Myanmar: Promise … With Pitfalls

Courtesy of The Economist, a report on the investment potential of Myanmar:

MANY OUTSIDERS SEE Myanmar’s opening up as an unmissable economic opportunity. It is the last large Asian country to become connected to the world economy, leaving only North Korea, which is both smaller and infinitely less promising. Myanmar, with about 60m people, is closer to Thailand (70m) or Vietnam (88m). Indeed, its rapid development recalls Vietnam’s opening up, the doi moi, in the late 1980s, after decades of war and isolation.

The opportunities for foreign investors are plain. As well as offering a large potential domestic consumer market, Myanmar is rich in gas, oil and minerals. It has about 50m barrels of proven oil reserves and 280 billion cubic metres of gas. China is only one of many contenders for exploiting this wealth. On April 11th Myanmar’s government opened an auction of 30 blocks of offshore oil and gas. Big international oil companies such as Chevron, Total and Royal Dutch Shell will be interested, as will the Thai, Malaysian, South Korean and other Asian companies that stuck with Myanmar during sanctions. The government is putting a further 18 onshore blocks up for bids.

Myanmar has oil and gas in abundance, but investors are equally interested in what it does not have, which is pretty well everything else. After decades of state control and economic isolation, Myanmar is almost devoid of any functioning financial services; one bank estimates that only about 10% of the population have any sort of bank account. Spotting the opportunity, 28 foreign banks have set up representative offices in the country. Under existing legislation all they are allowed to do is conduct research, but the potential for full retail banking is clear. Microfinance companies are already permitted to operate. Cambodia’s very successful ACLEDA bank, which has a strong presence in microfinance throughout the region, has just opened in Myanmar and should do well.

The telecoms sector was heavily restricted by the old military regime, mainly for political reasons, but now the government is auctioning off the nationwide network to a mix of local and international firms. This auction attracted as many as 91 initial bids, with the world’s biggest firms all putting their hat in the ring. Twelve companies have been shortlisted.

Tourism is another industry desperately in need of investment. Tourist numbers have risen to about 1m a year, causing hotel prices to rocket. But supply is now beginning to catch up. Accor, a French hotel group, recently announced that it was building big new hotels in Yangon and Mandalay, as well as the first ever international hotel in Naypyidaw. With its natural beauty and its wealth of Buddhist monuments and pagodas (notably in the ancient city of Bagan, to many the equal of Cambodia’s Angkor Wat), Myanmar might eventually see as many visitors as Thailand, which is currently getting about 21m a year. That would significantly boost its economy and provide hundreds of thousands of new jobs.

Thein Sein’s government is trying hard to get the right regulatory framework in place to absorb the wall of money heading Myanmar’s way. So far the legions of foreign consultants and lawyers now swarming all over the country have been impressed by the results. Most importantly, the government is fully aware that after decades in seclusion it has a lot to learn. Ministers and officials are soaking up all the advice they can get, wherever they can find it.

Help wanted

In the very early days, this meant ordering in episodes of “The West Wing”, a television series about the White House, to see how democracy works in practice. Now the learning process has become more targeted. The Japanese are helping to draft a stockmarket law; the Asian Development Bank is working on a new company law; the IMF, among others, is helping to reform the central bank; and the British have flown Shwe Mann, the Speaker of the lower house of parliament, to London to see democracy in action at Westminster.

Even the Japanese, keener than most, are being ultra-cautious. The generals jokingly tell their guests from Japan that their home country has joined NATO—“No Action, Talking Only”

The reforming ministries have already passed or drafted many of the laws needed to tilt the economy towards openness and liberalism, probably to the point of irreversibility. Early successes included the swift abandonment of the old official exchange rate of the kyat in favour of a managed exchange rate close to the old unofficial level, which gives the buyer about 100 times as many kyat for his dollars. A new law to legalise trade unions in the private sector was passed in 2011. And a new investment law took effect towards the end of last year, giving investors most of what they wanted. More recently the government also pledged to sign up to the New York Arbitration Convention. Simon Makinson, managing partner in Myanmar of Allen & Overy, a law firm, says this is a good thing because no big multinational company would have wanted to see its commercial disputes settled under Myanmar’s own archaic legal system. The finance industry has been cheered by a proposal currently being debated in parliament that the central bank be split off from the government and manage monetary policy on its own.

But much more remains to be done. Thousands of businessmen now fly to Naypyidaw on the new air-shuttle service from Yangon to be flattered by ministers, quiz officials and look at opportunities, but so far relatively few are biting. Even the Japanese, keener than most, are being ultra-cautious. The generals jokingly tell their guests from Japan that their home country has joined NATO: “No Action, Talking Only”.

The Japanese are right to be prudent. Myanmar may have a lot of potential, but it remains a “frontier” investment destination. The obvious drawbacks, as the manager of Japan’s Famoso factory has learned, include an intermittent electricity supply; internet connections that are poor in the cities and almost non-existent outside them; dreadful roads that often become impassable in the monsoon season; and scarce and extremely pricey office space.

Most of these physical problems can probably be fixed relatively quickly. Myriad other shortcomings will take much longer to remedy. The country’s once excellent education system was all but destroyed by the generals, leaving generations of Burmese with poor language and numerical skills and no higher education worth the name. Labour might be cheap, but all those new employers will soon run into severe skills shortages. Qualified professionals of almost all kinds, from lawyers to doctors to teachers, are in short supply.

Beneath a thin veneer of expertise and dedication at the very top, much of the bureaucracy consists of former military officers who have been provided with sinecures. They constitute what is known as the “green ceiling”, which means that getting anything done can take a long time. According to Romain Caillaud, a Yangon-based consultant for Hans Vriens & Partners, a consultancy, “there are still very few multinationals making money in Myanmar…tenders require a lot of work to be completed, it takes a lot of effort and makes the process unprofitable.” Corruption is a big problem, with many of the quasi-military bureaucrats expecting bribes and kickbacks. And although most sanctions have been lifted, those that remain in place will force many (particularly foreign banks) to tread warily for a while yet. America, for instance, maintains restrictions on dealing with the 100 or so most prominent “cronies” of the old military regime.

But the most important legacy of Myanmar’s recent past is the unresolved ethnic strife that has been tearing the country apart for decades. The government knows that investors crave stability and peace more than anything else. Can it move the country towards a more representative, more federal system that would offer the best hope of providing it?

This entry was posted on Saturday, June 1st, 2013 at 5:48 am and is filed under Burma.  You can follow any responses to this entry through the RSS 2.0 feed.  Both comments and pings are currently closed. 

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Wildcats & Black Sheep is a personal interest blog dedicated to the identification and evaluation of maverick investment opportunities arising in frontier - and, what some may consider to be, “rogue” or “black sheep” - markets around the world.

Focusing primarily on The New Seven Sisters - the largely state owned petroleum companies from the emerging world that have become key players in the oil & gas industry as identified by Carola Hoyos, Chief Energy Correspondent for The Financial Times - but spanning other nascent opportunities around the globe that may hold potential in the years ahead, Wildcats & Black Sheep is a place for the adventurous to contemplate & evaluate the emerging markets of tomorrow.