Executive Summary of Monthly Financial Sector Discussions 03/2018

Executive Summary of Monthly Economic Development & Outlook Discussions

Wednesday, March 07th, 2018

Robust discussions centered around critical “Anti-Money Laundering Compliance” needs for the Banking sector along with some recent offshore financing developments followed by a brief discussion on the Economic Assessment for the current year and forward looking Economic Outlook for 2018-19.

A brief overview of both the domain discussions mentioned herein.

1. Banking Sector Assessment Outlook

The discussions centered around the following two topics:

A. Anti-Money Laundering Compliance:

Discussion started with reports regarding the charging of a prominent Myanmar businessman for Terrorism financing.  Such a watershed event would most certainly bring scrutiny from international financial institutions through enhanced due diligence and a potential re-evaluation of their various Myanmar counterparty businesses, especially as it relates to their compliance on third-party security audits on Anti-Money Laundering and Anti-Terrorist Financing (AML & ATF) related issues.

Certain stakeholders at the meeting noted that in their respective institutions AML compliance waivers were given and leniency was extended during the reform process over the last few years, however this phase is coming to an end and the culmination of this potential ‘watershed event’ will likely trigger a more rigid and enhanced due diligence environment by most financial market participants / global stakeholders.  The timing of these events could not have come at a worse time for local Myanmar banks as they continue to struggle with new Central Bank Reform Regulations also as discussed in previous Myanmar Economic Forum (MEF) discussions. There was a recognition in the discussions that AML compliance has been viewed to date, by the majority of the local banking community as a burden (financially and technically) and this will need to be now seen as the single most important issue to be instituted immediately with diligence and speed.

Global stakeholders pointed out that failure to secure qualified third-party compliance audits could result in a massive banking crisis locally especially if any of Myanmar’s current international counter parties that currently facilitate its cross-border USD settlements were to be forced to comply with globally and legally accepted AML protocols and compliance standards.

There was universal recognition that on going forward basis the most sensitive area for future cross-border USD settlements will be potentially driven by AML compliance considerations.

Myanmar banks have traditionally opted to clear USD related settlements via Singapore Financial Institutions albeit, at higher costs versus the logical choice of clearing USD settlements directly in the US (with exception of one Myanmar institution that has a direct settlement account in the US albeit clearing via a Japanese banking institution). Stakeholders discussed the potential negative impacts on the economy, in the event of more robust compliance by Myanmar bank’s global counter parties.

Stakeholders at the discussion went on to highlight to the credit of the Myanmar government and institutions, that the Myanmar Parliament passed an AML Law in 2014 and the Central Bank of Myanmar (CBM) issued an AML guidance note to banks in 2015, however other local stakeholders were quick to point out that not much actionable AML compliance related work followed in practice.

Reasons for this were attributed to the lack of understanding of AML in general, inadequate procedures, high costs of compliance, lack of qualified assessors and lack of enforcement.  It was also noted that without quality third-party audits, it is unlikely that local banks will be able to convince foreign financial institutions and global governing institutions that the situation is improved.

Also related to AML was a discussion centered on the much needed and anticipated influx of capital into the balance sheet of Myanmar Banks.  New CBM regulations require higher provisions of Tier-1 capital. Currently there is a rigorous process by the CBM and the Internal Revenue Department (IRD) to approve share capital purchases as source of funds is a major concern. These were viewed by all stakeholders in the discussion as positive development for transparency.

Ancillary discussions also briefly covered ground on a controversial draft tax bill in the parliament that would grant special amnesty to investors and owners where source of funds cannot be confirmed.   Without having specific data points to discuss, this important topic was adjourned to another meeting.

B. Market Risk Participation Agreements (MRPA):

Some discussions centered around a program “supposedly” initiated by the CBM (although confirmation is awaited) that is currently piloted within three (3) Myanmar Banks.  The program has been designed to allow the recipient chosen banks to systematically address the new CBM large exposure limit of 20% of core capital.  It is reported that this program will allow each of these chosen local banks to issue syndicated loans to foreign banks and split up the large problem loans grouped under a single conglomerate exposure into smaller more specific tranches with different risk premiums or discounts with the necessary asset collateral attached.  The lowest risk rated tranches are the ones being sold to foreign banks in Singapore.  Members discussed the pros and cons of the program, acknowledging the efforts would bring in much needed liquidity onto the Balance Sheet for the recipient banks however raised concerns of the reduction in higher quality loans of local banks through such a program especially if the resulting effort created a system wherein all the bad loans were left on the balance sheet and the higher quality ones were to be structured away via such a program.

All participants at this morning discussion recognized the need to jointly invite a representative of the CBM to participate at these monthly meetings so as to facilitate more engagement and communications with all stakeholders.

2. Economic Assessment Fiscal Year 2017-18 and Outlook for 2018–19:

Real economic growth in FY2017/18 (April – March) is likely to be 6.4 percent driven by strong industry and services activity offsetting a slow recovery in agriculture.

Inflation has risen since a low in the first quarter (FY2017/18). External performance remains strong buoyed by export growth in rice and garments along with a stable exchange rate.

Despite a positive growth outlook, the pace of poverty reduction is likely to remain modest.

Downside risks to the macroeconomic outlook has intensified from rising inflation caused by central bank financing, rising fuel prices along with the international reaction to the conflict in Rakhine State.

The Discussions thereafter adjourned, with the next monthly Discussion date confirmed for Wednesday, April 04th, 2018.