Risk still outweighs reward in Myanmar markets

Soon after Myanmar’s de facto leader Aung San Suu Kyi started her second year in office in 2017, then-finance minister Kyaw Win proclaimed that the economy was like an airplane at full throttle on a runway “ready to take off.”

Fast forward two years and with general elections looming in 2020, the promised economic lift-off has not yet materialized due to a combination of unfavorable politics and poor policy implementation that has kept investors away.

Suu Kyi’s government has given greater priority to the economy since a reshuffle last year that, among other things, installed a private sector oriented finance chief and a new investment czar.

Until then, the one-time pro-democracy icon had arguably overlooked economic reform in pursuit of her signature peace process initiative.

In the past year, a new ministry was created specifically to attract foreign investment while a number of previously closed economic sectors were opened to more foreign participation, including banking, education, insurance and retail.

But the local business community is still frustrated with the slow pace of reforming one of Asia’s most laggard economies, the legacy of decades of military misrule.

“While political crises are partly to blame … the economy was simply not a priority of the new government until recently,” said businessman Zaw Naing, owner of the local firm Mandalay Technology and a self-professed Suu Kyi supporter. “Many local businesses, especially small ones, are struggling to stay afloat right now.”

The government’s lagging economic management isn’t readily apparent in headline statistics, however.

The International Monetary Fund (IMF) expects Myanmar’s economy to grow 6.4% in the year period from September 2018-2019, a clip well above regional competitors and on pace with China, albeit off an exceptionally low base.

Other indicators, however, are less glowing. For example, approved FDI between October 2017 and September 2018 fell to its lowest level since 2014, according to official statistics.

Myanmar, meanwhile, remains near the bottom of the World Bank’s ease of doing business global index, placing 171th out of 190 countries worldwide, while recently conducted chamber of commerce surveys report sinking business confidence.

That’s hardly what observers expected when Suu Kyi was installed into power in 2016, a transition from military to quasi-democratic rule many thought would produce economic dividends through renewed foreign investor interest in one of Asia’s “last frontier” economies.

Under president Thein Sein’s quasi-civilian administration (2011-15), Myanmar saw the lifting of Western sanctions in reward for political reforms, a boost in official development assistance, an uptick in tourism, and big new foreign investments in energy and telecoms.

“Nothing since 2016 [the year of Suu Kyi’s installation] has been as significant in boosting the economy, which was also riding on wide international economic recovery and higher oil and gas prices,” said Vicky Bowman, director of the Yangon-based Myanmar Centre for Responsible Business (MCRB).

Bowman said earlier liberalizing reforms under Thein Sein actually caused sectors of the economy to overheat after decades in the doldrums and raised immediate concerns about the government’s ability to manage opening the long-closed economy to the world.

“In particular the ridiculous overvaluation of land and the high prices of hotel rooms in 2012-14 served to dampen investor and tourist enthusiasm, as well as leading some Myanmar companies to overstate the value of their assets.”

While the NLD has announced various reforms, seen most visibly in two new corporate laws, their impact have been constrained by new political and security crises, not least the military’s expulsion of Rohingya Muslims that the United Nations has said likely had “genocidal intent.”

Those accusations have deterred Western tourists and investors, with the latter worried about the impact of future sanctions on their outlays, not to mention the reputational risks of doing business in Myanmar.

“The European business community, especially garment manufacturers, wants the Myanmar government to show there is a political will to address the [Rohingya] crisis and other political challenges,” said Filip Lauwerysen, executive director at the European Chamber of Commerce in Myanmar.

For others, protectionism and poor infrastructure stand in the way. Tomoaki Yabe, a businessman in the logistics industry, says Japanese investors would enter the market in greater numbers if economic liberalization was accelerated.

“Myanmar’s infrastructure and business environment are not ready for sophisticated or advanced manufacturing,” he said in reference to Japanese investors. “Import regulations also make it challenging to set up a supply chain here, given the difficulty to source materials domestically.”

When the government eases foreign investment restrictions in particular business sectors, as they have done recently for retail, wholesale and insurance, more investment will come in, he added.

In that direction, Suu Kyi’s NLD-led administration has passed two major pieces of legislation, the Investment Law and Companies Law, which aim to reshape the local business environment and at least partially liberalize the economy.

The Investment Law will act to decentralize investment proposals under $5 million to regional bodies, speeding up the currently slow and laborious approval process.

AustCham Myanmar chairman Chris Hughes, who advised the government in drafting the bill, hailed the law as “among the first of their kind in the world” to include responsible and sustainable business objectives and requirements. “These requirements have teeth too – investments can be refused or prior approvals terminated if the standards are not met,” he said.

The Companies Law, which entered into force last August, allows foreigners to own up to 35% in Myanmar firms without the company losing its classification as a “local company.” The measure, at least on paper, could open several areas of the economy which are currently closed to foreigners, including banking and financial services. Implementation, however, has been slow, businesspeople say.

There are glimmers of hope. Myanmar’s only functioning Special Economic Zone, the Japan-led Thilawa SEZ in southern Yangon initiated under Thein Sein, is widely viewed by Yangon’s business community as a future model for liberalization.

Suu Kyi, too, has praised Thilawa as “a crowning success” and indicated that her government is keen to learn from its successes.

Yabe, who runs Thilawa-based logistics firm Daizen Myanmar, said the SEZ’s ability to attract $1.6 billion in FDI owes to modern infrastructure, state support for investors and transparent regulations.

“If the government wants to attract Japanese and other manufacturers to put their money in Myanmar [outside Thilawa], they need to sort out the power supply and road connectivity and provide clear and consistent regulations,” he said.

Elsewhere, however, the NLD’s infrastructure development push has raised concerns about transparency and a tilted competitive playing field, both among local and foreign investors.

For instance, Yangon Bus Public Company, a joint venture majority owned by the Yangon government, purchased 2,000 buses from three Chinese suppliers without an open tender in 2017.

Last year, another Yangon government-owned company signed a $1.5 billion “framework agreement” with China Communications Construction Company, a state enterprise once sanctioned by the World Bank for fraudulent practices, to develop a “new city” on 20,000 acres of land across the river from Yangon.

“As Myanmar does not have the proper regulations in place for public-private partnerships, private companies are concerned about the fairness and potential monopolies resulted from these state-backed ventures,” businessman Zaw Naing said.

That said, certain strides have been made towards improving transparency. Pyi Wa Tun, owner of Myanmar energy firm Parami Energy, believes Suu Kyi’s administration is determined to be seen as “a clean government.”

“Myanmar’s efforts to fight corruption is pleasantly shocking even by ASEAN [Association of Southeast Asian Nations] standards,” he claims, noting that dozens of senior officials have been brought down on corruption charges, including from within Suu Kyi’s NLD.

Pyi Wa Tun believes a proposed new “project bank,” established by the Ministry of Finance and Planning in January to transparently list all government infrastructure projects underway, has the potential to “put economic growth back on track.”

At the same time, two big external risks loom over the economy. First is the possibility the EU will revoke Myanmar’s tariff-free access to European markets under the Everything But Arms (EBA) scheme in punitive response to recent rights abuses, including against the Rohingya.

As Myanmar sends approximately 60% of its garment exports to Europe, any such move could be devastating for the sector, which currently employs an estimated half a million workers.

The IMF has warned that a prolonged humanitarian crisis and the withdrawal of EBA preferences would undermine economic growth. So, too, would punitive cuts in EU concessional donor financing.

“What is important now is for the government to go on implementing the Companies Law and other policies transparently, and seek common ground with Brussels to resolve the trade tensions,” said Lauwerysen.

The second big risk involves dirty money. An MCRB report and IMF assessment have flagged the the risk of Myanmar slipping back onto an international money laundering watchlist.

The Financial Action Task Force (FATF), an intergovernmental body, removed Myanmar from the OECD “grey list” in 2016 based on “significant progress” the country had made in combating money laundering and terrorist financing.

But a 2018 evaluation report from the Asia-Pacific Group on Money Laundering found that the country is still exposed to a large number of significant money laundering threats and identified many weaknesses particularly in regards to implementation.

The FATF’s observation period concludes this October and the body will decide in February 2020 whether to reinstall Myanmar on the “grey list”, a designation that will complicate and impede international financial transactions.

“The government has a lot of work to do to demonstrate that it is taking concrete action on anti-money laundering. And although the will is there, the task is huge,” said Bowman. “And as with everything, capacity is limited.”