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Savers stuck with bank deposits despite negative real rates

Bank accounts remain the most popular choice of investment for savers, despite inflation running higher than commercial banks’ deposit rates, said financial industry sources.

Bank workers count cash in a branch in Yangon. StaffBank workers count cash in a branch in Yangon. Staff

Sources at several commercial banks said there had been no decrease in deposits, while one said that as his bank increased its number of branches total deposits were still rising. U Pe Myint, managing director of CB Bank, doubted there would be any decrease in deposits as a result of the high inflation, because there were no alternative sources of investment.

The Central Statistical Organization’s office in Nay Pyi Taw confirmed to The Myanmar Times that core inflation was running at around 14 percent in September 2015 and 15pc in October, following the impact of flooding in the middle of that year. This figure decreased very slightly in November and December last year, a CSO official said. The consumer price index rose 13.7pc between January 2015 and November of that year.

Interest on commercial bank deposits, meanwhile, starts at 8 to 8.25pc for savings accounts. The lending rate is 13pc for commercial banks.

“In the months of the flood of 2015 inflation rates surpassed banks’ deposit rates and resulted in negative real interest rates,” said one Yangon-based economist. The situation was harmful to savers, particularly “grassroots people and fixed-income earners”, while the rich are able to hedge against inflation, he added.

Commercial banks have no plans to alter their interest rates this year, said U Pe Myint. The Yangon-based economist agreed raising interest rates would be difficult. “It would be more costly for businesses, and the risk would be that business raise prices and this could push up inflation further,” he said.

However, high inflation had to be monitored in order to assess whether it was due to immediate causes, such as the 2015 flood, or structural imbalances such as the prolonged budget and trade deficit, the economist said.

Although both factors could be at play, an official at the representative office of an international financial institution in Yangon, said 2016 inflation would depend mainly on the new government and its policy response to financing the budget deficit.

The K24 trillion budget for the new fiscal year and the associated National Planning Law, which have been drafted by the current government but will be implemented by the incoming NLD administration, propose a K3.9 trillion deficit.

Meanwhile, people looking for other places to put their money face risks, U Maung Toe said. Real estate prices seem to be on a downward trend, and gold is unlikely to increase, he said.

“It doesn’t seem like people have much choice in terms of investments that can keep up with inflation,” added one finance professional.

U Soe Thein, former deputy director general of the Ministry of Finance and now working in private sector finance, said that despite inflation making real deposit rates negative, other sources of investments could not compete with banks.

“Depositing money in bank comes with a very low chance of losing money at the moment,” he said. “Other sectors seem very high risk, and we’ll need to wait and see.”

Although competing sources of investment are scarce, the government has named six companies that will list on the newly opened Yangon Stock Exchange (YSX) in March of this year. “We have to wait and see whether [savers’] attention will move [toward the] public companies selling their new shares in March,” U Pe Myint said.

As soon as the government announced the companies that will list on the YSX, however, the OTC share prices of many of those companies became volatile, said several sources. OTC shares in Myanmar Thilawa SEZ Holdings Limited rose from K10,000 to K50,000 within a year, and FMI’s share price increased from K12,329 in January 2015 to K25,000 as of January 6.

“The stock market should not be replacement for putting investments in bank accounts,” U Soe Thein said. “Rather it should complement the banking sector to form a stronger financial system.”

High inflation will eventually cause serious problems in the long run, particularly when the Central Bank finally allows the market to determine interest rates. This is likely some way off, though the bank has tentative plans to liberalise the interest rates paid on long-term treasury bonds later this year. The bank introduced treasury bill auctions and deposit auctions in 2015, to absorb excess liquidity in the banking sector.

Source: Myanmar Times

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