Myanmar paves way for bond issuance with new draft law
Myanmar has moved closer to an offshore bond issue after circulating a draft law clarifying how the sovereign can raise debt, and hiring Citi and Standard Chartered as ratings advisers. The moves have been welcomed but investors have been warned to expect a long wait before they get their hands on any deal, writes Shruti Chaturvedi.
A proposal to revamp Myanmar’s public debt management law lays out which government entities can raise external debt. Under the draft guidelines, only the ministry of finance can borrow money or issue government bonds.
The government may issue guarantees for projects after approval from the country’s national assembly, said law firm VDB Loi in a note on August 7, citing information from the Myanmar Official Gazette in July (Volume 68, No 31).
The draft also specifies the purposes for which the sovereign can raise debt. These include funding a budget deficit, projects and investments, repaying existing debt and refinancing.
The move towards more transparency was followed by news of the government mandating Citi and Standard Chartered Bank for ratings advisory work that will open the door for the country to issue an international sovereign bond.
The two developments come as the fast growing country seeks to move away from depending on official development assistance (ODA) funding and looks to develop its capital markets, both for local and overseas investors.
“Myanmar has been through significant transformational changes over the last five years and implemented a number of reforms, from exchange rate unification to the creation of an independent central bank and a more liberal trade and investment system,” said Lyn Kok, president and chief executive, Thailand and Greater Mekong at Standard Chartered.
However, as is typically the case with tightly controlled frontier economies in which market forces have played a limited role, reaching a point where the country can issue an international sovereign bond will take a few years, said market participants.
“It [the draft law if implemented] will give more comfort and be reassuring for foreign investors and institutions, as they will see the government is trying to organise the process of raising external debt better,” said Edwin Vanderbruggen, senior partner VDB Loi.
“They are trying to move away from case-by-case [approval] practice and trying to get some structure in. It is a modest beginning and it is a pity we still do not have a comprehensive framework for public-private-partnerships, which would allow for a bit more flexibility for the government to arrange for guarantees. Nevertheless, it is a strong step in the right direction.”
Adisorn Singhsacha, managing partner at Twin Pine Consulting, which advised on Laos’ Thai baht bond issues, echoed his sentiments. By centralising government debt raising to one ministry, the country is bringing itself up to speed with its more economically developed neighbours, he said. How much of an impact this will have remains to be seen, as implementation of reforms can take time.
Accessing funding cheaply
With a population of 53.7m and a GDP growth rate of over 8%, Myanmar offers plenty of opportunities for foreign investors. The country is rich in oil and gas resources and strategically located between Asian powerhouses India and China.
However, it suffers from a high current account deficit and needs a lot of investment in infrastructure to develop roads and power to harness its potential in commodities. Moreover, lending and commercial banking are still in their infancy, with micro finance and micro credit more prominent.
Myanmar will need to issue bonds as a way to fund the development of ports and projects, said Singhsacha. “As a capital market instrument, Myanmar is not likely to issue a sovereign bond in the near term. But they’ve just appointed banks to provide rating advisory so I think the rating will come two or three years down the line.
"For a bond issuance, you are probably talking about three to five years from now.”
He cited the East-West Economic Corridor initiative that will include different transport links between Laos, Myanmar, Thailand and Vietnam as an example of a project that will need foreign capital.
High borrowing rates in the local currency provide yet another incentive for Myanmar to go offshore. “Commercial banks’ local currency lending is set at 13%,” said Singhsacha. In contrast, multilaterals have provided Myanmar with foreign loans in the Libor plus 4% to 6% bracket.
Foreign investors and the country itself stand to gain greatly from the development of Myanmar's capital markets. But for that to happen, the government will have to undertake more reforms, such as standardising the approval process, so that if a borrower meets certain criteria they can go via an automatic route, said market participants.
Market commentators do not expect a Big Bang. But the opening-up of the economy and its exposure to international markets will not only help the government access funding essential to Myanmar’s development, but will also encourage local corporates to follow better market practices when it comes to auditing and contracting.
That will in turn help them to attract foreign lenders, said a source who advises such firms.
“We have a generation of young and middle aged Burmese businessmen who want to do things the right way but who do not have the experience or resources to do so," said the adviser. "Now, these guys are paying taxes, which they didn’t [before]. They are cleaning things up, getting employment contracts in order, so it’s having a great effect.”