Macro Series Micro Series Weekly Series
Bulletin Series
Myanmar Research Series
July
2012
Myanmar appears at the brink of explosive growth, making up for decades of stagnation. In light of the series of reforms witnessed recently and the questions posed over Myanmar’s place as a legitimate investment destination, this report explores 1) How real and sustainable the current path to reform is; 2) The context in which investors should view Myanmar; and 3) The current challenges Myanmar needs to face in order to improve the investment environment..
Myanmar – A Legitimate Investment Destination
Billy Selig, CEO
Fatin Mattar, Director
James Leatham, Associate
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Singapore: +65 93381870
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Singapore: +65 90925791
Myanmar: +09 420100283
1.
Background
Myanmar is the largest country in mainland Southeast Asia with a land area about three times the size of Britain. Arable land comprises a quarter of the country’s total land area, of which only about half (93,000 km2 ) is currently under cultivation. Myanmar is also known to be mineral rich and has been mining metals & gemstones since the 15th century. However, only half of the country’s total land area has been geologically surveyed. Myanmar’s rivers and highlands make it well-suited for hydroelectric power. More importantly, it is endowed with vast reserves of hydrocarbon energy resources and ranks 4th in the world in proved natural gas reserves, with 11.4 trillion cubic feet, and 65th in the world in proved oil reserves. The country is one of the world's oldest oil producers, and has been exporting oil since 1853. It also has a sizeable population of 55 million, nearly two-thirds of which are of working age. Intriguing questions that are often asked are, “how could a country so rich in natural resources be so poor?” and “can Myanmar ever realize its economic potential?”
2.
Executive Summary
Free-market or command economy? This paper discusses Myanmar’s decline from being the most developed and wealthiest country in Southeast Asia during the British colonial era up until the 1960s, to being labelled the Least Developed Country globally by the UN in 1987 and one of the poorest countries in Asia today. We examine the transitions Myanmar has made in economic policy-making; from its adoption of a free-market economy during the colonial years, to its shift into a closed market system reliant on state-led development during the military era, to its now apparent reversion toward a more libertarian market economy.
Myanmar reforms are real and sustainable There is great concern among investors as to whether the ongoing political and economic reforms being made in Myanmar are real and sustainable. In addressing this question, we juxtapose Myanmar against the Arab Spring - a region that is also in the cross-currents of significant political change and striving for reforms that will make material improvements to the economy and quality of life of its citizens. We offer reasons why Myanmar has a better chance of yielding significant political and economic progress than the Middle East.
Myanmar is more likely to follow the development path of Indonesia or Thailand, rather than Vietnam A view that is frequently echoed in the marketplace is that Myanmar may be the next Vietnam. Whilst recognising that each country is unique, we discuss the above view through a structural comparison of Myanmar with Vietnam, Indonesia and Thailand during their early days of reformation toward economic openness.
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Brief History – Myanmar’s Journey towards Democracy Burma gained independence from Britain in 1948 whereupon it became a democratic republic. Since the coup d’état in 1962, Myanmar has been under military control. In May 1990, the government held free elections for the first time in nearly 30 years and Aung San Suu Kyi’s party, the National League for Democracy (NLD), won a landslide victory of 392 out of 489 seats. However, the military junta refused to cede power. In 2010, the military-run Union Solidarity and Development Party (USDP) won the general election, which opposition groups, Western countries and the UN claim to be fraudulent. The government has since implemented a series of economic and political reforms that promote a mixed economy and a more liberal democracy. Aung San Suu Kyi, the leader of the opposition, was released from house arrest and permitted to campaign. On 1st April 2012, her party, the National League for Democracy (NLD), won 43 out of 45 available seats, allowing it some representation in the 664-member parliament still dominated by President Thein Sein and the military.
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Myanmar’s Economic Policy Dilemma Economic golden age
The introduction of free-market economic principles during the colonial era (1885-1942) propelled Myanmar’s self-sufficient economy to its heights, although eventually, an undercurrent of dissatisfaction was generated among the indigenous population as most of the benefits from trade and industry went into the hands of foreigners (British, Chinese and Indian), while most locals were employed as labourers. As a result, a strong Myanmar nationalist movement emerged, rejecting the “non-interventionist” economic philosophy of the colonials in favour of socialist ideals and insular economic policies. This was the birth of Myanmar’s 50-odd years (1962-2011) of military rule.
Economic deterioration
Myanmar’s lack of success in industrialization since its independence is due, in part, to the decades of economic mismanagement under a succession of military regimes with a predisposition towards state-led development, economic isolation and thick regulatory barriers particularly for investment and business.
For decades the military apparatus claimed the largest portion of economic output while undermining basic market institutions, sending the country down a slippery slope of inefficient resource allocation, production, trade and investment. The allocation of resources toward the development of industries was prioritized based on importsubstitution objectives of meeting domestic demand, rather than on the basis of comparative advantage. This distorted the demand-supply balance and pushed up costs.
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Furthermore, the lack of foreign exchange earnings from the curb of exports and the losses sustained by inefficient state enterprises meant that government revenue was far short of necessary current public expenditures. Since the 1970s, the central bank has printed money to finance public deficit. This has resulted in a chronic case of inflation since the 1980s.
With the change in policy toward economic isolation, Myanmar exports plummeted beginning the end of the colonial era in 1948 Exports as a % of GDP
The extended deterioration of the economy manifested itself most evidently in the dismal investment and foreign trade figures.
Year 1938-1939 1951-1952 1961-1962 1973-1974 1983-1984 1990-1991 1999-2000
Consumption (%) 70.6 76.4 81.6 87.2 85.7 88.3 87.0
Investment (%) 12.2 18.2 16.5 10.2 18.0 13.4 13.4
Source: Ministry of National Planning (1960); ADB
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Exports (%) 32.8 5.4 1.9 6.5 6.8 1.9 0.3
Imports (%) -15.6 0.0 0.0 -3.9 -10.4 -3.6 -0.7
Total (%) 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Sanctions enacted by the Western nations were also significant contributors to the capital and technology-starved condition of Myanmar today. Sanctions put in place by the U.S. in 1993, EU in 1996, and Canada in 2007, left all but a modest number of foreign businesses (mainly Asian) operating in Myanmar.
Jim Rogers: “If you can find way to invest in Myanmar, you will be very, very rich over the next 20, 30, 40 years,”
Renewed attention on Myanmar
In 1988, Myanmar’s military-ruled government passed a Foreign Investment Law to promote FDI. However, this was not successful in generating significant attention or confidence from the global investor community. It was only in the last 12 months or so that a coordinated shift in government posture toward freer borders, wider diplomatic and economic engagement globally, and the election of the NLD into parliament sparked a wave of renewed interest in Myanmar as a serious destination for global frontier investors.
A quick orientation More than 54 million people inhabit a land area twice the size of Vietnam. It has 14 provinces, made up of seven states representing the areas of Myanmar’s main ethnic groups and divisions. Key population centres include Yangon, Naypyidaw and Mandalay, while new SEZs are planned in Thilawa (near Yangon), Dawei in the south of the country, and Kyaukphyu in the country’s northeast.
Source: IE Singapore
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4.
Case Study on Politics: Myanmar is not an Arab Spring
By contrasting the situation in Myanmar to the Middle East, we aim to demonstrate why we believe in the longevity of Myanmar’s economic and political reform process. Although Myanmar appears to be making a reversion to the laissez faire market philosophies of its heydays, many investors are concerned about the reversibility and the sustainability of the reforms. Discourse on Myanmar’s reforms is occasionally negative and even suggests that Myanmar’s political reorganisation should be assimilated to that of the Arab Spring, which remains to this day in political turmoil.
Polar opposing catalysts
The Arab Spring was a revolt in which the repressed people in one way or another forced the resignation of their autocratic leaders, whereas in Myanmar it was the autocratic leaders themselves that initiated the popular reform process. In early 2011, a humble Tunisian fruit vendor gave an extraordinary demonstration of the importance of social justice and inadvertently gave birth to the Arab Spring by self-immolating in public. The repressed Arab working classes then, in domino fashion, uprose against economic injustices and political oppression. It would be fair to say the complacent leaders of the Arab world were taken completely by surprise, whereas the world has been surprised by the extent of the positive reforms that have been carried out by the leaders in the former pariah state, with the promise of more to come. Conversely, it was the Burmese generals themselves that drew up a ‘seven-step road map’ to disciplined democracy back in 2003, years before the possibility of an Arab Spring contagion reaching Asia. In marked contrast to the Arab Spring, where bloodshed was prevalent, not only were the Burmese generals’ reforms a top-down affair, they were widely supported by the local Myanmar citizens and seen as their long-awaited path to economic progress and better standards of living.
Why Myanmar’s reforms are likely to continue on the same path
Deeper analysis of the root causes of Myanmar’s self-instituted political paradigm shift indicates that the progress of reform will continue on its positive and upward trajectory: i) Defensive liberalisation President Ne Win spent his retirement under house arrest and several members of his family were jailed when he lost power. Many Burmese claim that General Than Shwe, Thein Sein’s predecessor, engineered a peaceful transition to a nominally civilian government to protect his accumulated wealth. Make no mistake; the process is not being led by one or two reformminded leaders, the country’s ruling elite believe it is time to restructure and rebuild, so much so that Thein Sein has choreographed
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benign exit strategies for certain hard-line anti-reformist generals, most notably for Vice President Tin Aung Myint Oo, who submitted his resignation in May 2012, citing health issues. ii) The threat of China The Communist Party of Burma, founded in 1939, was officially unrecognised by the Burmese government when the country gained independence in in 1948. Its violent, Beijing-backed insurgent armies operated clandestinely and caused China to become increasingly unpopular with the locals. At the same time, Myanmar had become irrefutably dependent upon China, who were capitalising on their monopolistic position. To lower its dependence upon its giant neighbour, and to increase a little competition from western nations, Myanmar needed to launch a political opening in order for sanctions to be eased. iii) Responsibilities to the ASEAN Economic Community The opportunity to chair the ASEAN Economic Community in 2014 is a critical landmark in Myanmar’s development as they now have assumed a level of regional, if not global responsibility. The ASEAN secretary, Dr. Surin, said in March that he has “much optimism” and that he is “very satisfied with the determination, awareness of responsibilities and expressions of commitment” demonstrated by Myanmar. iv) Vast economic potential and increasing commitment by the global community The ongoing uncertainty in the Middle East and North Africa has only made Myanmar’s hydrocarbon resources more attractive to investors. Additionally it has the potential to become a major purchaser of infrastructure, an alternative low-cost manufacturing destination to Vietnam and China, and a substantial domestic consumer market. Myanmar’s strategic location between China, India and Thailand is also of tremendous interest to investors. With the construction of the Dawei port and Special Economic Zone (SEZ), Myanmar’s development into a regional transport hub will also provide an alternative shipping route from Asia to the Middle East, India and Europe which by-passes the Malacca Strait, bringing transhipment cost savings to thousands of businesses. The need for foreign capital in Myanmar is significant - whereas previously only suspended, the US has now officially removed all sanctions on US firms transacting and investing in Myanmar, although the blacklist of people and businesses remains in place.
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Looking ahead
The Myanmar government has included into the new constitution elements of civilian control, socio-economic liberalisation and even political pluralism. Attitudes towards law enforcement are changing and FDI is being aggressively encouraged. Former Ambassador to Belgium, Thaung Tun: ”There is a risk of entering Myanmar. There is also a risk of not entering Myanmar.”
The Arab revolutions were ignited due to the economic needs of the working classes but this problem has yet to be confronted as disunity among the classes that were once galvanized around the common desire for regime change, and struggles for political control rage on in the Middle East. Despite the early hope, the Arab Spring narrative is now dominated by talk of an ‘Arab Winter’. Myanmar’s comparative political peace has allowed sufficient room for reform on economic policy to take place. With the NLD now in parliament, full general elections promised in 2015, and a slew of reforms critical to foreign investment on the way to being promulgated, it appears that Myanmar’s chances of realizing material political and economic progress is brighter than the Middle East.
5.
Case study on Economics: Myanmar is possibly the next Indonesia/Thailand, not Vietnam
The following table highlights key structural similarities and differences between Myanmar and Vietnam, Indonesia and Thailand at the beginning of their respective reforms toward economic openness. This transition began in the late 1980s for Vietnam, the late 1960s for Indonesia, and early 1980s for Thailand. Salient points Resources: Myanmar is very much a natural resource driven economy with a relatively large population (two-thirds of working age) that brings potential for manufacturing and consumer-related industries. In this respect Myanmar is significantly similar to Indonesia as opposed to Vietnam which is mainly a labour-driven economy, characterized by its predominantly manufacturing-related industries. Forces of power: Unlike Vietnam which had the communist party as the monopolizing power in governance, Myanmar, Indonesia and Thailand were all either directly or indirectly characterized by significant military presence, control and influence in politics. Control of businesses: In Myanmar, Indonesia and Thailand, major businesses are controlled on the whole by encumbent families, cronies or the capitalist elites. In Vietnam however, the government is the most powerful figure in business.
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Vietnam
Myanmar
Indonesia
Thailand
Area
331,210 km2
676,578 km2
17,508 islands (6000 inhabited) 1.9 million km2
513,120 km2
Population
92m
55m
248m
67m
Religion
80% Atheist, 9% Buddhist, 7% Christian
89% Buddhist, 4% Christian, 4% Muslim
86% Muslim, 9% Christian
94% Buddhist, 5% Muslim
Language
Vietnamese, French, English
Burmese (65%)
Bahasa Indonesia, English, Dutch
Thai, English
Rule of law
mix of communist legal theory and French civil law.
mixed legal system of English common law and custom law
civil law system based on the RomanDutch model and influenced by custom law.
civil law system with common law influences
Beginning of economic openness
1986
2011 - Aung San Suu Kyi voted into Parliament with military backing
1968 - Suharto to power with military and U.S. backing
1980 - Prem (formerly a military guy himself) to power with monarchy backing
Cause
inefficiency and corruption
top-down initiative with broad support from the people
economic crisis and tensions between the military and communists led to rise of Suharto over the communist-backed Sukarno.
consolidation of monarchy and military to overcome communist threats
Major spheres of political power
communist party of vietnam. several groups advocating democracy exist, but are not recognized by the government
military
military
monarchy, military, urban elite
Government type post reform
communist
nominally civilian parliamentary government
republic
constitutional monarchy, democracy
Economic policy preceeding boom
centrally-planned; closed markets
centrally-planned; closed markets
centralised; headed toward socialist ideals and closed markets
market economy but headed toward socialist ideals and closed markets
Economic policy during boom
socialist-orientated market economy (market-based mixed economy based on state-owned industry)
have shown intention to move towards a liberalized market economy
liberalized market economy
liberalized market economy
Businesess controlled by
mainly government
tycoons connected to the military and the military itself
encumbent family, cronies and allies in the military
urban elites, military allies
Drivers of FDI at beginning of reform
manufacturing (textile, auto, electronics, etc), real estate, oil & gas
oil & gas, power & energy, mineral mining
oil & gas, power & energy, mineral mining, manufacturing (textile, etc)
manufacturing (electronics, machinery, auto, textile, etc), real estate, banking sector, construction
Main resource base
modest; includes phosphates, coal, manganese
rich in oil, natural gas, copper, coal, precious stones
rich in oil, gas, tin, copper, gold
modest; includes tin, tungsten, lead, zinc, natural gas
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6. Risks & Challenges for Myanmar
Rule of Law
Myanmar's legal system is based on a convoluted combination of laws stemming from the various regimes of the past, sitting against a backdrop of common law system derived from the British colonial period, and now supplemented with laws and regulations effected by the new government. Where legal rights have to be enforced or contested, the overwhelming majority of businesses prefer to seek resolution through an arbitral tribunal rather than through the Myanmar courts. Arbitration within Myanmar, usually favoured by Myanmar parties, is subject to the Myanmar Arbitration Act (1944) which is out-dated and inefficient. Foreign investors therefore greatly favour international arbitration outside Myanmar; although in this case the Arbitration (Protocol and Convention) Act (1939) will come into effect, making the enforcement of foreign awards in Myanmar less clear. The aforementioned legal intricacies pose an obvious challenge to investors. Tangible improvements to the rule of law, including increased judicial independence and greater transparency in the regulatory system, will be required in order for the long-term potential of the economy to be realised. However, as they do in all emerging nations, these changes take time to effect. The legal framework surrounding investment in Myanmar is slated to undergo a change. Of particular interest to investors will be developments in: a. The Foreign Investment Law (FIL) – Promulgated in 1988, it governs foreign investment laws including foreign ownership, taxation, hiring of employees, and import/export. A new FIL has been drafted and is expected to be pushed through parliament in the next few months. b. The Special Economic Zone Law (SEZL) – Promulgated in 2011, it governs foreign investments in the 4 Special Economic Zones under construction- Dawei, Pathienn, Myawaddy and Thilawa. The SEZL is also reportedly under review and is planned to be redrafted. c. The Dawei Special Economic Zone Law (DSEZL) – Promulgated in 2011, it governs foreign investments in the Dawei Special Economic Zone. The government’s ability to prove itself as a credible unit that devises, installs and upholds a clear and fair legal system will be critical to cultivating investor confidence and cementing hopes of Myanmar becoming a major destination for FDI.
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6.
Appendices
Geography:
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GDP:
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International Trade:
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Currency:
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Foreign Direct Investment:
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Labour Market:
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Banking:
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Real Estate:
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Hotels R This page has been blanked out. To view the full report, please contact our sales representative at
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Serviced Apartments This page has been blanked out. To view the full report, please contact our sales representative at
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Oil & Gas
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Metals & Mining:
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Infrastructure - Special Economic Zones:
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Infrastructure – Major Sea Ports:
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Infrastructure – Other Major Projects:
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6.
Bibliography
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