Reform promises opportunities for overseas investors – but locals and neighbours alike are wary
Near Yangon’s historic riverfront on Monday, the buzz at the Thein Phyu Money Changer Centre came not only from the overnight news that Aung San Suu Kyi and her opposition National League for Democracy party had won a landslide victory in parliamentary by-elections. It was also the first trading day at a newly liberalised market rate for the kyat, the local currency.
The opening rate of Kt818 to the dollar was a far cry from the previous official rate of Kt6.4. The shift is the most crucial of a raft of financial reforms under way in the south-east Asian country as its long-ruling generals ease their grip.
“It’s a new system, new era – and I hope, also new politics,” says one young teller at the recently opened exchange centre, a venture by six commercial banks where a shiny digital signboard takes pride of place.
Yet just outside, rusting taxis rattle past dilapidated buildings. Power cuts have kicked in again, despite Myanmar’s abundant natural gas reserves. On the broken pavements, one stall featuring ancient handsets has hot-wired public phone lines to offer local calls for the equivalent of 10 cents.
In a nation with a per capita income of barely $800 a year, mobile phones and computers are limited to the affluent classes. Sim cards for mobile telephones cost from $3,000 upwards, and most homes lack landline and internet connections. There are no cash machines for foreigners’ use, and just one or two for domestic customers. Credit cards are accepted only by a few high-end hotels. Like many other things, this is about to change – and that change will be given impetus as western governments, led on Wednesday by the US, ease sanctions that have helped to cripple the economy.
Already, however, the reformist government is reeling out changes at breakneck speed. A more liberal foreign investment law will emerge to replace the existing, restrictive code within weeks. A land use bill improving rights for farmers, who constitute about three-quarters of the nearly 60m population, has just been passed. Sweeping financial, banking and other economic reforms are in train.
Some banks have recently gained permission to install cash machines. One company has proposed introducing a Kt5,000 ($7) Sim card. Businesses, from foreign-owned hotels to local department stores, hope that credit cards, like other aspects of a modern financial system, will accompany the easing of sanctions. “It will be a watershed moment,” says Craig Powell, general manager of Traders, a leading downtown hotel.
The “managed” float of the kyat enables the government to intervene to influence the exchange rate, something experts – including the International Monetary Fund and Joseph Stiglitz, the US economist who has taken a close interest in Myanmar – say is essential. The aim is to create a cushion against the impact of expected heavy inflows of aid and investment that could push up inflation.
At the same time, the government is planning to liberalise current account transactions and develop capital markets – including allowing the entry of foreign banks – and to encourage banks to lend rather than holding government bonds.
Together, the measures form the economic frontline of bold reforms unleashed by the government of President Thein Sein since it took power just over a year ago. Mr Thein Sein, a former general known for his low-key approach and lack of cosy business ties, has astonished compatriots and the world with his determination to bring Myanmar into the 21st century.
Driving this push, say government insiders, was a growing realisation among the generals that decades of economic mismanagement and diplomatic isolation under their harsh rule had brought the country to its knees by 2010.
By then, Myanmar had for some years been ranked one of the poorest countries in global indices. It is difficult to imagine it was Asia’s rising star in the early 1960s, the world’s biggest rice exporter with an educated workforce and a well-functioning economic and legal system. One UN agency described it at the time as the nation “most likely to become fully industrialised” before its neighbours.
However, the 1962 coup that brought the generals to power put paid to that, leading instead to decades of stagnation. During a 2003 domestic banking and financial crisis, one of the economy’s lowest points, private banks were shuttered and mortgages banned. Even today, it is hard to obtain housing finance, and farmers are forced to turn to often predatory private lenders for credit.
In one of the frankest assessments yet, U Myint, the president’s most senior economic adviser, told a recent gathering of foreign aid officials: “We have to acknowledge that over half a century since we gained independence, it has not been lack of resources but rather misconceived ideas and flawed policies that have been our undoing.”
That message underlines the view among local analysts that the impetus for change came – perhaps inadvertently – from Than Shwe, the previous leader and military strongman. In an effort to redeem his stained legacy, he chose Mr Thein Sein, a loyal, quiet military professional, to run in 2010 elections to succeed him.
Western sanctions had by then brought Myanmar to the point where it was more than 70 per cent reliant on China for foreign direct investment: “Not a happy place to be,” remarks an expatriate executive. According to the Economist Intelligence Unit, the value of approved foreign investment projects reached nearly $20bn in the 2010-11 financial year, leaping more than 60-fold from the previous year. But 99 per cent of it was in oil and gas, mining and power-related projects. The consumer economy remained moribund.
Government actions have now begun to reflect a keener appreciation of public needs – in a way that has also affected foreign governments and businesses. The abrupt suspension last September of a $3.6bn Chinese hydropower dam project in Myanmar’s north telegraphed the changing attitude. The decision followed a public outcry over the environmental impact and terms that meant 90 per cent of the power generated would go to China.
The decision, though applauded by many, shocked China and would-be investors, putting pressure on the government to accelerate a new foreign investment code to assure investors that suspension of a mega-project was a one-off. Through a series of bilateral visits, the government also discreetly assured China that its other projects – including up to six dams and a massive pipeline and port development, remained on track.
A few months later, however, a Thai-led project to build a coal-fired power plant in the planned $56bn Dawei port development in the country’s south was suspended. One Yangon-based economist says the government again used the decision to signal to investors that big projects would be welcome only if they fitted with its new-found concerns about the environment and local impact. Both issues are addressed in new environmental laws.
Cross-border trade with Thailand, China and India is huge and largely unofficial. Other countries, including South Korea and Malaysia, have invested too. The significance of Myanmar’s re-emergence is noted most of all by Thailand, which regards it with mixed feelings.
On the one hand, Thailand has benefited from open access to Myanmar’s natural resources – more than half of Bangkok’s electricity supply relies on gas piped from its western neighbour. Thai companies have also moved into property development and service industries there.
On the other hand, Myanmar is drawing a steady stream of tourists, one of Thailand’s mainstay service industries, and is targeting close to 1m visitors in 2014, up from about 300,000 in 2011.
Other south-east Asian countries will also have justifiable concerns. Myanmar’s labour force is largely unskilled. However, with wages as low as Kt700 a day for a worker in a garment factory, it could compete with many of the low-cost manufacturing destinations.
The IMF said in January that it saw “high growth potential” for the country. Citing stronger commodity exports and higher investment, supported by robust credit growth and improved business confidence, it estimated economic growth of 5.5 per cent in the 2011-12 fiscal year and forecast a rise to 6 per cent in the current year to March 2013. The government recently raised its estimate to close to 7 per cent in the current fiscal year.
Inflation, projected at 4.2 per cent for the 2011 financial year, is on the rise, however, and expected to pick up to 5.8 per cent or higher given the likely increase in foreign investment and aid flows. That in turn has lent greater urgency to financial reforms, including the kyat’s managed float and moves to grant the central bank independence from the finance ministry.
The currency reforms are not only fundamental to a more open economy, they are “a key to western investment”, notes Prof Stiglitz. Indeed, says Rajiv Biswas of IHS Global Insight: “This monetary transition will encourage a significant upturn in trade and investment flows over the medium-term, helped by major new legislation to encourage foreign investment.”
For western investors, the “look-see” phase is likely to intensify with the lifting of sanctions. Before then, however, companies are eyeing opportunities to sell goods and are investigating potentially lucrative infrastructure and transport contracts. Big investment banks are arranging client visits. Some, including Nomura of Japan and Switzerland’s UBS, have issued reports cautiously endorsing Myanmar as a possible “Asian tiger” – even as they all warn that developments will take time.
“Myanmar is in the same place China was in early 1979, when Deng Xiaoping said: ‘We have to do something new.’ Myanmar is opening up,” Jim Rogers, the billionaire US investor, told a recent conference in Singapore. “If I could put all my money into Myanmar, I would.” The country, as Mr Rogers noted, is “right between China and India, 60m people, massive natural resources, agriculture … they have metals, they have energy, they have everything.”
As for Myanmar’s own companies: “We’re jittery,” says one local executive with a pharmaceuticals importer. “Big foreign investors have economic scale and access to markets – they can easily overwhelm us … We have had discussions with the government about this; we can’t compete with multinationals.”
After local business fiercely opposed initial government proposals to give foreigners eight-year tax breaks, the incentive was watered down to five years in the forthcoming foreign investment code, he says.
“Even so, it will be a struggle for us. In the end, though, we have lived through so many systems – and have faced the worst scenarios. We can survive, we can handle anything.”
Sanctions impact: ‘Reformers need help to address heightened expectations’
The orderly conduct of Myanmar’s April 1 by-elections appears to have met an important western benchmark for easing sanctions. The upshot is a frenzy of diplomatic manoeuvring both from within and outside the country.
In Myanmar, the issue has acquired a new political dimension after the resounding electoral defeat of the government-backed Union Solidarity and Development party. People close to Mr Thein Sein warn of mounting pressure on the former general from conservatives within his government and party who opposed his ambitious reform agenda.
Since coming to power just over a year ago, he has played a delicate balancing act between competing political agendas – including from a core of retired military officers who were reluctant to make concessions that could threaten their power.
While praised abroad for his moves to release political prisoners, resolve ethnic conflicts and ensure clean elections, the president is facing internal criticism, says one government adviser. “He fought the hardliners in order to try to meet the west’s demands; they complain it has brought nothing but humiliation and now he’s under pressure to deliver economic benefits – the first and most visible thing would be a significant gesture from the west.”
Charles Petrie, a former UN resident representative in Myanmar, warns that people’s expectations have been raised and that the west should move quickly.
“Everything hinges on three things: the democratisation process, ongoing efforts to fully resolve conflicts in ethnic zones, and economic reform efforts. When you are dealing with the first two, and even if you are successful, the fragility of the economy means that third leg of the stool may not be strong enough,” says Mr Petrie. “They [government reformers] need support to help address heightened expectations that have been raised by the reforms.”
Many argue in favour of a phased easing of sanctions, to maintain pressure on the government for further reform. Others warn of economic disruption from a flood of foreign investment that could accompany a broad lifting of restrictions.
Western business is keen to access the resource-rich country. Reforms include a foreign investment code, now being finalised, that is understood to offer strong incentives for companies to set up in Myanmar. Their worry is that regional rivals may get in first. “Many Asian firms are already investing and operating in Myanmar,” says Rajiv Biswas at IHS Global Insight, a forecaster. “Asian companies are definitely positioning for more rapid economic growth in Myanmar as economic reforms are implemented.”
By Gwen Robinson
4 April 2012
@ Financial Times