Myanmar’s Investment Perspectives

A Brief History of the Myanmar We Know

After reading so much news about the recent reforms and the hope for a better Myanmar I had the chance to visit the place myself. Myanmar is home to about to 55-60 million people depending on the source (last official census in 1983). In the last four decades Myanmar made headlines for all the wrong reasons. If you happen to follow the media we all know the stories. Run under a ruthless military junta since 1962, Myanmar built a reputation around human right abuse and isolation. It is well known for using force labor and for denying foreign aid during the 2008 cyclone that left an estimated 138,000 fatalities. It is one of the world’s most corrupt countries and serves as a major hub for drug exportation. It was also condemned by the United-Nations (UN) for refusing to hand over power to the legally elected Government of the country, the party led by Nobel Peace Laureate Aung San Suu Kyi. After being invaded and colonized by foreign powers, certain paranoia and superstition runs deep inside the junta. Mysterious actions and a penchant for secrecy only attracted more attention. Under their rule they moved and changed the capital’s name and location on several occasions, changed the flag and tweak around with the time zone under the impression that it will confuse potential foreign evil imperialistic invaders.

However, Myanmar has suddenly been on a path of political and economic transformation, spearheaded by President Thein Sein, a former general. The transformation in Myanmar is accelerating with the U.S. and other developed countries easing sanctions and restrictions. Instead of being mention in the “bad boy” club with fellow countries such as Iran and North Korea, Myanmar is now becoming the darling of the media and is being labeled as the “next big thing” or the “golden destination”.

Why the sudden rush of reforms? There are no clear answers but several factors such as the Arab Spring, growing civilian unrest, foreign pressure, a decaying economy and living standards, fear of becoming China’s puppet, diminishing regional influence, having richer more in powerful neighbors, the embarrassing rejection of the ASEAN chairmanship and the pursuit for wealth might all play a role.

Why is Myanmar important?

Why is Myanmar getting front page attention? Myanmar has always potentially mattered because of its abundance in natural resources, its strategic commercial location and an untapped market of 55+ million people that is now opening up. It is at least four decades behind Thailand in economic development. Burma has the largest and most strategic landmass in Southeast Asia. Contiguous to five countries, Burma is an inordinately resource rich country, and is the only ASEAN member state that has land borders with China and India.

Brief Macroeconomic Data
Comparisons between Myanmar and Thailand are often made. Here is some basic intelligence.

Political Reforms
Myanmar has been busy with reforms, expansion of international relations, removal of sanctions, debt forgiveness, bilateral trade, the redrafting the foreign investor law, modernization of the stock exchange, the floating of the currency and steps toward democracy. These factors would enhance growth opportunities and boost the country’s economic development.

Foreign investors interested in Myanmar will find that one of the boldest economic reforms is the new investment regulations. Reuters has obtained a draft of the foreign investment law, the first in more than two decades. According to the draft, foreigners will no longer need a local partner to set up businesses in Myanmar and may be granted a five-year tax holiday from the start of commercial operations.

Reuters reports:
The draft law adds to other signs of a remarkable economic liberalization in the long-isolated country. Foreigners, it said, can now either own companies 100 percent or set up a joint venture with Burmese citizens or government departments. Such joint ventures must involve at least 35 percent foreign capital.

Foreign investors can also lease land from the state or from private citizens who have permission to use land, the law says. The initial lease would be for up to 30 years, depending on the type and size of foreign investment, and could be extended twice, for up to 15 years on each occasion.

Foreign firms will not be allowed to employ unskilled foreign workers, and citizens of Myanmar must make up at least 25 percent of their skilled workforce after five years, with companies ensuring the necessary training to achieve that.

The validity of the news is uncertain at the moment given the leak related to confidential parliamentary discussions. The law is expected to be passed by its parliament in 2012.

Another important economic development is the creating of a new stock exchange by 2015. Daiwa Securities and the Tokyo Stock Exchange

Since April 1st the government decided eliminate the dual exchange and to let the kyat float. Noting the float would help the government’s aim to gradually eliminate restrictions on international payments and transfers abroad.

In the long run, for Myanmar to foster sustainable development it needs to focus on avoiding military conflict, continue its path towards democracy, foster stronger international relations, built market confidence by taking steps toward eliminating corruption, have a reliable judicial system, and invest in infrastructure, technology, healthcare and its education system.

The Investment Opportunities

From an investment perspective, Myanmar is a resource rich country with a sizeable consumer market of 55-60 million people. Myanmar possesses significant natural gas and oil reserves which is strategically important to high energy demand China and Asia. Myanmar has also 80% of the world’s teak supply, precious gemstones and metallic minerals, and substantial fertile land for agriculture. The preservation of temples, pagodas, and colonial buildings combined with its natural beauty heightens its attractiveness as a tourist destination. Its geographic location with its long coast line is ideal for commerce with China, India and other parts of Southeast Asia and provides an opportunity to be a central shipping hub. It also has a large supply of cheap labor which is getting the interest of neighboring countries where wages are rising.

If I had money to invest I would focus on sectors of strategic importance such as infrastructure, power generation/energy, banking, tourism, trade/port, agriculture, water supply, waste management, roads unpaved, railways, and communications. Why? Key industries such as infrastructure, energy, and banking will serve as the foundation for all other industries in the sector. They are the wheels of a well-functioning economy. All other sector of the economy is dependent on these three sectors among others. For an industrial company to grow, it needs a solid infrastructure, a reliable affordable source of power, and a well develop banking system that provides financing. It is hard to develop a country without a solid foundation. By investing in these sectors you are positioning yourself at the top of the ladder.

My suggested area of focus:

Power generation
As Myanmar grow so does demand for energy. Without energy, Myanmar can’t progress. In many parts of the country electricity is elusive and relies on diesel generator. Power blackout are frequents. According to the World Bank and Asian Development Bank, 25% of the population is connected to a grid, near the same level as the Democratic Republic of Congo. That leaves 75% as potential consumers. The power infrastructure is extremely important. That is one of the main questions you hear from people looking to set up manufacturing. Neighboring Thailand, with a similar population, consumes 20 times more electricity per capita with access available to more than 99 percent of its population, thanks in part to natural gas imported from Myanmar. Hydroelectricity represents nearly 70 percent of Myanmar’s power generation, while natural gas fuels more than 20 percent and coal 9 percent, according to the state-run Central Statistical Organisation. Installed power capacity for fiscal 2011-12 was estimated at 2,544 megawatts, up from 1,717 four years ago.

There are opportunities in the area of:
1) The production of energy (either restoring or producing),
2) Improving energy efficiency of plants’ generating units.
3) Distribution. Improve the conditions which energy is transmitted.

Infrastructure
Because of the lack of maintenance and capital expenditure Myanmar is suffering from inadequate infrastructure – roads, bridges, canals, railways, ports and communication facilities – impedes economic growth. Massive investment is required to rebuilt and expand the current infrastructure. At the moment major investment in the sector is expected and should stimulate the real-estate market and other sector of the economy.

Banking
To grow the economy it requires a well-functioning banking sector to provide credit efficiently to Myanmar firms and households. A solid well capitalized banking sector is considered a pillar of the economy. Having access to credit are the wheels of development. It would be good to establish a nationwide bank that reaches to the most rural areas, the same strategy ACLEDA is using in Cambodia. Micro-credit institution would also helpful with the goal of targeting and fostering an entrepreneur spirit

Tourism
Research for this particular topic are my personal eyes. Yangon, the business hub of Myanmar, is seriously lacking modern hotels and nice restaurants. It is a frontier market with frontier looking hotels with a few exceptions (Traders). There is a lack of supply in all the categories, from backpacker to bargain to luxury. There is a growing hungry demand which might explain the double in price for a nice room on year to year basis. Yangon expects the ASEAN Chair in 2014 and the Southeast Asian games in 2013. If Myanmar wants to welcome more foreign delegations and foreign investors massive investments in upper quality hotels are required. The increase in tourism and foreign investors will fuel a construction boom in the sector. When tourist spends it often directly goes in the pocket of the people who needs it the most. Just imagine if Myanmar becomes a premier destination like Thailand what will happen to standard of living with all this hard currency pouring in the country. There is a supply gap and there is an opportunity to fill it.

Communications
According to Nomura Holdings Inc, one in 30 people have a mobile phone and less than one percent of the population has an Internet connection. It is the trend in poor country to have to use a cell phone for talking, using the internet and potential transferring money. There is a lot of development to in this sector. Communications networks are required for the success of the other themes.

The Risks

Like most frontier market, there are many challenges and risks. Bad governance and corruption, a weak regulatory framework as well as poor infrastructure, limited human capacity and electricity shortages present significant obstacles to sustainable growth. An inadequate infrastructure leads to development and productivity constraints. A fragile banking sector limits private sector access to credit, and weak rule of law discourages investments. The government also needs to build international confidence that the military junta won’t intervene with the recent reforms towards democracy. The next big test is in 2015 where the country holds the national elections.

Conclusion

Today’s emerging markets are yesterday frontier markets. Myanmar has taken the path of economic and social progress. This is the same journey made by big emerging countries today. Despite the progress achieved through Myanmar’s domestic reforms, there is still much to be accomplished. Myanmar’s continuing reforms, expanding international relations, removal of sanctions and debt forgiveness as factors that would enhance growth opportunities and strengthen regional economic, financial and diplomatic ties.

Caution while investing is required because economic growth could be great but it does not guarantee a good return on any equity investment, private equity or public. As mentioned above, I would focus on sector where the economy is dependent on them such as power generation, banking, infrastructure and communication. By investing in these sectors you are strategically positioning yourself to directly benefit from the growth and future opportunities.

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