Myanmar: Asia Pacific’s new financial market?


As banks look for new opportunities to pursue growth across the Asia-Pacific region, one of the most unlikely candidates that may prove to be a figurative goldmine is the greenfield nation of Myanmar (Burma). Once a poster child for the region’s economic development, Myanmar’s fall from grace has been dramatic and prolonged, but political stability and a more open border puts it in good stead for financial institutions to access a market of 48 million people previously denied to them.

With a series of reforms and political rhetoric under its progressive president, Thein Sein, Myanmar is today a nation with the potential to re-emerge as an economic powerhouse. In April its Government formed an agreement with the Tokyo Stock Exchange and Daiwa Securities to establish its own Stock Exchange by 2015. After struggling for so many years under international sanctions and holding a place on the United Nations ‘Least Developed Country’ list, Myanmar is now opening its boarders to offshore investment. The IMF Mission Chief for Myanmar, Meral Karasulu, has said the country is making progress and could see GDP growth of 5.5 to 6 per cent over the next two years.
Prior to military rule, Myanmar was a major global producer of teak wood products, and is well endowed with natural resources. Second only to Thailand in the region, it has the most arable land per capita at 2,030 square meters. Recent estimates also consider the country to have as much as 250 years of production worth of natural gas, positioning the country well to seek re-emergent growth.

The political sanctions levelled against it by many nations, including Australia, has previously stifled offshore investment opportunities. With the lifting of some of those sanctions by the EU Foreign Affairs Council, Australia and the US, the expectation is that it will become progressively easier to set up shop in Myanmar.

Banks in Australia, and the broader Asian region, have been encouraged by these developments. ANZ recently identified Myanmar as one of the Asian opportunities for greenfield growth, as part of its goal to become a regional super bank. This will complement the Bank’s strategy to boost established operations in Korea, Japan and China. "Increased trade and investment will help support the reform process in Myanmar, as well as enhance the economic prospects of ordinary Burmese,” an ANZ spokesperson told FST Media. This echoes comments previously made by CEO, Mike Smith. “While acknowledging that sanctions remain in place, ANZ is well positioned to play an active role in support of that process as part of the bank’s super regional strategy," he said.

Initial opportunities

The opportunity to be involved in Myanmar’s re-emergence may already be there. Thailand is one nation already capitalising on this. Since 2005, Thailand has spent $30 billion on Foreign Direct Investment (FDI) into the country, to the point where now 38 per cent of Myanmar exports and 23 per cent of its imports come from Thailand. Furthermore the nations share a 2,100km boarder, making Thailand a major entry route for tourism, and the two nations share resource synergies. Thailand is short on the natural gas resource that Myanmar has copious quantities of, and Myanmar lacks the manufacturing capacity of Thailand.

The scale of investment that will be required in Burma as it modernises will be massive. According to Asad Mawjee, Director of independent investment management firm, Global Thematic Partners, those corporations that already operate in country will need capital to meet the expected rapid growth, and that will be an early opportunity for financial institutions.

“According to our research the primary way with which organisations could invest and meet corporate governance requirements would be through Thailand,” Mawjee said. “When you think of the biggest beneficiary of Myanmar opening up the gates it’s Thailand.”

It will still be some time before Myanmar becomes a financial gold rush internally. With the capital markets closed it is currently difficult for an overseas bank to invest in the region in the first instance, and complicating things further the country has only just begun to unify a dual exchange rate system where the unofficial market rate had been massively different to the Government-set one (the official rate of the Myanmar kyat was K6/ $US1. Following the float of the currency in April, the initial rate was K818/ $US1). There’s still a long way to go before these reforms will stabalise the kyat into a reliable currency. This instability excludes the option to set up a direct presence in the country at this stage.

So for now, according to Asad, it would be wiser to invest in some of the infrastructure organisations that are going to need capital to undertake projects in the region. He identified two concrete producers; SCG in Thailand and Semen Gresik in Indonesia, as significant infrastructure opportunities and potential business partners for an entrance into Myanmar. Outside parties interested in investment could also potentially find partnership with regional players, CIMB Bank and Bangkok Bank, who are already established in the country.

“Long term it’s in a strategic position in part because of its location. It shares long boarders with India and China and has a population of 50 million people,” Asad said. “The question is when will these opportunities come around and what is the best way to invest in them?”

Warnings to the future

Sean Turnell, former Senior Analyst at the Reserve Bank of Australia and author of the book Fiery Dragons: Banks, Moneylenders and Microfinance in Burma, agrees the country’s development is in its infancy and there is a long way to go before it can realise its potential as an economy.

“The military takes far too much of the country’s financial resources. Because of the underdevelopment of the banking and financial services industry the primary vehicle for financing continues to be printing money by the central bank. And of course that’s deeply problematic for any financial sector because it tends to drive monetary instability.”

The greatest concern for Turnell is an early sign that Myanmar’s promise as an economy might hit a roadblock to offshore investment by modelling itself on Russia. There, an oligarch class emerged with capitalism that became problematic to many attempts at investment. Enjoying significant protections and concessions, the oligarch class became a powerful break to any attempts at reform. In Myanmar, there’s a system of export and import licenses already in effect that requires the right connections to tap into. Despite the increase in trade to the country, there’s already a problem with a substantial portion of the economic activity being controlled by a very select group of people.

Closer to home, financial institutions active in Asia might anticipate working in a market similar to Vietnam, which also followed the Russian model closely. “It is simultaneously both a model for Myanmar and a warning,” Turnell said. “The experience in Vietnam seems to have gone a little awry recently in ways that are not unconnected to corruption and connections to oligarchs and so on. It worries me that even if a fully democratic government was to emerge it could become very problematic if the fruits of reform were seen to go to one particular group of people. I think then public support for reform could disappear, just like in Russia and become replaced by a certain cynicism about where things are going.”

Although it’s the reason financial institutions are so interested in Myanmar, its underdevelopment will also hamper the pioneering organisations that set up a presence in the nation. Myanmar faces significant technological and infrastructure challenges as its financial system tries to catch up to the region. The roads are substandard and electricity is irregular. ATMs have begun appearing in the major capital cities, but those ATMs require dedicated generators to compensate for the power grid.

And, at a time where banks in the broader Asian markets are talking up mobility and social networking engagement, Myanmar has Internet and mobile penetration of just 0.2/100 people (Internet users) and 1.2/100 people (mobile subscriptions). By contrast, Thailand is 28/100 people and 101/100 people, Malaysia is 55/100 people and 121/100 people and Singapore is 70/100 people and 144/100 people.

“All of that is not insurmountable. It’s been the case that many countries have made the transition, but certainly in Myanmar, the problems are very acute and foreign investors will need to be aware of that,” said Turnell.