Myanmar is learning the hard way that accusations of ethnic cleansing and genocide are especially bad for business.
Last year’s military crackdown on ethnic Rohingya Muslims in Rakhine state, an offensive that resulted in well-documented atrocities and the evacuation of over 650,000 refugees across its border into Bangladesh, has had immediate consequences for the economy, specifically for foreign direct investments (FDI).
“We’ve seen a fall in FDI in 2017,” acknowledged Than Aung Kyaw, deputy director general of the Directorate of Investment and Company Administration (DICA), the government office that oversees FDI matters.
In 2017, DICA approved US$5.6 billion worth of new FDI, compared with US$7.8 billion in 2016. “What’s happening in the Rakhine state has definitely affected the country’s economy and FDI amount,” he said.
Myanmar’s economic growth in fiscal year 2016/17 (ending March 31) was 5.9%, compared with 7% in 2015/16, according to the World Bank. The bank projects 6.4% growth in 2017/18.
“The [Rakhine] crisis could negatively affect investment flows already affected by investor perceptions of slowing reforms,” the World Bank noted in its latest economic outlook report on Myanmar dated November 13. “Accelerating much needed investments in the economy will also require progress on structural reforms in, among other areas, finance, energy and business regulations.”
Myanmar’s FDI figures started to slip before the Rohingya crackdown that started in late August, due primarily to the government’s failure to push through significant economic reforms. A glacial pace in decision-making has come to characterize State Counsellor Aung San Suu Kyi’s National League for Democracy-led (NLD) government.
Since the Rakhine crisis erupted, there have been signs that the government is waking up to fact that faster action is needed. In December, Parliament passed long-awaited amendments to the Companies Act, legislation passed in 1914 that classified any company with more than 1% foreign equity a foreign entity.
That classification prohibited firms from buying land and joining the stock exchange; the new amended Act has hiked the threshold to 35%.
Last week (January 30) the government also issued a ‘Notice To Proceed’ (NTP) to four long-delayed power plant projects with an estimated value of US$5.6 billion. Combined, they are slated to add 3,000 megawatts (MW) to the national grid, potentially doubling the current capacity.
Currently about 30% of the population has access to electricity. Blackouts are common, even in the commercial capital of Yangon, during the hot and rainy seasons.
Despite the obvious need for investments in new power plants – the current national capacity is 3,189 MW while demand is growing 15% per year – the government has refused to lift subsidies on prices, making private sector investments in the sector unattractive.
Under the new agreements signed with six investors, including France’s Total SA, Germany’s Siemens AG, China’s Zhefu and Sinohydro, and Myanmar companies TTCL PLC and Supreme Group, the government has agreed to pay a reasonable tariff for the electricity produced, investors said.
“We have an initial agreement on the tariffs,” said Htu Htu Aung, a
senior executive at Supreme Group of Companies, a Myanmar conglomerate that is committed to building two liquified natural gas (LNG) power plants with joint venture partners in the Ayeyarwady region and Rakhine state.
Both projects have been under discussion since 2014. Under the agreement, projects will be financed by syndicated loans from international banks which shall be underwritten by government guarantees, he said.
“The current government doesn’t want to have more loans from lender organizations so we discussed again on how to proceed,” Htu Htu Aung said. The government go-ahead is for construction as well as negotiations on the power purchase agreement (PPA), which should usually come first.
Pressed on the agreed price, Htu Htu Aung just said it will be the “most competitive.”
What Myanmar needs to do to attract sufficient investment in power production is to reform the entire electricity market, according to Eric Rose, lead director of Herzfeld Rubin Meyer & Rose Law Firm Ltd, which announced on February 1 that it was closing its Yangon office after five years.
In a policy paper presented to the Suu Kyi government two years ago, Rose suggested Myanmar follow the Philippines’ model of establishing a wholesale electricity spot market that unbundles transmission and distribution charges and implement cross-subsidy schemes. The suggestion was never taken up, Rose says.
The government, however, does have an economic reform agenda – it’s just been slow in implementing it, sources say.
“Peace is still the first priority for us but ending decades-long armed conflict is a bit more difficult than we expected,” said Hanthar Myint, chair of the NLD’s economic committee. “It will take time, probably decades, so we have been accelerating the economic reform process since late 2016.”
Last year, the government amended the Foreign Investment Law, aimed at leveling the playing field between foreign and local firms.
Despite the changes, the European Union last month decided to postpone the signing of a bilateral investment treaty with Myanmar, in part because there are still concerns about the disparity in treatment for Myanmar and foreign companies, sources said. The Rohingya atrocities haven’t helped with confidence.
“We expected much economic growth last year but we had crisis in Rakhine state and it effected the potential arrival of foreign businesses,” Hanthar Myint said. “But this year, we are really hoping to yield from what we had done last year.”
Sean Turnell, an Australian economist who is a special consultant to State Counsellor Suu Kyi, confirmed that several liberalization measures were in the works this year. He said that the Rakhine crisis “has injected greater focus and urgency on the economic side of reforms.”
Initiatives underway include the rehabilitation of Myanmar’s state-owned banks, including the Myanmar Bank of Agriculture, a behemoth that could improve the lives and livelihoods of millions of Myanmar farmers (70% of the work force is still employed in agriculture) as well as the implementation of Basel standard regulations for the banking system.
“The new Condominium Law will come into effect, thus allowing foreign investors much greater certainty in purchasing apartments in Yangon and elsewhere,” Turnell said. “This will likely be a strong starter of foreign investment from the region, some of it ‘flight capital’ from China.”
Other developments on the drawing board include the implementation of regulations for the new Companies Act, which may make things fairer
for minority stakeholders; an assessment of state-owned enterprises
with an eye towards corporatization or even privatization; the
introduction of a Public Investment Program (PIP) that will look to
facilitate Public Private Partnerships (PPPs); and new Standard
Operating Procedures (SOPs) to help reduce corruption.
“The [Rakhine] crisis could negatively affect investment flows already affected by investor perceptions of slowing reforms” – World Bank
The government also hopes to slowly wean the state from printing kyat notes to finance the budget by increasing tax revenues instead with an eye on curbing inflation and currency depreciation in the process.
“Macroeconomic stability has always been and is everywhere a necessary prerequisite for substantial investment, domestic as well as international,” Turnell said. “Delivering such stability has been a key achievement of the NLD government,” he claims.
Turnell noted that the kyat has appreciated against the dollar in recent months and inflation is now 4.7%, compared with 16% prior to the November 2015 election that brought the NLD to power with a resounding democratic mandate.
“We have been making several changes and liberalizations to lure foreign investors and we expect the dramatic increase of FDI to start in 2020,” said DICA’s deputy Than Aung Kyaw. “Meanwhile, we just hope to stop the fall in FDI yearly.”