Whenever you go for a stroll in the center of Yangon, Myanmar’s most famous and important city, one may dwell on the grandiose pagodas. The smell of the street food, the screams of the vendors implementing basic and archaic marketing strategy and the sight of groups of joyous kids playing football with wooden-made balls accompany your thoughts in this walk. At dinnertime, you may sit down at one of the few, but well known, restaurants resembling European standards, where you can enjoy cherished European food and a glass of costly but enjoyable imported wine. The personnel is very kind and well trained, and your order usually arrives within an acceptable time frame. After you receive the bill you inevitably think that you are overpaying in comparison with the amount of food you ordered, but considering that you ate original Tartufo along with a well-preserved bottle of Chianti on the other side of the world, the price is acceptable. You then approach the entrance, smile in the direction of the cashier and show him your freshly issued VISA from your renowned European bank. The cashier’s face turns incredibly pale and refusing to touch even the credit card; he exclaims: “Only Cash.”
How it incredible it may sound; this is a genuine episode in Myanmar, where 72.5% of the money in circulation is cash with the remainder deposited at a financial institution. The primary cause of this situation is one of the most underdeveloped systems of the world, the Burmese Banking System. As shown in graph 1, as of 2014, Myanmar percentage of people using a debit card is the lowest among Asian countries and almost the same can be said about the percentage of people having an account at a financial institution (Cambodia has a slightly lower percentage).
Myanmar’s banking system is clearly in a dreadful state, and it appears much worse than its fellow neighbor. In 2015, Myanmar economy was still paying off the consequences of the 2003 Burmese’s financial crisis, one of the most intense and damaging financial panic of modern history.
Graph 2 shows how the domestic credit to the private sector, considered as a good indicator of the shape of the banking system, has decreased from 2001 to 2011 only in Myanmar. As displayed in graph 3, the main cause of this situation seems to be the events happening between 2002 and 2003.
Myanmar has, in fact, experienced a very long lasting and damaging financial crisis, whose effects can still be tracked after more than ten years of the country’s banking system. Recently, in the western world, there has been a great debate over how a financial panic should be managed and how a central bank should interpret its role of lender of last resort. There are few certainties, and not even history seems to be a helpful reference point for those kinds of catastrophes. However, as outlined by the data presented, there is one indisputable point: Myanmar’s financial crisis has been certainly managed in a questionable way since its damages to the main economy and to the way Burmese perceive the financial systems are astonishingly real and tangibles, even after so many years.
The Banking Crisis
By the end of 2002, many Burmese used to entrust a significant portion of their savings to a group of informal financial institutions, legally forbidden to take deposits, which for sometimes had managed to pay above-market returns to its shareholders (3-4% monthly return). Unfortunately, the financial soundness of those institutions proved as valid as their investing techniques, and thousands of savers discovered that their funds were an essential part of a Ponzi’s Scheme and thus not redeemable.
In the same period and with incredibly bad timing, the Myanmar’s government passed a law tightening controls on financial institutions to fight money laundering. Moreover, at the beginning of 2003, the finance minister was sacked and replaced by a member of the military, with no tangible experience regarding financial matters. These episodes are seriously compromised savers’ confidence in the banking system, whose stability was hanging by a thread.
At the beginning of March 2003, rumors on the opening of an investigation over the conduct of Asia Wealth Bank (arguably Burma’s largest bank), that according to the local media was carrying out some unclear and suspicious transactions in China, started circulating. Alea Iacta Est. Financial Panic was on.
The inexperienced Burmese institutions failed to answer effectively. During a financial panic, the main goals of a central bank and the Ministry of Economic and Financial affairs have to be:
- Enhance the stability of the system: ensuring with facts and words the soundness of the financial players involved in the crisis, reducing the contagion effect by helping to distinguish insolvent from illiquid institutions.
- Promote availability of credit: keeping banks alive by providing collateralised loans, lowering interest rates and do everything possible to prevent an unjustified and nervous fall in financial asset values.
The Central Bank of Myanmar, after a period of uncoordinated limitation on withdrawals set independently by each single bank, decided to intervene to stop the panic. The decision was to limit withdrawals to 500 000 Kyats (successively revised downwards) on all banks in the country. The effect of this choice was deleterious. The depositors started to sense the terrifying feeling that their hard-earned savings were no more under their control. The CBM, thus, succeeded in transforming a panic involving some very entrepreneurial banks, above all Asia Wealth Bank, into a systematic panic regarding all the financial institutions operating in the country. Moreover, the CBM refused to provide the requested amounts of loans to some distressed banks in the initial phase of the panic and only at a later stage, it started to print some new Kyats to provide liquidity to the system. The worst was yet to come.
On February 26th, 2003, the Central Bank of Myanmar instructed banks to stop all account transfer transactions. It is quite difficult to understand the logic behind this directive, but it was most likely meant to be a way of stopping funds from flowing from weak and distressed institutions to the most solid ones. The real effect, however, was to transmit the ill-fated consequences caused by bank runs directly to the real economy in a more direct and intense way than what had happened in other analogous situation. As a result, the normal functioning of the business cycle of a Burmese enterprise was seriously impeded since workers, suppliers and any other participant in the production chain could not be paid. However, the CBM, in a desperate effort to avoid a financial collapse, made one last extraordinary move, instructing all private banks to ask the repayment of up to 25% of the outstanding loan’s principals. As predictable, an army of indebted entrepreneurs started a fire sale of any single asset they possessed, driving the price of intangible assets at absurdly low levels. Moreover, the impossibility of performing account transfers created a secondary market for bank account where they were sold at 60% of their face values.
Given the closeness of the Burmese economy, instead of experiencing a currency crisis, Myanmar assisted to the historical peak in the Kyat-Dollar exchange rate, indicating how illiquid the system was. At the same time, according to KPMG, the outstanding private loans decreased by 44% and the deposit demand fell by 70% on pre-crisis levels.
The Central Bank of Myanmar failed in enhancing the stability of the system by not taking a clear position in defense of the solidity of the system and by imposing limits on withdrawals at all banks, worrying depositors and not distinguishing between insolvent and illiquid institutions. On the other hand, the CBM also failed in promoting the availability of credit, by instructing banks to recall loans and not providing enough liquidity to maintain a steady price level of financial assets.
The economic outcomes of this financial crisis were disastrous. The credit market was destroyed and, as said in the introduction, is still struggling to recover. Three banks have shut down operations shortly after these events. A great loss of wealth was experienced by the whole economy. However, the most harmful characteristic of this crisis was that its costs were, for the larger part, borne by depositors and borrowers. As a result of this, the credibility of the financial system and, more in general, of the market economy was seriously compromised, and if after 13 years only one Burmese out of four has ever crossed the door of a bank, we should not be amazed.