Can the central bank’s new guard save businesses in Myanmar?

Among the nominees for deputy governor are economist and retired Budget Department of the Ministry of Planning and Finance officer U Soe Thein, incumbent deputy governor U Soe Min and existing member of the board U Bo Bo Nge.

Meanwhile, the newcomers to the Board include former deputy director general of the Union Attorney General’s Office U Myint Thein Tun, former finance deputy general manager U Soe Paing, former director of the Union Attorney General Office Daw Yi Yi Win and former prorector of the Yangon University of Economics Daw Khin May Hla. The fifth nominee, U Kyaw Min Tun, is an incumbent.

The list of deputy governor and board member nominees has been submitted to the Pyidaungsu Hluttaw for approval.

Financial assistance

The upcoming changes have sparked hopes of financial sector reform in the business community given that economic development in Myanmar has been thwarted by poor access to capital and the lack of financial assistance available to businesses.

Despite new government policies aimed at helping small and medium-sized enterprises (SMEs) gain financial assistance, local businesses say the policies have not been effective.

“There are 24 local banks in Myanmar and the total loan amount extended to businesses is only US$12 billion. In Singapore, loan amount from DBS Bank alone is $120 billion. We are many times behind when it comes to extending loans,” said freelance banking and investment advisor U George Soe Win.

Meanwhile, under existing central bank regulations, the 19 other foreign banks permitted to open in Myanmar have not been able to provide direct financial assistance to local SMEs.

“As long as international banks have to do business with local banks in partnership and are not allowed to do direct lending, there will be no hope for local businessmen,” one exporter, U Nay Lin Zin, told The Myanmar Times.

High interest rates

One of the reasons for the bottleneck in financial assistance is high interest rates. According to central bank regulations, banks must offer a minimum interest rate of 8 per cent on deposits. However, they can also charge a maximum of 13 pc on loans.

Currently, local banks are paying customers between 8 pc and 12 pc on deposits. Meanwhile, standard loans are priced at 13pc while loans to SMEs are priced at 8.5 pc.

The cost of borrowing is far too high for local start-ups and SMEs wanting to do business in Myanmar, entrepreneurs said. “Also, local businesses will find it very difficult to compete with foreigners who have easy access to low-interest loans,” they told The Myanmar Times.

“There are many requirements to doing good business including access to electricity, transportation and good logistics. But the most important requirement is access to capital. Without it, no business can develop in a full-fledged manner. So, the central bank’s monetary policy is very important in determining ease of financial assistance in Myanmar,” U George Soe Win said.

The rationale behind the central bank’s tight monetary policy is inflation. From 2000-2015, Myanmar recorded an average inflation rate of 16 pc, the highest in the region, with the major drivers being shocks attributed to floods and other natural disasters, money supply growth, exchange rate pass-through and imported inflation, according to a June 2017 report by The ASEAN+3 Macroeconomic Research Office (AMRO).

Local banks have to consider and match inflation when setting interest rates on loans and deposits. Given the high rates of inflation in the country, it has not been easy for the banks to lower rates. As such, access to funds in the country has typically been out of reach for many.

So far, international institutions such as the Japanese International Cooperation Agency and KfW Development Bank from Germany have stepped in to extend loans at 5 pc interest rates, but the amounts are still insufficient.

Meanwhile, under existing central bank regulations, domestic banks are not permitted to extend loans exceeding 25 pc of its authorised capital. “Because the capital reserves for local banks are low to begin with, providing loans is usually not viable for them,” U George Soe Win said.

Poor financial facilities

The financial services facilities available in the trade sector are weak too. For example, there are currently no facilities enabling Myanmar exporters to do business on credit. “In other countries, if the exporters can show a Letter of Credit (LC), they can get trade financing assistance from the banks. If they can show a warehouse certificate for their goods, they can get loans in advance,” Myanmar Rice Federation vice-chair Dr Soe Tun said.

Those systems have not yet been established in Myanmar, making it difficult for local exporters to compete in the international market. “Most international trade is done via LC, which allows payments to be settled within 90 days after the goods arrive,” Dr Soe Tun said.

But Myanmar merchants only have access to telegraphic transfers (TT), which involves immediate cash payments.

“Myanmar is far behind its regional neighbours because we don’t have the financial assistance other exporting countries enjoy,” he said.

Meanwhile, Myanmar is further handicapped by the depreciating value of the kyat, which closed July 28 at a rate of 1,367.30 per US dollar. Exactly a year ago, the rate was 1,167.10. The value of the kyat is falling as the supply of money increases, and as interest rates in the US rise.

As a result, Myanmar’s trade deficit now stands at around US$5.5 billion, with exports lagging behind imports at US$11.6 billion and US$17.2 billion, respectively, data from the Ministry of Commerce showed.

In comparison, the trade deficit stood at US$5.4 billion in 2015-16 and US$4.9 billion in 2014-15, according to the statistics released by the Central Statistical Organisation.

Under pressure

As such, pressure on the central bank to reform its policy is mounting ahead of the upcoming changes to its board.

“The central bank’s monetary policy is the most significant for development of the financial sector. If the policy is the same even after this change, things will not work. While we don’t know what changes they will make, we can expect that the new deputy governors and members to the board will effectively implement some good policies,” says economist U Khin Maung Nyo.

One change to anticipate is better transparency. “What I have considered is to mainly work on transparency. It is too early to speak about other specific plans,” deputy governor nominee U Soe Thein told The Myanmar Times.

There is a fair bit to do on that front, beginning with improving the availability of data on the country’s foreign exchange reserve, gold reserves kept in foreign banks and money in circulation, which could all help to shore up the value of the kyat. Meanwhile, public disclosure on the amount of loans extended to the government has also been lacking.

With inflation now falling, to a yearly average of just 5.96 pc according to an official statement, “the central bank must now participate more actively in the nation’s economic development,” U George Soe Win said.

Source: Myanmar Times