THE BEAR'S
LAIR Myanmar's debt
millstone By Martin Hutchinson
We were told last week that Myanmar had
paid off its US$6 billion debt arrears to the
World Bank, the Asian Development Bank and the
Paris Club of official creditors, with the help of
$3 billion in debt forgiveness from Japan.
This has already released $1 billion in
new money from the Asian Development Bank and the
World Bank - to a government already rated the
sixth-most corrupt in the world by Transparency
International. It must raise the question of just
how much benefit Myanmar's people are likely to
get from the flood of resources now available to
the country.
Institutionally, the
international development banks have a bias
towards doing business with local governments, and
to lending for
large infrastructure
projects, while doing little for the local private
sector. There are a number of reasons for this.
First, the international consensus has
arisen that the World Bank, the International
Monetary Fund (IMF) and other international
institutions should be the last to suffer in a
national default. Hence when dealing with
governments, or government guaranteed entities
their debt is effectively senior to that of
private banks.
This has perverse effects,
notably that in marginal cases, a large loan from
international institutions can effectively close
the market to private lending, since the credit
default swap market comes to reflect the junior
status of private obligations, which in cases such
as that of Greece get shoved a very long way down
the country's monstrous list of creditors.
This superiority does not apply when
lending to the private sector, when normal rules
of bankruptcy are applied. Hence the officials of
the international agencies are much more likely to
suffer damaging career effects if they lend to a
private company, rather than to a government. The
World Bank has an affiliate, the International
Finance Corporation, which specializes in
private-sector finance, but its resources are
derived from the parent bank and are only a modest
fraction of those available to the parent.
A further problem in countries like
Myanmar where the private sector is poorly
developed is that its entities are both primitive
in their record-keeping (thus making them unable
to cope with the international agencies' armies of
bean-counters) and small in size, with
correspondingly small financing requirements.
World Bank officials are not going to make their
career move ahead by negotiating a $5 million
loan, and indeed the complexity and rigor of the
World Bank's lending procedures make such a loan
uneconomic for both borrower and lender.
In the past, the international agencies
have sought to get round the program by
instituting two-tier lending programs, in which
they lend money to a local bank, and then set
criteria for the bank to on-lend it local
borrowers. These generally result in expensive
credit for the local borrowers. In countries like
Myanmar (and most of the East European countries
in the 1990s), where the great majority of the
banking system is controlled by the state, this
also generally results in loans being made to the
pet projects of well-connected local officials,
with the true private sector getting very little
benefit from the program.
Thus the
international institutions will make most of their
loans to states for infrastructure, of one kind or
another. Sometimes the infrastructure will take
the form of a single large project, which can be
monitored fairly easily, and which is genuinely
necessary (since Myanmar has effectively been cut
off from international sources of finance since
1990, there are worthy such projects to finance.)
In other cases, the institution will
devote funds to such more nebulous sectors as
education or healthcare, but in these cases it
will be state-directed education or healthcare,
with all the opportunities for inefficiency,
politicization and graft that implies.
The
problem is partly one of mindset: since the
international institutions deal primarily with
governments, they subscribe generally to the
"Keynesian bureaucrat fallacy" in which benign and
infinitely wise government bureaucrats are thought
able to solve all economic problems. This causes
them not only to trust governments, but to
distinguish between governments on the basis of
which fits best with their preconceptions.
For example, only an international
bureaucrat could declare that the South Korean
budget is in deficit while Brazil's is in surplus.
For Korea's figure they take the persnickety
approach of knocking out the substantial surplus
on Korean social security, which like the US
system in the 1990s benefits from favorable
demographics, thus turning a true surplus into a
deficit. For Brazil, they ignore debt interest
payments altogether and talk only about the
"primary surplus" which of course after interest
is in reality a massive deficit.
Thus the
two governments are held to very different
performance standards, which doesn't matter much
in those cases, both of which are pretty fixed on
their path but can be a real disincentive to good
governance in borderline cases, such as many
Eastern European countries in the 1990s.
For Myanmar, the international private
sector financial markets are little more helpful.
In the current global state of grossly excessive
liquidity and ultra-high leverage, the size of a
loan is much more important than its yield. On a
large loan, the fees can be very substantial,
producing chunky bonuses for those involved.
My former colleagues at Citibank in the
early 1980s were entranced with a loan of $2
billion - real money in those days - to a
speculative and overleveraged Canadian oil company
called Dome Petroleum, run by a charming chancer
known as Smiling Jack Gallagher. Irreverent then
as I am now, I made up a country music song about
the deal:
"My father said 'Beware loose
women, Keep your gun behind your back And
never, never lend two billion dollars To a
man called Smiling Jack'."
Alas, my
reputation as credit prognosticator of doom was
wrecked six months later by a Canadian government
bailout!
There will alas be few Dome
Petroleums in Myanmar's private sector for the
next decade or so, so the international banks,
with money burning holes in their pockets, will do
deals primarily for the government. By and large,
the big banks' overheads are so high and their
officers so overpaid that they cannot afford to do
banking business on the modest scale that the
Myanmar private sector requires.
If money
was fairly tight, margins on small loans would be
sufficient to make them attractive to at least
some of the behemoths, but with Bernankeism rife,
margins have been squeezed to such an extent that
private sector lending in Myanmar is unlikely to
attract any significant capital flows.
Myanmar needs a substantial private
sector. To get one, it needs a domestic savings
base equivalent to that in China and other Asian
emerging markets. For this it needs a banking
system and other savings alternatives that offer
returns that are positive after both tax and
inflation. Without such savings, sound small
businesses will not be able to appear, let alone
to grow.
It also needs property rights and
a judicial system that is both incorrupt and
independent of government. Only after these
essentials are in place will such reforms as
privatization be possible, because only then will
there be a base of money and people in Myanmar
with the expertise to run a privatized company.
At that point also Myanmar will become an
attractive market for banks from the region, whose
scale is more appropriate for Myanmar's needs but
which cannot compete with the behemoths during the
massive tidal wave of easy money.
None of
these essentials are easily addressed by
international institutions. Indeed, by their focus
on the government and provision of massive loans,
they are likely to make Myanmar's position worse.
Spectacularly corrupt as it is, Myanmar's
government has so far been restrained by its
inability to raise more than 5% of GDP through the
tax system. Pouring loan resources into it merely
widens the field for corruption, and pushes up the
exchange rate, thereby suppressing private
business.
The final danger brought by the
international institutions and the private sector
behemoths is that of surfeit. We have seen it in
Vietnam, where a tidal wave of capital inflows was
succeeded by a balance of payments crisis. A
boom-and-bust cycle like Vietnam's that lasts only
a couple of years would be hugely damaging to
Myanmar's future. One can beg Myanmar's government
not to borrow too much, and the international
agencies and global banks not to lend too much,
but such requests would be futile.
In the
19th century, Myanmar would have been advised by
one of the London merchant banks, which would
generally (not always, Barings got in trouble in
Argentina in 1890) have carefully rationed the
flow of credit and ensured that the local
government followed sound policies, on penalty of
having the money spigot cut off. It was a MUCH
better system.
Martin Hutchinson
is the author of Great Conservatives
(Academica Press, 2005) - details can be found on
the website www.greatconservatives.com - and
co-author with Professor Kevin Dowd of
Alchemists of Loss (Wiley, 2010). Both are
now available on Amazon.com, Great
Conservatives only in a Kindle edition,
Alchemists of Loss in both Kindle and print
editions.
(Republished with permission
from PrudentBear.com.
Copyright 2005-13 David W Tice & Associates.)
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