Monday, September 25, 2017

State banks reluctant to trade USD

Myanmar's private banks have asked the country’s regulator to stop state-owned lenders hoarding US dollars, but officials at state-owned firms say they face barriers to letting more of their foreign exchange holdings flow into the interbank market.

Pedestrians walk past Myanma Foreign Trade Bank in Yangon. Photo: Naing Wynn Htoon / The Myanmar TimesPedestrians walk past Myanma Foreign Trade Bank in Yangon. Photo: Naing Wynn Htoon / The Myanmar Times

The global interbank market in foreign exchange, where banks are free to trade foreign currencies among themselves, is worth trillions in US dollar terms.

Myanmar has had its own local interbank market since 2013, which the Central Bank set up in the hope that lenders would rely less on daily Central Bank dollar auctions and more on each other for foreign currency needs.

US dollar auctions typically meet only a small fraction of the commercial banks’ demand for US dollars, because the Central Bank itself has a limited store of foreign reserves. A World Bank report from May estimated the Central Bank’s foreign exchange reserves were equal to 2.9 months of import cover as of November 2015.

Daily auctions in dollar volumes have also declined this year, potentially due to a drop in the Central Bank reserves, and the nascent interbank market has not been able to pick up the slack, the report said.

Myanmar’s interbank market has faced a variety of hurdles since its inception, and the latest – according to private banks – is that the state-owned lenders are not pulling their weight.

These public sector banks were allowed to handle foreign currency for years before their privately owned peers, and until recently they held a monopoly on providing foreign currency accounts to state-owned companies or joint ventures.

This special treatment has left them with larger dollar holdings than the private banks, who say their state counterparts should sell more of their foreign exchange in the interbank market.

The daily volume of dollars exchanged at the interbank market rarely passes US$25 million, according to Central Bank data from the start of October 2015 to April 2016.

A Central Bank official would not reveal the percentage of interbank exchange involving state banks, fearing that the information would have a “negative impact”.

Private-sector bankers, say that state-owned banks are overly cautious in holding on to dollars to cover liquidity needs, while officials at state-owned lenders say they do participate in the forex market, but that managing their liquidity and profits are bigger priorities.

An official at Myanma Foreign Trade Bank (MFTB) told The Myanmar Times his bank’s participation in the interbank market comes second to its focus on making timely payments to its correspondent banks.

Domestic banks in Myanmar use correspondent banks to act as intermediaries or conduct business on their behalf in other countries, which avoids having to open a branch abroad.

MFTB has agreements with more than 200 correspondent banks, and state-owned lenders are hoping to expand their correspondent networks following an exemption from US sanctions in May.

U Khin Pe Oo, deputy general manager of state-owned Myanma Investment and Commercial Bank (MICB), said his bank does sometimes sell currency on the interbank market, depending on how much foreign currency the bank holds.

“As a state-owned bank we need to follow monetary policy,” he said. “But we also need to focus on profits, because we receive funds from the government budget based on those profits.”

MICB, like other state-owned banks, has to present its balance sheet to the Ministry of Planning and Finance each year, and request funds for the coming year based on profits.

Bending the rules

Banks are required to sell foreign currency if their exposure rises above 30pc of paid-up capital.

A private bank bugbear is that state-owned banks are informally exempt from this rule, although U Khin Pe Oo said MICB does observe the requirement.

But U Mya Tha, Myanmar Oriental Bank’s chair, said the Central Bank should still scrutinise state-owned banks’ foreign currency exposure and their reluctance to part with dollar holdings.

“There are many things that need to be reformed and that the Central Bank needs to discuss with the state banks,” he said.

U Mya Than is also chair of the Yangon Foreign Exchange Market Committee, which has recently been reorganised to include foreign banks.

But while the Central Bank allows foreign lenders to participate in the forex market, foreign banks can only lend in dollars, and have no real reason to participate in the interbank market, he added.

Although private banks accuse the Central Bank of inaction, the regulator is trying to address the problem, an official said, asking to remain anonymous.

He told The Myanmar Times that starting in January 2017 the Central Bank will impose penalties for all banks with foreign currency reserves above the 30pc level, and has plans to deal with banks that are overly long or short a particular currency.

The penalties and policy of equal treatment for private and publicly owned banks are enshrined in the new Financial Institutions Law, which was passed in January this year.

“All institutions will be treated equally under the new law,” the official said. “We are going to discuss this [matter] with state banks and other related institutions.”

But the official was also honest about the potential difficulties in penalising state-owned banks, which – although regulated by the Central Bank – are also ultimately under the control of the Ministry of Planning and Finance.

“All we can do is issue rules, regulations and warnings,” he said. “But we will probably have some difficulties penalising state institutions.”

Some progress has already been made this year in altering state-owned banks’ behaviour.

In the first quarter, MFTB and MICB agreed to return large volumes of US dollars back to private banks, following discussions between the then-Ministry of Finance, the Central Bank, and public and private banks.

Almost all private banks have foreign currency accounts at MFTB and MICB, because until 2012 only state-owned lenders were allowed to handle foreign currency, and those banks still provide settlement services for private lenders.

But over the years the net balance private banks held at MFTB had built up and up, and they demanded the money back.

The net balance between private banks and MFTB is now settled weekly through Nostro accounts, which U Mya Than said had been very helpful for private bank liquidity.

The Central Bank also now allows private banks to offer a wider range of foreign banking services, to compete better with state-owned lenders, with the specific aim of helping private banks to access foreign currency and, in turn, the interbank forex market.

As of March 22 private banks are able to offer state-owned enterprises foreign currency accounts, ending the state banks’ monopoly on SOE clients, although U Mya Than said he was not aware of any SOE opening an account with a private bank.

He said state enterprises are far more familiar with the state-owned banks, and the interest rates available at private banks are not much more attractive.

“The most we can expect is for government joint ventures to bank with the private sector, because the foreign partners prefer privately owned banks,” he said.

Additional reporting by Steve Gilmore