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Waiting for Windfalls Won't Help Cr

Subject: Waiting for Windfalls Won't Help Creditors


Waiting for Windfalls Won't Help Creditors

by Louis Kraar

"Drug traffickers have become the leading investors in Burma's new market
economy and leading lights in Burma's new political order.  Drug money is so
pervasive in the Burmese economy that it taints legitimate investment.
Since 1988, some 15 percent of foreign investment in Burma and over half of
that in Singapore has been tied to the family of narco-trafficker, Lo Hsing
? Robert S. Gelbard
U.S. Assistant Secretary for International Narcotics and Law Enforcement Affairs
February 28, 1997

With little visible means of support, Burma's sick economy bumps along.
Hotels are rising in Rangoon with more rooms than can be filled with
tourists, while shops sell imported liquor and other luxury goods. Part of
this frothy activity is evidently fueled by repatriated profits from the
drug trade, but the military regime also taps another source of funds --
OPM, Other People's Money. This hoard helps the State Law and Order
Restoration Council (known by the initials SLORC) muddle through, even
though it cannot repay over $6 billion in other known international debts.
China, for instance, provides substantial undisclosed credits for purchases
of weapons. Other imports are being financed by Burma's neighbors and the
foreign oil companies that are its most significant outside investors, Total
of France and UNOCAL of the U.S.

SLORC has a strong appetite for money, but little means of repaying loans.
The chances of its new creditors getting repaid soon, in fact, are bleak.

Like most activities of the secretive regime, its pinched financial
condition is shrouded in opaque government accounts and misleading
government statements. SLORC's newspaper mouthpiece, The New Light of
Myanmar (September 13, 1995) claimed that Burma "will earn about $40,000 a
day" -- equivalent to $164 million a year from anticipated exports of
natural gas to Thailand. General David Abel, Minister for National Planning
and Economic Development, claims the economy is growing briskly, but the
U.S. Embassy in Rangoon reports that the legal economy provided an average
income last fiscal year of only $113 per person -- "far lower than was
observed even in the world's poorest countries."

Penetrating the mysteries of Burma's financial condition requires looking
beyond its own accounts to those of reputable international organizations.
The Burmese government publishes nothing about its external debts, which can
be seen more clearly in the World Bank's annual World Debt Tables published
in 1996 and the International Monetary Fund's staff report of January, 1997.

External loans to Burma have steadily increased from a low of $61 million in
1991 to $134 million in 1994, according to the IMF. Moreover, Burma can no
longer obtain the easy credit from development loans with 20-year terms and
effect interest rates of almost zero. Instead, Burma is getting tougher
seven-year loans at near - market interest rates, apparently from government
export-financing agencies of such major trading partners as China, Taiwan,
Thailand, Malaysia, and Singapore. The World Bank tables show that the
Burmese government accumulated $450 million of accumulated export credit
through 1994. Concludes an analyst who has studied the data: "It seems that
trade credits from the governments of Asian trading partners are Burma's
main financiers."

Burma has gained some debt relief from the Japanese government's Overseas
Development Assistance. In the process, Tokyo conveniently ignored the
charter of its own aid agency, which stipulates that loans should not be
granted to governments with excessive defense spending. SLORC spends nearly
half of its government outlays on Burma's bloated military, while
restraining investment in education and health. Nonetheless Burma got the
debt relief, which is put into an account that its government can use for

Burma's apparent policy is to make some interest payments only on debt owed
to multilateral financial institutions. In 1994, the latest year for which
figures are available, the Burmese government paid $173 million in external
debt service. About $125 million of that nominal payment went to the
Japanese and came back as debt relief from which Burma can import goods. The
remaining $48 million just covered obligations to the Asian Development Bank
and the World Bank. This suggests that trade creditors from neighboring
Asian countries will have to wait their turn to be paid back, some day. How
Asian creditors justify such loans to their own legislatures is an
intriguing question that no one in the region seems to be asking, at least

Thailand, however, is beginning to worry about how its private traders with
Burma will be paid. On a visit to Rangoon in May, Thai Prime Minister
Chavalit Yongchaiyndh urged Burmese officials to protect Thai traders from
foreign exchange risks. Those business people have complained about the
risks inherent in having to deal with dual exchange rates: an official rate
of 6 kyat per dollar and the more realistic rate of 170 kyat per dollar.
Bangkok wants Burma to ease foreign exchange risks by moving toward a
genuinely convertible currency.

Supposedly Burma will obtain plenty of cash once the offshore Yadana natural
gas field starts exports to Thailand. Foreign investors and creditors are
having a tough time now, but are being told to just hang on for another year
or so. They probably must wait a lot longer than that. Even the start of gas
flowing through the pipeline will not generate enough hard currency earnings
to bail out Burma. Exactly how much hard currency the pipeline will deliver
to Burma and when are far from clear, but many observers cite $400 million a
year as the eventual net effect of the Yadana project on Burma's balance of
payments. That figure, however, is not money that SLORC can bank on. It may
include the import-substitution effects from an electric-generator and urea
fertilizer facility that are yet to be worked out and financed, much less built.

SLORC, in fact, has already mortgaged much of its immediate earnings from
the gas pipeline. Burma borrowed $7 million from UNOCAL in order to finance
imports of urea fertilizer and must repay the American company, with
interest. Likewise, Thailand has reportedly supplied millions of dollars
worth of oil against Burma's future earnings. In addi tion the state-owned
Myanmar Oil and Gas Enterprise reportedly has an option to buy 10% to 15% of
the Yadana consortium's equity, and may pay for that investment from the
Burmese government's first three years of receipts from a production-sharing
agreement on the natural gas.

Consequently Burma may not gain anything close to $400 million a year until
beyond the year 2001, and that sum would still be far from enough to cover
its chronic balance of payments deficit. It totaled an estimated $575
million last fiscal year ending in March. The largest and fastest growing
factor in that current account deficit is a merchandise trade deficit.
Burma, of course, could severely restrict imports for five years until the
Yadana windfall starts, but the government has limited ability to do that.
So far SLORC simply ignores the balance of payments problem, hiding it in
understated official statistics. Says one informed observer,"The SLORC
appears to lack either the will or the political legitimacy to sustain an
austerity campaign."

Not since the days of Indonesia's Sukarno regime in the 1960s has Southeast
Asia seen such a profligate government with little capacity for rational
economic management. No windfalls from either a gas pipeline or narcodollars
can bail out Burma.

Louis Kraar is a senior editor of Fortune magazine. The views expressed here
are those of the author.

Burma Debate March/June 1997