As Myanmar prepares to elect a president in the coming days, completing its transition to democracy after 54 years of military rule, investors are eagerly looking for signs that the new government will improve the business environment and unlock the potential of Asia’s most alluring market.
“Myanmar is the last of the closed markets in Asia to open up,” says Thomas Hugger, founder and chief executive officer of Asia Frontier Capital, a Hong Kong outfit that manages funds focusing on Southeast Asia, Vietnam and Iraq. Hugger has been scouring the country for investment opportunities in recent months. “It is rare that investors get a chance to go into a country where everything is starting from almost zero,” he says.
On February 1 the country’s first elected parliament took office, bringing to power the National League for Democracy (NLD) of Aung San Suu Kyi, the longtime opposition leader and Nobel Peace Prize winner. Her party won an overwhelming victory in the November 2015 election, winning 390 of the 498 seats contested. The 70-year-old pro-democracy icon had hoped that the crushing popular mandate would persuade the military authorities to remove or ignore a constitutional ban on her becoming president because her two sons have British nationality, but the military has refused to budge. (The constitution reserves 25 percent of seats in parliament for the armed forces, enough to block any constitutional change.)
In recent weeks, however, the two sides appear to have struck a sort of modus vivendi under which the NLD will elect one of its members as president and Suu Kyi will act as the power behind the throne, with the military retaining considerable influence. During the parliamentary campaign, she played down the constitutional issue and claimed she would be “above the president.”
On March 10 the NLD nominated Htin Kyaw, 69, an Oxford University economics graduate, writer and close adviser to Suu Kyi, as its candidate for president and Henry Van Thio, a member or the Chin ethnic minority, for the vice presidency. The military put forward its own presidential candidate, General Myint Swe, the chief minister for the Yangon region. Htin Kyaw is virtually assured of defeating the general when parliament votes on March 17. The other two candidates will take up vice presidential posts.
“The NLD is just reverting to Plan A, which is to let a loyalist start the transition process and hopefully hand over to Suu Kyi at some point midterm,” says Moe Thuzar, a fellow at the Institute of Southeast Asian Studies in Singapore.
The handover of power to an NLD government will be a key milestone in the transformation of Southeast Asia’s poorest and most closed country. “There is now a lot more political clarity on the way forward in Myanmar,” says Manu Bhaskaran, CEO of Centennial Asia Advisors, a Singapore-based subsidiary of the Washington strategic advisory firm Centennial Group. Both the military and Suu Kyi have chosen to be pragmatic and have shown a preference for compromise, he contends.
The new government will face no shortage of challenges. The economy has been expanding at an annual rate of more than 8 percent for the past three years, the fastest rate in Asia, but the country remains one of the poorest in the region. With a population of 53.4 million and a gross domestic product of some $64.3 billion, its per capita GDP of $1,270 exceeds only that of Cambodia among developing East Asian and Pacific countries, according to the World Bank. Fast growth has pushed inflation into double digits and caused the current-account deficit to grow to around 8.5 percent of GDP. Myanmar’s currency, the kyat, has fallen by 20 percent over the past six months, to a rate of about 1,201 to the U.S. dollar.
“With a loose fiscal policy and explosion in credit growth, the economy has been overheating,” says Gareth Leather, senior Asia economist at Capital Economics in London. Trying to rein in the excess without slowing growth dramatically will be a tough balancing act for the incoming administration, observers say. “The first thing the new government needs to do is to stabilize the economy,” says Melvyn Pun, CEO of Singapore-listed Yoma Strategic Holdings, one of the largest private sector investors in Myanmar with interests in banking, real estate, infrastructure and consumer goods.
The government also faces other tricky political difficulties. Investors will want to see steady progress in resolving the country’s ethnic insurgencies, ending the persecution of the Rohingya Muslim minority and stopping human trafficking, Bhaskaran contends. Last October, the outgoing military government signed a cease-fire agreement with eight armed ethnic groups in a bid to end conflict between Myanmar’s ethnic factions. The deal does not cover seven other armed groups, though, including the Kachin Independence Army, one of the largest armed ethnic groups along the country’s northern frontier, and analysts say the new government needs to expand the cease-fire to bring lasting peace.
Yet even as they acknowledge the potential obstacles, many investors remain optimistic. “People have waited a long time for a new civilian government, so it is understandable that expectations are high,” says Khin Maung Win, chairman of Yangon-based Myan Shwe Pyi, which operates power plants and sells construction equipment. “I think the new government understands what needs to be prioritized, and I believe they will put the right policies in place.”
The payoff could be huge if the NLD succeeds. Capital Economics’ Leather says Myanmar has the potential to sustain a growth rate of 10 percent “if it can get the right reforms in place quickly.” Given the country’s structural problems, he believes a growth rate of about 7 percent over the next decade might be more realistic.
The country should be able to take advantage of China’s audacious “One Belt, One Road” regional infrastructure push and capitalize on the mainland economy’s move up the value chain. The world’s second-largest economy is losing low-end manufacturing to cheaper locations in Asia. So far, the biggest beneficiary of that trend has been Vietnam, but Myanmar shares a land border with China and should be able to carve a niche for itself. The country can also benefit from closer ties to its partners in the ten-member Association of Southeast Asian Nations.
“As rapidly rising wage costs and yuan appreciation have eroded China’s competitiveness in low-cost manufacturing, there is a considerable shift in production toward ASEAN’s frontier economies,” says Rajiv Biswas, chief Asia-Pacific economist for IHS in Singapore. Thailand had been a major manufacturing hub in Southeast Asia until rising wages began hurting its competitiveness, he says. “Myanmar now has the opportunity to become a hub for Thai companies as well as multinational companies looking to relocate their production out of Thailand to an another location in Southeast Asia,” Biswas says.
What does Myanmar need to do to tap its potential and become the next Asian tiger? Aside from a massive infrastructure push to build and upgrade roads, ports, airports and power plants, Bhaskaran says the government needs to prioritize the soft infrastructure of governance. That means adopting investor protection laws to encourage the inflow of foreign capital, he says. Myanmar has traditionally ranked the worst in Asia on Transparency International’s Corruption Perceptions Index, and the World Bank recently rated the country as the second-worst place in Asia to do business, and No. 167 out of 189 countries globally.
“They need to set up an investment promotion agency with similar powers and mandate as, say, the Malaysian Investment Development Authority or the Board of Investment of Thailand to bring foreign direct investments into the country,” says Bhaskaran. “We need to see comprehensive economic cooperation agreements with India, China and with other ASEAN partners to help generate new investments.”
The new government also needs to focus on a strong central bank and restore public faith in the financial system. “Myanmar’s monetary policy, banking supervision and exchange rate framework need to be reformed, which means a major revamp of the central bank,” says Bhaskaran. “Their banking system remains archaic and out of date, so they need to focus on modernization of the payments system and things like deposit insurance,” he adds, which will help rebuild public trust in the financial system.
In December the Yangon Stock Exchange opened for business but still has no listed companies, although shares in six public companies trade over the counter. Later this month the exchange is expected to give a green light to the listing of those six companies, which include First Myanmar Investment Co., an affiliate of Yoma Strategic Holdings. “FMI is a conglomerate that owns a local bank in Myanmar, a health care joint venture with Indonesia’s Lippo Group that is building private hospitals, and a real estate joint venture,” says Yoma’s Pun. Over the next two years, Pun says, there could be dozens of companies on the exchange. “There are lots of private companies in Myanmar that need capital or have thousands of shareholders, so they would rather be listed,” he says.
Mark Mobius, chairman of Templeton Emerging Markets Group, an arm of Franklin Templeton Investments, is excited about getting in on the ground floor of an undeveloped market like Myanmar. “Private equity and unlisted companies will be our first targets, as well as companies on the new exchange” and listed companies elsewhere in the region with Myanmar exposure, he says. Still he cautions that the lack of listed companies and significant turnover will deter many institutional investors, and points out that other barriers like foreign exchange controls will come down only over time. “The first order of business for the new government should be privatizing state-owned companies,” says Mobius. State firms are large enough to provide good liquidity and growth, he says. “The new government also needs to ensure a smooth and open foreign exchange regime to allow foreign investors to take money into and out of the country.”
Asia Frontier Capital’s Hugger believes the best investment opportunities are in infrastructure and tourism-related facilities like hotels. Real estate typically captures a lot of investment in newly opened economies, he notes, but “the problem in Myanmar is that property prices have gone through the roof in recent years, and a lot of people have already made a lot of money,” he says.
Pun likes the consumer sector and finance. “Ninety percent of the population in Myanmar is unbanked, so there is a lot a new bank like ours can do,” he says. “There is a growing middle class in Myanmar and a lot of people with cash, so when the stock market opens, they might buy shares,” he adds.
With such extensive reform and development needs, Myanmar is not for the faint of heart. Pun says. Myanmar’s bourse is likely to have teething pains like any other new frontier market. “Investors need to take a five- to ten-year view of Myanmar,” he says. “A frontier market at an early stage is not for investors who have a time horizon of six to 12 months.”
This article has been updated to reflect the nomination of presidential candidates on March 10.
