central Bank must respond quickly and transparently in this sort of situation. In the past, suspicions were resolved when U Aung Ko Win [chair of KBZ] communicated directly with the public,” he said.

In 2012 depositors withdrew funds from KBZ after reports spread that the chair had been arrested, he said, adding that rumours can trigger bank runs anywhere in the world and the issue is not specific to Myanmar.

In Myanmar however, reports of bank runs are frequent. Once or twice a year, stories emerge about the reputation of bank shareholders or related businesses.

Last year for example, depositors at AGD Bank withdrew funds after Htoo Group’s chair U Tay Za reportedly sold a majority stake in the bank to a number of shareholders.

Myanmar currency the kyat has been under pressure. Like the rest of Asia, the USD kyat has been soaring. It’s a sign of the shrinking US Dollar liquidity being aggravated by domestic factors.

Myanmar balance of trade deficit has been ballooning

This has contributed to her deteriorating current account balance

Add to this Myanmar’s government budget deficit

Curiously government debt has been shrinking.

So what has funded those deficits? My guess: subsidies from zero bound rates via banking credit expansion.

I have no updated data although a credit boom could have been manifested via signs of a property bubble

Anyway, Myanmar has been no stranger to a banking crisis. In 2003, bank credit growth soared to only 8% of GDP enough to trigger a crisis.

Here is how Wikipedia explains of the Myanmar 2003 Banking crisis: The 2003 banking crisis of Myanmar was a major bank run in private banking that hit Myanmar (Burma) in February 2003. It started with a decline in the trust for private financial institutions following the collapse of small financial enterprises and proliferating rumors about the liquidity of major private banks. Leading to a bank run on the Asia Wealth Bank, the crisis quickly spread to all major private banks in the country. It led to severe liquidity problems for private banks and scarcity of the kyat. Though exact data is not available, it is believed that the crisis caused major economic hardship for many in Myanmar

Why are banks prone to bank run?

The great dean of the Austrian school of economics Murray N. Rothbard explained:

But in what sense is a bank "sound" when one whisper of doom, one faltering of public confidence, should quickly bring the bank down? In what other industry does a mere rumor or hint of doubt swiftly bring down a mighty and seemingly solid firm? What is there about banking that public confidence should play such a decisive and overwhelmingly important role?

The answer lies in the nature of our banking system, in the fact that both commercial banks and thrift banks (mutual-savings and savings-and-loan) have been systematically engaging in fractional-reserve banking: that is, they have far less cash on hand than there are demand claims to cash outstanding.

“Less cash on hand than there are demand claims to cash outstanding” equated to “severe liquidity problems for private banks and scarcity of the kyat” That’s in 2003.

Again, when there’s smoke, there’s fire?

Myanmar’s Seething Property Bubble, Redux

I was shocked to learn that office space rental prices in Myanmar has zoomed past their equivalent in New York’s Manhattan

From Bloomberg: (bold mine)

Sean Danley has spent the past six months scouting office space in Yangon after being sent to establish the Myanmar branch of his U.S.-based employer.

He looked in the city’s three sole 1990s-era towers, where annual rents have climbed to more than $100 a square foot, compared with less than $75 in downtown Manhattan, according to broker CBRE Group Inc. Too expensive, he said.

The villas he considered either didn’t have safety exits, weren’t clean, required sharing space with other companies or were in odd locations -- all unsuitable to the image of his $29 billion in revenue engineering and construction company, which he said he wasn’t authorized to identify. After seeing 10 places and losing one possibility to someone faster with his “bag of money,” Danley is still looking.

In 2011, I pointed out that Burma, which officially is known as Republic of the Union of Myanmar, has commenced to liberalize her previously closed political economy governed by military autocrats. Such structural change obviously should be a welcome development.

BUT the global yield chasing phenomenon has apparently seeped or spread into Myanmar’s economy, as evidenced by escalating the inflating property bubble as I earlier noted in June of 2012

One can sense mania when the investing public imprudently ignore risks. From the same Bloomberg article:

International developers will probably seek partnerships with local counterparts in a country where they’re not yet sure of rules and regulations, Pun said. For large-scale projects, some foreign companies bring their own workers from outside, while also using local resources available, he said.

Foreigners have been stampeding into Myanmar in the anticipation that foreigners will “no longer require a local partner to start a business in the country, and will be able to legally lease but not own property” based on a March 2012 draft foreign investment law (Wikipedia.org). 

But foreigners are prohibited to own land and immovable property (PWC).

So the massive influx of foreign investments on the non-property sectors has played a significant role in driving up Myanmar’s property prices to stratospheric heights.

Yet one would wonder how such eye-popping scale of property price inflation has been financed.

Myanmar has a dysfunctional, “outdated and debased” banking system as a result of decades of “abuse by the previous regime”. The banking system has effectively been “shunned by about 90% of the population” (CNN) where the average Burmese simply hold their savings or cash at home. 

Financial services such as loans, financial products, interbank operations and other forms of credit barely exists.

And the absence of a viable banking system and capital markets has prompted residents to turn into “real estate as a place to stash their cash” according to a Myanmar based finance analyst (Quartz). 

Myanmar is slated to open the Yangon Stock Exchange in 2015.

And because of the largely cash based nature of the transactions in the property sector, some analysts opine that the boom-bust cycle in Burma has been “overstated”.

I believe that the cash transaction segment of Myanmar’s markets sizzling hot property markets represents only part of the story. 

According to a survey conducted by an IFC report only 16% of households use the formal financial services. The other sources of loans emanates from family, friends and moneylenders [IFC: Microfinance in Myanmar Sector Assessment] So Myanmar has a huge shadow banking system which essentially eclipses the formal banking sector.

Importantly, the idea of the absence of leverage in Myanmar’s property boom may not entirely reflect on reality. 

Singapore has played a big role in providing financial services to Myanmar even when US sanctions were in place. According to Hans Vriens of the Insight Bureau Briefings, “Most overseas transactions are handled in Singapore, which acts like an off-shore banking platform for Myanmar and using the informal hundi system” 

Additionally, aside from the $2.4 billion of bilateral trade, there has been “significant business presence by Singaporean firms on Myanmar” as well as a “large Myanmar community in Singapore and a pool of Myanmar companies using Singapore as an intermediary hub to expand overseas”. 95% of Myanmar’s foreign transactions reportedly has been coursed through Singapore’s United Overseas Bank (UOB) (Asia One Business). 

So loans by the informal sector may have partly been financed by Singaporeans and or Myanmar based investors domiciled in Singapore.

This also implies that while property transactions may have mostly been executed through cash, the source of funding  may have been conducted through shadow banks, or through overseas lending via Singapore’s banks or both.

Whatever the source of transactions, one thing is clear, Myanmar’s money supply has been exploding, according to the World Bank’s Data.

Myanmar’s excessively high property prices (or property bubble) is likely either to fall from its own weight or would likely recoil from the prospects of monetary tightening as consequence to ongoing instability in the global bond markets. 

It's unfortunate that central bank's inflationism will act as spoiler to what has generally been a positive development.

How Despotism Promoted Ignorance in Myanmar

Many people nurture the mystical impression that noble intentions drive actions of governments pertinent to social welfare concerns.

Well, not in Myanmar’s case, where the former rulers opted for policies that resulted to a massive black hole in education.

From Wall Street Journal, (bold emphasis mine)

The University of Yangon was once one of Asia's best colleges. Today, abandoned buildings rot away on its overgrown campus, with some walkways deserted except for dogs.

Its state of affairs embodies a crucial challenge for leaders as Myanmar opens to the outside world. The military junta that dominated the country for five decades all but destroyed the university system after a series of student protests convinced its leaders that schools were breeding grounds for dissent.

But now that the lifting of most Western sanctions has paved the way for an expected wave of investment, companies are finding a nation largely bereft of skilled workers. Doctors and lawyers often lack up-to-date training, and other professions are desperately short of qualified staff with even basic critical-thinking skills, employers say.

The lack of expertise in the country was sometimes used by military leaders as a justification for handing big business contracts to associates of the regime. A small number of Myanmar students went overseas to study. Only over the past year, since the military regime stepped down, has the government actively encouraged those educated abroad to return and share expertise.

Of course such policies reflected on the “rule of thumb” for politicians where the principal concern of politics has been about political control or political power.

The difference lies in the nature of political institutions in Myanmar. The ruling military junta relied on a regime whose power has been rooted on ignorance and fear rather than from getting the consent of the governed. So the curtailment of dissent was then seen as a political imperative.

In addition, the past regime profited from society’s ignorance through the “justification for handing big business” or by awarding economic opportunities to favored network of families, friends or allies: cronyism in socialist clothing.

But all these have backfired.

Compounded by the snowballing opposition to the military junta, eventually the military junta was forced into a referendum that transformed Myanmar’s politics into a presidential republic with a bicameral legislature. 

And thus, the pronounced turnaround in Myanmar’s political economy, through economic reform policies of liberalization.

The political and economic developments in Myanmar seem to be confirming the position held by the great Professor Ludwig von Mises (Liberalism p.46),

Only a group that can count on the consent of the governed can establish a lasting regime. Whoever wants to see the world governed according to his own ideas must strive for dominion over men's minds. It is impossible, in the long run, to subject men against their will to a regime that they reject. Whoever tries to do so by force will ultimately come to grief, and the struggles provoked by his attempt will do more harm than the worst government based on the consent of the governed could ever do. Men cannot be made happy against their will.

For as long as economic liberalization will be the premier thrust, Myanmar looks like a promising compliment to ASEAN, whom likewise needs to have more economic freedom.

Myanmar’s Property Bubble

The impact from global negative real interest rates and monetary measures such as QEs seems to have percolated to Myanmar.

From Global Post,

Hoping to set up shop in Yangon? Bring duffel bags full of cash.

You might assume that property in Myanmar, one of Asia’s most impoverished and dysfunctional nations, would rent for a pittance.

But as the long-shuttered pariah zooms towards political and economic reform, it is swarmed by foreign investors speculating that Myanmar’s big boom is nigh. There are now too few hotels and office buildings in the crumbling commercial capital, Yangon, to cope with the influx of moneyed outsiders.

It doesn’t take an economics whiz to guess what happens to property markets with a glut of interest and a paucity of supply.

Yangon hotels that once charged $60 a night are charging $250 or more. The average rental price for office space has surged to $60 per square meter, according to Antony Picon, an associate director of research with the Colliers International real estate services firm.

“I’ve seen a swamp in the middle of nowhere and they’re asking the same thing they’d ask in the center of town,” Picon said. Houses that recently rented for a few hundred bucks a month are going for thousands.

While economic reforms through liberalization has been a good development, unfortunately this has been accommodating the international monetary policies fueled ballooning property bubble in Myanmar.