The Stampede Into Myanmar

Via the Emerging Frontiers blog, a look at Myanmar

WITH the United States and the European Union suspending sanctions against Myanmar, Western companies are rushing to invest in a country they were forced to leave half a century ago. Myanmar is South-east Asia’s final frontier. There is almost a stampede to be the first into this country of 60 million. But aspiring investors are in for a rough ride. Myanmar is the most challenging investment climate in Asia with the exception of North Korea. General Ne Win’s 1962 coup closed the borders, nationalised the economy and kicked several hundred thousand Indians out of the country, many of them entrepreneurs and shopkeepers.

It is true there is hope now. The government is making a concerted effort to negotiate a peace agreement with the Kachin. Naypyidaw has begun to overhaul its mismanaged economy. Parliament is working on a new investment law. Two land laws were recently passed by a surprisingly active and reformist Parliament. The President has already introduced a realistic exchange rate, signed the ‘Labour Organisation Law’ allowing the right to strike and form unions, and a law on Special Economic Zones. The government hopes these zones will play a similarly important economic role as Shenzhen has for China. President Thein Sein – a former general in General Tan Shwe’s junta – surprised everybody with his bold initiatives this past year. He brought Ms Aung San Suu Kyi into the political process, and signed peace agreements with 11 ethnic groups. A new peace agreement with the Kachin in the north is underway. Peace with the ethnic minorities has been elusive since independence in 1948. And for the first time the government discusses previously taboo subjects like widespread ‘poverty’, and ‘underdevelopment’.

But the fact is that generals have tragically mismanaged Myanmar’s economy for decades. Civilians were banned from government and even from advisory positions. The often bizarre economic policies of General Ne Win and General Tan Shwe made Myanmar the poorest in Asia aside from North Korea. Reliable economic data is still scarce. Official statistics say Myanmar is Asia’s fastest growing economy with an average gross domestic product (GDP) growth of 12 per cent over the past 12 years, a rate that would have tripled per capita income. But electricity production tells a different story, as it often grows 1.5 to two times as fast as GDP. Electricity consumption per capita grew on average only 2.7 per cent a year. In other words the economy was stagnating. The country’s recent political opening has raised widespread expectation of economic progress and reducing poverty levels. Success hinges on the economy’s transformation and job creation.

But how well-poised is Myanmar to deliver? In fact, the economy remains backward. Visiting a bank is indicative. Unloading a small lorry parked in front of the bank, workers carry big bags on their backs into the branch. The bags of cash are deposited inside. Cash is stacked to the ceiling, counted and recounted behind the counters, looking more like a paper factory than a bank. This is the backbone of Myanmar’s cash-based economy. Banks by law provide virtually no credit facilities to farmers, no mortgages, no consumer credit, and no credit cards – a result of United States sanctions. Most overseas transactions are handled in Singapore, and by the informal hundi system. There is textbook mismanagement: an overvalued exchange rate; highly subsidised electricity; controlled and sometimes banned rice exports; poor infrastructure and low public sector salaries; price controls, and import and export licences and taxes. The government runs chronic budget deficits, partly because it receives only about 3.5 per cent of GDP in tax revenue. The central bank prints the shortfall every year. This may no longer be necessary as soon as Myanmar becomes a quasi petrol state, thanks to offshore gasfields currently being developed. Already, Total and Chevron are exporting over US$3 billion (S$3.8 billion) in natural gas to Thailand annually. The Shwe gasfield comes on stream next year, and its natural gas will be pumped straight through a pipeline into China’s Yunnan province. In 2015 another big offshore gasfield will start exporting to Thailand. Two years ago, 12 new oil and gas investments were approved worth US$10.8 billion. Another 10 offshore blocks were auctioned off last year.

This boom may sound like good news but actually spells bad news for manufacturing and agriculture. Myanmar is suffering the Dutch disease with its gas and jade exports boom – the national currency, the kyat, has appreciated to 820 against the US dollar from 1,400 in 2008, despite the central bank printing more money, high inflation, and no visible gains in workers’ productivity. Despite this, manufacturing remains a promising growth area for the Western foreign investment Myanmar is so keen to attract to counterbalance Chinese companies dominating foreign investment in the last few years. For one, Myanmar’s cheap labour is a significant advantage, unlike rapidly rising wages in Thailand and China. Wages are low by regional standards, with unskilled workers making between 1,500 kyat (S$2.30) and 2,000 kyat a day, or about US$2. Some Thai textile manufacturers are moving their factories to Yangon. Agriculture remains critical to Myanmar. Productivity in this sector hails back to the British era when Burma was the world’s leading rice exporter. But decades of poor government policies, including an artificially low domestic rice price, stagnated production. While most of the 30 million workforce will find employment in agriculture, an overvalued exchange rate, a lack of credit, and high 10 per cent inflation have depressed real prices of many agricultural products by 50 per cent in the last five years, impoverishing those on the land.

The opportunities in Myanmar are real, but so too are its legacy problems from decades of poor economic management. It will take brave political decisions by the government to significantly improve the investment climate and create a level playing field for foreign investors. Meanwhile caution should be a byword for investors lining up for opportunities in South-east Asia’s suddenly available second largest country.

This entry was posted on Wednesday, June 6th, 2012 at 7:45 am and is filed under Uncategorized.  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.

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