Myanmar’s leaders are not used to being feted by foreigners.
For almost 50 years a secretive junta of generals kept the country – formerly known as Burma – isolated from the outside world. Local political opponents were often jailed. Stifling sanctions left it unable to trade with most Western nations.
Yet, in early September over 1,000 international bankers and investors stood to applaud Myanmar’s softly spoken president Thein Sein as he inaugurated a Euromoney investment conference in the new administrative capital, Nay Pyi Daw.
The cause of such euphoria? Sweeping political and economic reforms begun over the past 18 months that are opening up this opaque country and have led the West to suspend most of its sanctions.
Landmark achievements include the release of political prisoners, including opposition leader and Nobel Peace Prize winner Aung San Suu Kyi, the relaxation of media censorship as well as new laws to attract foreign invest ment. That’s in addition to on-going cease-fire talks with ethnic minorities.
The biggest surprise of all came on April 1, 2012 when Suu Kyi won an historic by-election and was appointed a member of Myanmar’s parliament. Overnight it became acceptable to do business with the regime.
“We are undertaking the financial reforms to contribute to the well being and economic development of our country,” the president told delegates.
Yet investors had better beware. For all of the steps Myanmar has taken, it remains a minefield for the unwary. The country’s infrastructure is a shambles. Its laws are antiquated. It has no properly functioning bureaucracy and no reliable banking system. And it is notoriously corrupt.
Question marks also remain over the country’s political future and the readiness of the former hardline generals to hand over power in elections slated for 2015.
“Anyone who tells you that they know what is going on in Myanmar is lying,” says one businessman who regularly visits Yangon. “I can probably count the people who genuinely understand what is happening inside the country on my fingers.”
Ambitious reforms
One man who does know is U Win Shein, the country’s minister of finance and revenue.
Appointed in September 2012 in a reshuffle that removed some of the hardliners, he is widely viewed as one of the new generation of reformists who are trying to professionalise the government. He is well aware of the size of the country’s obstacles.
“Being a country in transition, we face enormous challenges,” Win Shein tells Asiamoney. “We lack infrastructure, knowledge, experience and capital. We are trying to overcome our difficulties with the support of the international community.”
The dire state of the country is due to decades of economic mismanagement by the country’s former military leaders.
Back in the early 1960s, Myanmar was one of Asia's rising stars, with annual per capita income of US$670, more than double that of neighbouring Thailand. But under the catastrophic Burmese Way to Socialism, it became the region's poorest, with per capita income of US$835 in 2012. Myanmar also went from being the world's biggest rice exporter to a country that could not grow enough to feed its own people.
Considering the damage done by such inept rule, new reforms could hardly be more welcome.
In just two years, more than 40 separate laws have been enacted. They range from a new foreign investment law that in some cases allows 100% foreign ownership to a new central bank law, as well as regulations that free up the country’s once rigid foreign-exchange regime.
Win Shein says tax reforms are next, as well as measures to streamline and restructure ministries to speed up policy implementation.
“We have to change our mind-set,” he says. “We now have a parliament. We have checks and balances. We have rules and procedures. The 2008 constitution is very important.”
The new openness is striking. Not long ago anyone uttering the word ‘democracy’ publicly could have ended up in jail. Now people are only too happy to discuss politics or the role of Suu Kyi.
“We are not afraid any more,” says a taxi driver stuck in one of Yangon’s interminable jams.
Yet the biggest challenge facing president Thein Sein and his quasi-civilian government is how to rapidly alleviate poverty in a country ranked as one of the world’s poorest.
It was economic woes as much as political repression that led hundreds of thousands of protesters to take to the streets in 1988 and again in 2007, plunging the country into a crisis from which it is only now emerging.
Win Shein admits that it will take time to bring about change.
“People want everything immediately,” he says. “But sometimes you cannot change fast enough. You need time. But we are trying our best.”
Unclear laws
Key to this process will be attracting foreign investment to help revitalise moribund infrastructure and build new industries.
The government is eager to encourage investment. After months of delays, it finally unveiled a new foreign investment law on November 2, 2012.
The law offers some tempting titbits, including tax holidays of up to five years as well as 50-year land leases. On paper, it even guarantees against expropriation.
But it’s far from clear exactly what many of the legal provisions mean, and it’s not even certain whether the laws can be enforced, given the absence of an independent judiciary.
“The foreign investment law leaves a lot of room for discretion,” admits Kevin Murphy, managing director of Andaman Capital Partners, a Yangon-based investment advisory group. “The government is learning on the job. The first guys to do a deal in a new sector will have to put in extra leg work”.
New arrivals face plenty of other obstacles. Limited office space in Yangon and soaring demand from foreign investors has sent real estate prices to dizzy levels. Monthly rents can be as high as US$70-US$100 per square metre, on a par with New York or Tokyo.
It’s also difficult and expensive to find qualified staff, since most universities were closed down during the pro-democracy uprising of 1988 and never re-opened.
For US investors there is the added risk of ensuring that they do not do business with cronies, military-linked companies or other undesirables that appear on a Specially Designated Nationals (SDN) list. As of September 2013, more than 200 officials, enterprises and crony businesses were on the SDN, subject to stringent US sanctions. Companies or individuals failing to respect them could face criminal charges.
Big attractions
Yet the wave of optimism sweeping the country is almost palpable.
In Yangon, new construction sites are springing up everywhere. Hotels need to be booked months in advance and traffic jams suffocate the roads.
Alisher Ali is typical of the new breed of savvy frontier market investors. After honing his investment banking skills in markets like Russia, Kazakhstan and Mongolia, he arrived in Yangon in July 2012, founding Mandalay Capital, which provides corporate finance and advisory services.
“I believe Myanmar represents the best investment opportunity in the frontier markets globally in the next decade,” he enthuses. “This is like Indonesia, Thailand and Malaysia in the 1980s and 1990s. It has massive potential.”
Another big advantage, says Ali, is that Myanmar has no lingering communist legacy like China or Vietnam, meaning that people are more open to doing business.
“Obviously you can wait and enter in five or 10 years’ time when all the laws and infrastructure are in place. But by then most of the upside will be gone.”
Myanmar boasts plenty of opportunity. The country has vast resources of oil, gas, teak, jade and copper. It has a population of 60 million who lack even the most basic consumer goods. And it is positioned in one of the fastest growing regions in the world.
The McKinsey Global Institute projects that the economy has the potential to quadruple from US$45 billion in 2010 to over US$200 billion in 2030, with per capita income rising from US$1,300 to US$5,100 over the same period.
A few major international companies have already signed deals.
On June 27, the government announced that Norway’s Telenor and Ooredoo (formerly Qatar Telecom) had fought off nine global consortiums to land the country’s first hotly contested mobile phone licences. That’s despite the fact that a new telecoms law has yet to be passed.
Foreign oil companies are also voting with their chequebooks. In the latest auction, 59 bidders were shortlisted for 18 onshore licences.
Yet the foreign money flowing into the country is a drop in the ocean compared with neighbouring Thailand. Between April 1 and end-August, Myanmar approved just US$1.8 billion in foreign direct investment. Thailand, in contrast, is targeting US$33 billion for the year.
Aung Naing Oo, director general at the Ministry of National Planning and Economic Development, believes that the country is headed in the right direction.
“Myanmar has already achieved a great deal,” he tells Asiamoney. “We are very clear about our goals, but when it comes to micro-management there are a lot of weak links.” In particular, Aung Naing Oo believes the organisational culture needs to improve to encourage greater personal initiative and professionalism.
Some bankers think that is not enough. “This is not simply about good intentions,” says Paul Gambles, managing partner of Bangkok-based MBMG Group. “It is about execution. The real issue for foreign investors is: can you earn decent returns and can you repatriate profits?”
Banking overhaul
There’s a more prosaic issue when it comes to ploughing large sums of money into Myanmar: its lack of a fully functioning banking system.
Jean-Pierre Verbiest, a former country head at the Asian Development Bank and an adviser to Myanmar’s central bank, has witnessed the teething problems first hand.
“Until mid 2012, it was common for some private banks to write their balance sheets by hand,” he says with a laugh. “But it didn’t matter because the central bank had no monetary policy.”
Most locals don’t trust the local banks. In 2003, three leading private lenders had their licences suspended after a run on deposits. Confidence in the financial system never quite recovered.
Yet judging by the rapid expansion of automatic teller machines (ATMs), this sentiment is quickly changing.
Twelve months ago it was difficult finding an ATM anywhere. Now three separate ATMs dispense cash 24 hours a day in the central courtyard of the revered Shwedagon Pagoda.
Other changes have been just as rapid.
In July, parliament passed a law granting autonomy to the central bank. Previously it had been a department of the Ministry of Finance, responsible for printing banknotes.
For Winston Set Aung, one of the respected new deputy central bank governors, the priority is to put in place the building blocks to ensure stability in the financial system. A new bank law, expected by the end of the year, is likely to pave the way for joint ventures between local and foreign banks.
The government faces a dilemma over such liberalisation: how best to gain the participation and expertise of foreign banks while ensuring they don’t dominate the weaker and less experienced local players.
Development of an interbank market is another key step. Currently the central bank oversees an informal daily auction in the local currency, the kyat, involving up to 17 dealer banks. However, starting in 2014, interbank currency trading in kyat is set to commence.
Building the institutional capacity and deploying the new monetary policy tools to promote broad-based economic growth is not going to be easy. And, as the example of spiralling inflation in Vietnam shows, the price of getting it wrong can be extremely high.
“We are aware of the lessons from other countries,” says Set Aung. “We have to work in a systematic fashion.”
Infrastructure woes
A trustworthy financial sector will help Myanmar guide capital flows into sectors that most urgently need them. Infrastructure stands top of that list.
From a lack of roads and modern telecommunications to constant power cuts, the country is in desperate need of new investment. Even the aged 20-seater plane that flew Asiamoney from Yangon to Nay Pyi Daw had to turn back halfway due to technical problems.
In a recent study, McKinsey & Company projects that Myanmar needs to spend US$320 billion on infrastructure between now and 2030 – US$180 billion on real estate, US$80 billion on water and utilities and $60 billion on transportation.
The figure does not include other vital ‘software’ like technology, education and vocational training.
In theory these needs offer foreign investors a goldmine of opportunities. Yet many big infrastructure companies are hesitant to commit to billion-dollar deals until Myanmar’s regulatory environment is clearer.
“The dilemma is: how do you do things right for the long term whilst giving foreign investors a fair deal?” asks Nancy Rivera, managing director of structured finance at the Overseas Private Investment Corp., a US development arm. “The government must be prepared to accept best international practices.”
It must also draw up a workable independent power-plant law and a realistic tariff structure.
For a template of what can go wrong, investors need look no further than Dawei. Launched with great fanfare back in May 2008, this hugely ambitious project on Myanmar’s southern coast was slated to include everything from a deep-sea port to a special economic zone and industrial estates.
Yet five years down the line the project has barely moved forward because of inadequate funding and lukewarm support.
Many put the blame squarely on Italian-Thai Development. The company won the original 75-year concession to build the industrial complex and port but it has a history of taking on big projects and then struggling to fund them.
The bottom line is that investors need rewards that are commensurate with the risks.
“Let the canary win if it is the first one down the coal mine,” says Murphy. “The danger is that badly-needed infrastructure projects do not move forward fast enough.”
Political risks
As important as extra roads, power and clean water is the issue of politics. Will the government hold free and fair elections as promised in 2015, and if so who will win?
Opposition leader Suu Kyi has said she will run for president. But she is currently banned from doing so by the 2008 constitution, which forbids anyone married to a foreigner from taking office.
Even if the constitution were changed (it is in the very first stages of being amended), there are plenty of other question marks. Would Suu Kyi get enough votes to outflank the military? And if she did, would they hand over power?
“At this stage, the only certainty in my mind is that the generals will continue to pull the strings,” says one journalist who has covered Myanmar for more than two decades.
Yet there is a more nuanced and pragmatic option to the upcoming elections. U Shwe Mann, the influential house speaker and a former general has also announced that he will run for president. One scenario would see him take the top job while Suu Kyi enters the executive branch, possibly as vice president or house speaker.
Would the NLD accept such an outcome? “At the end of the day what most people want is stability,” says one local businessman. “The genie is out of the bottle. Reforms are starting to take root. The generals can’t turn back the clock.”
There is another benefit of such a scenario. Whilst Suu Kyi is still hugely popular, she lacks any experience in running a country. The same can be said of her NLD colleagues, many of whom like Suu Kyi are in their late 60s and 70s.
“A dream team of Suu Kyi and Shwe Mann would be the best of all worlds,” says one analyst. “It would unleash a tidal wave of foreign investment.”
Not everyone, however, is convinced that the transition will be straightforward or that there won’t be a backlash against reforms from hardline generals.
Also, the government is holding talks with ethnic minorities, some of whom it has been fighting since independence in 1948. Settling disputes with these sometimes violent groups will be essential to ensuring the sort of security foreign investors want to see.
“Investors have to understand that there is political risk,” says Jainil Bhandari, Partner at Rajah Tann. “There is very little you can do to totally insulate against it.”
Bumpy journey
Mynamar offers potentially fertile ground for investors, yet the combination of an uncertain political situation, lack of infrastructure and outdated laws with questionable enforcement make it a highly risky prospect.
The country’s overriding problem is that it needs to do so much virtually from scratch.
At least 200 laws are awaiting consideration by the Parliamentary Bill Committee. Implementing them could take years.
“The real danger is paralysis,” says Simon Makinson, partner at Allen & Overy (Thailand). “Everyone is offering the government good advice, but often they don’t know which way to turn.”
President Thein Sein and his inner cabinet have deservedly won praise for their bold reforms, but it is still early days.
Myanmar’s attractions will not vanish overnight. But now looks an unwise time to invest unless you are a multinational or a company with deep pockets and a long time frame.
“Most investors who enter Myanmar on the first wave are going to lose money,” warns an emerging markets veteran. “Just look at Vietnam or China. It simply doesn’t pay to go in early. The whole system is untested.”