An overview of Myanmar’s investment environment Fadi Haddad March 2013 email@example.com
Myanmar: investment and political background Myanmar, formerly known as Burma, is a country in Southeast Asia bordering Bangladesh, India, China, Laos and Thailand. It has a population of 68 million, among the largest in the region and of a similar size to Thailand. The country has a range untapped natural resources sought after by foreign investors such as oil, natural gas, construction materials, gems, metals, textile, wood products and agriculture. For the past 50 years, Myanmar was ruled by a military government, which caused most Western countries, and notably the USA, to implement sanctions against it and isolate Myanmar from the rest of the world. In 2010, the situation changed with the new president U Thein Sein’s decision to open the country and put an end to the military rule – a decision that has been welcomed by the United States with both President Obama and Hilary Clinton visiting Myanmar in 2012. Since then, investors from all over the world are entering the country, mainly from China, Japan, Thailand and Malaysia. The country still struggles with a poor human rights record, conflict zones and heavy corruption. The military, although officially out of the current government, is still very much involved in the politics as well as in the economy, running some of the largest holding companies in the country such as the Union of Myanmar Economic Holdings (UMEHL). This is to be expected, as the country is still in the very early stages of democratisation and the situation will likely normalise over time. What the investor should focus on is the great potential of Myanmar and its advantages: large population, cheap labor (about 80 USD per month – although largely unskilled), numerous natural resources, shared borders with China and India, an extensive sea access, aging industries waiting to be refurbished and an enormous tourism potential. Myanmar is part of the Association of South East Asian Nations (ASEAN), a free trade agreement between all of the Southeast Asian nations promoting trade and tourism in the region. Myanmar will be a full active member soon and will host next year’s ASEAN summit for the first time. The major attraction in Myanmar, besides its countless temples and pagodas, is its under-‐developed, almost virgin economy. Myanmar lags behind in almost every essential industry: banking, telecoms, retail, tourism and construction. Banking The financial industry is among the most rudimentary and archaic in the country. There are 22 banks in Myanmar: 3 are government owned, 2 are military owned and the rest are privately owned. Only a handful has computers, as electronic payments are not yet common. Every bank has a Western Union office for transfers and credit card services have only been available in two banks – CB Bank and KBZ – since December 2012. This doesn’t seem to bother the local population, as less then 10% currently own a bank account.
Foreign banks are naturally trying to get in to the market, but just as in China 25 years ago, the government is restricting this move and foreign banks can only have representative offices in Myanmar. In a few years, the government will allow them to make basic financial operations, such as forex and only when the local banks are brought up to international standards will the market be totally liberalised. There have been some reports of the government authorizing joint ventures in the banking industry between foreign and local entities. Telecoms The other industry currently struggling, although making rapid progress, is the telecom. The number of cellphone holders is second to last worldwide after North Korea – a pre-‐pay SIM card costs over 150 USD and the “one-‐time-‐use” SIM card costs 20 USD – leaving this industry seriously underserved and an opportunity for international providers. Internet is among the most expensive in the world: installation cost for the wiring and router ranges between 500 and 900 USD with a monthly fee ranging between 50 and 100 USD, depending on the speed. On the plus side, 3G technology has been introduced recently and rumour suggests that the price of the pre-‐pay SIM cards will fall to 10 USD at the end of April. Myanmar is catching up in this field, as in Yangon many people already own the latest Samsung or iPhone and small telecom shops have invaded the city’s main shopping streets. Retail The retail industry is going to grow very big, very fast – Myanmar’s 68 million strong market is a big incentive for foreign investors. International brands such as Bata, Lacoste, Converse and Nivea have started to flood the market, charming local consumers who have been seeing the same products on their shelves for the past 50 years. Though it is still unclear what is actually in Myanmar and what is “legally” imported from Thailand. Nevertheless, even though the population is still mostly poor with one of the lowest, if not the lowest, purchasing power of Southeast Asia, the new and encouraging economic reforms should create a large middle class eager to spend. An important indicator reflecting the successful economic reforms is car ownership. It has significantly increased and for the first time in the history of Yangon, there are traffic jams. This has been made possible due to the cheap imports of used cars from Japan and the drastic reduction on import duties. Tourism Tourism is one of the most important industries in Myanmar as it brings in direct foreign capital, something that the other industries are taking more time to do. The country has temples and beaches that can rival Thailand and Cambodia’s once the infrastructure is properly established. Tourism is increasing on average 20% year-‐on-‐year with over 1 million tourists in 2012 and more are expected to come in 2013. Myanmar’s perceived
‘authenticity’ is attracting tourists from all over the world. This is a relatively small figure compared to Thailand’s 20 million yearly tourists but may also be an indication of what to expect in the future. Moreover, Myanmar will host the 27th South East Asian Games in December of 2013 in Nay Pi Taw (the new capital), Mandalay (the second largest city) and Yangon. Unfortunately, the hotel industry is highly unprepared for this surge of tourists, athletes and journalists. There are currently 8’000 hotel rooms in Yangon (compared to 42’000 rooms in Bangkok) and 28’000 throughout the country. Building hotels is one of the main drivers of the ongoing works in Myanmar, as over 300 hotels are estimated to be under construction today. The number of rooms in Yangon is expected to increase by 37% per year by 2016 mainly driven by big international hotel chains from across the globe. This shortage has pushed hotel room rates up 350% in 5 years and prices are expected to increase a further 25% in 2013. This doesn’t seem to bother tourists whose number increased 54% in 2012 alone, many of whom are sleeping in the temples as hotel occupancy is 100% in the dry season. This situation is expected to continue for the next 5 to 10 years, as there are fewer than 2’000 rooms in Yangon that meet international standards. Construction and public infrastructure This construction boom is not only limited to hotels but extends to everything else in both the private and the public sector. In the private sector the demand for office and residential buildings as well as malls is increasing. There is about the same office space in all of Yangon than in one 60-‐story building in Bangkok. The set up of small shared and serviced offices by westerners is on the rise and provides a good short term solution, though for a more sustainable answer, the government is looking for investors to start building Yangon Business Center. This project will combine high-‐rise office buildings and malls in the township of Insein – north of downtown Yangon. The influx of expats and “returnees” (wealthy Burmese migrants returning to Myanmar) as well as the growing upper-‐middle class are driving the demand for new residential buildings and condominiums with international standards. A short drive around Yangon is enough to witness the ongoing construction, mainly in downtown area. On the other hand, the public sector has a lot more investments to do. One of the downsides of doing business in Myanmar is the very poor infrastructure, notably the lack of electricity and the very old road network. Much of the infrastructure still dates from the British era, which ended in 1948, and has only marginally evolved since then. For that reason, the government has started making investments in heavy infrastructure, such as dams to provide electricity to the 70% of the population estimated to be unplugged, and in roads and bridges. The Asian Development Bank, the IMF and the World Bank promised loans to the government for up to
900 million USD; that is excluding the 18 billion USD in loans, aid and debt forgiveness from Japan over 3 years, 200 million USD from the EU on a two-‐year programme and about 20 million USD from the Australian government. For other projects such as new airports, ports and free economic zones around the country, the government is eagerly looking for foreign partners interested in doing private-‐public partnerships. The three notable projects today are the: 1) The Thilawa port project: the current Yangon port is located in downtown area right off Strand road, a main street in the center of Yangon. Unfortunately, the port cannot be extended to cope with increasing traffic as the city is quite literally behind it. For that reason, the government is developing the Thilawa port 30km south of the city and creating a 2’400 hectare free economic zone around it for a total of 12.6 billion USD. The project was started the late 1990s, but was the victim of poor timing and changes in government policy. The terminal opened in 1998 just at the start of the Asian financial crisis, and the combination of the crisis and sanctions reduced both freight traffic and any interest by foreign investors in building facilities in the Thilawa free trade zone. 2) The Dawei deep-‐sea port project is probably the biggest project in Myanmar. Estimated at $80 billion dollars, which also happens to be the figure of Myanmar’s entire GDP, this port – if and when completed – is expected to compete with Singapore’s. The small town of Dawei is located southeast of Yangon and is only about 280km away from Bangkok, which is the main driver for this project. The plan is to create a shorter route for the ships going to Thailand and avoid transiting through Singapore, which would save time and money. On top of serving Myanmar’s population it would open the door to a 70 million people market in Thailand as well as in the surrounding countries such as Laos and Cambodia. The port will be developed along with the Thai government but the details for the partnership and the financing remain unclear at the moment. Additionally, the government has decided to create a Free Economic Zone around the Dawei port – similar to the one in Aqaba, Jordan – and encourage the development of a big industrial city. 3) The new Yangon International Airport will be built in the region of Bago, about 80Km north of Yangon. The government is still looking for a private-‐public partnership and big bidders such as the Zurich Airport are trying to be part of the project. This new airport will have a capacity of 7 million passengers (compared to 2.7 million for the current airport) and should be completed in December 2016. However, the cement industry in Myanmar is very rudimentary and cannot cope with all these projects. Ten of the 14 existing cement plants are still owned by the government producing roughly 2.7 million tons a year. These factories are old, inefficient and still using old methods to produce low quality cement.
The current market demand being estimated at about 6 million tons a year forces the country to import from Thailand, Indonesia and India to fill the gap. For that reason, and according to the website of the Department of Investment and Company Administration (DICA), the construction industry falls under the “hot investments” category. That means that the government wants to significantly reduce the portion of imports and promote local production as well as exports of Myanmar cement. The government said that it would hand out 10 permits to allow cement plants, four of which have already been approved in the past year for an additional quantity of 1.9 million tons a year. The cement consumption is expected to grow 10 to 20% per annum for the next 5 to 10 years and is estimated to peak at 20 million tons. Many analysts compare the Myanmar market to Thailand’s 20 years ago and expect a similar growth rate considering that both countries roughly have the same population and land size.
Foreign Direct Investment law: Myanmar just emerged from 50 years of isolation where foreign investment was not considered in any way. The government is doing its best to adapt to the surge of foreign investors but the corruption and the lack of talent in the public sector make it a rather difficult task. Today Myanmar has an FDI Law, FDI Rule and an FDI Notification all of which cover similar ground and yet are somewhat different. There are no specific processes to follow in the creation of a company and most things seem to happen on a case-‐by-‐case basis. What is certain is the following: -‐ In order to set up an industrial company/factory, one needs to have a local partner for a joint venture. Terms of the JV will be set on a case-‐by-‐ case basis but it is legal for the foreigner to own the majority of the shares. -‐ For a services company, a foreigner does not need any local partner. -‐ One needs to apply for a permit at the DICA and at the relevant ministry. -‐ The working capital for a factory is of 500’000 USD, 50% of which should be deposited on the DICA account before the project’s approval to show the authorities the investor’s seriousness. -‐ For a services company, the working capital is of 50’000 USD. -‐ There is a 2’500 USD registration fee – non-‐refundable in case the government rejects the project. -‐ There is a 5 year tax break on any factory in Myanmar. -‐ There is a one year duty free on raw material imports. -‐ Corporate / income tax is of 25%. It is important to note that not only are the Burmese culturally a very laid back society, but 50 years of autocratic rule has shaped the current generation into “taking things slowly”. Most people seem content with the current situation, which is relatively much better than just two years ago, and many don’t seem in a hurry to do business, which complicates things since a local partner is sometimes mandatory to set up a business. Myanmar and especially Yangon area have several Special Economic Zones as an incentive to investors. The SEZ law is still under revision but what is certain is that the tax breaks in these areas is of 8 years under the new drafted law. The new law should be published next year. Another important point to consider when investing in Myanmar is taking the money out of the country. Getting money into the country is easy and in the case of Myanmar one does it through one of the government banks: Myanmar Investment and Commercial Bank (MICB) or the Myanmar Foreign Trade Bank (MFTB). When it comes to taking the gains out of the country, one has to get approval from the Central Bank first and then the transfer will be done through
one of these banks to the foreign entity. However, so far, there have been no major cases where the Central Bank refused a transfer.
The challenges: Many significant challenges surround the investment environment in Myanmar today, especially when setting up a factory or any other big investment. First of all, the poor infrastructure is the main obstacle to setting up a business. Electricity is scarce and roads are bad, which means that there will be extra costs in investing in generators and in proper transportation. Apart from government bureaucracy and corruption, perhaps the biggest challenge is land prices. The surge of foreign investors, not only looking at the untapped potential of a 68 million people market but at the very cheap labor cost, are all surprised when they see the land prices. Cost of land in industrial zones as well as the special economic zones are reaching absurd levels. There is no official pricing but a figure seems to be repeatedly used: 200’000 USD per acre for a land with no access to electricity and most likely no or bad road access. The real estate prices in Yangon are also extremely high. Small shops in the city are about 2’000 or 3’000 USD a month and decent apartment rentals are quite often above 2’000 USD a month for very low quality housing. The final and most unstable challenge is the political situation. Two years ago, after the massacre of several hundreds of monks by the army in central Yangon (official figure states less than 10 deaths), the military government had to gradually step down in a very Buddhist Myanmar, leading to the situation we are at today. Many of the current government ministers are ex-‐military officials but the president seems to be reliable, and his popularity is constantly increasing, competing with the famous Aung San Suu Kyi. The ongoing conflict between the Burmese army and the Kachin Independence Army in the north of the country by the Chinese border threatens the country’s stability. There are also occasional clashes with the Muslims at the Bangladeshi border, on the southern Thai border and in the center of the country just recently in March 2013. Investors should closely monitor the lead up to the next general election in 2015. Aung San Suu Kyi wants to run against the current president and both parties have a significant pool of supporters susceptible to create chaos.
Why should you invest: Despite the poor infrastructure, the corruption, the incomplete FDI law and the political situation, investing in Myanmar is still a wise decision. Investors shouldn’t expect Myanmar to operate like western economies, or even the rapidly developing economies of Asia and should take these challenges into account when making decisions. The country is still at the very early stages of opening up and the investors should not underestimate the cultural shock and the slow responsiveness of a population that has been isolated and controlled for the past 50 years. Investing in Myanmar today is quite an aggressive move and should not exceed 10 to 15% of the overall portfolio exposure to emerging markets. Getting involved in this thriving frontier market from early on could give the investor exponential growth over the next 10 years. Unlike poor Cambodia and Laos, Myanmar is rich in natural resources and will most likely follow the steps of Thailand and Malaysia instead. Asset management is impossible in Myanmar, as the stock market is still under construction, hence the only way to gain exposure is through private equity deals across all industries. The country is still very poor and basic services, such as electricity, are still a luxury. Yangon, the most populous and developed part of the country, still lacks proper infrastructure and essential amenities, a favourable situation paving the way to countless investment opportunities and new ventures. Being part of the big investments in Myanmar, such as the Dawei port project or the new airport, is challenging as one needs to be very well connected or at least benefit from a sovereign support to gain credibility. Setting up a plant or a factory is possible, as long as the investor finds a reliable and honest local partner. The most viable strategy is to start investing in SMEs, which have promising growth potential with less hassle and bureaucracy. This will allow the investors to get a feel of the market, learn how to navigate the system and gain experience and reputation in Myanmar. Once these SMEs grow and become reputable, the doors will automatically open to new larger and more sophisticated ventures. Things are moving fast in Myanmar. My first trip was in September 2012 where traffic jams were acceptable, big tourist sights were free of charge and I couldn’t bargain for anything, as the price they offered was the actual selling price. On my second trip, just 3 months later, the traffic situation had worsened, the main pagoda had a 5 USD entrance fee and shop owners understood how the tourism industry works. Now there are two big malls, a Cineplex, burger chains from Korea and Malaysia and a thriving nightlife. Things are moving fast. One shouldn’t miss the opportunity that exists in what will be a major Southeast Asian economy in years to come.