Myanmar’s capsized investor opening

Gary Kleiman May 27, 2015 10:14 AM (UTC+8)
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By Gary N. Kleiman

The Rohingya refugee crisis, sending thousands of poor persecuted Muslims in Myanmar by boat to neighboring Asian shores, reflects lingering ethnic and religious rivalries as well as economic dysfunction despite headline 8% GDP growth. Despite the partial lifting of foreign commercial sanctions and tentative investor forays, the business elite connected to the ruling military remain the dominant force as political, financial and infrastructure systems suffer from a half-century of abuse. Preparation for November elections, which bar Nobel laureate and opposition party head Aung San Suu Kyi from seeking the presidency due to her children’s UK citizenship, are set to further delay policy changes advocated the past two years by development agencies and international companies as they grapple with a mixed recent Indochina track record.

Buddhist-Muslim violence along with rebel conflicts exact heavy costs, and the generals in charge led by Thein Sein, guaranteed one-quarter of parliamentary seats, have never articulated a clear economic platform. Since her release from house arrest 5 years ago National League for Democracy founder Ms. Suu Kyi has stuck a populist tone criticizing Chinese natural resource deals in particular, but has not offered an alternative vision.  The upcoming polls will be contested by 70 registered groups in total, with rural ones representing the most impoverished areas. Coca-Cola and Unilever have returned in part to tap the low-end consumer segment of the 50 million populations but have so far concentrated on Yangon with $5000-range annual per-capita income. Telecom firms from Qatar and Norway investing billions of dollars have provided broad coverage, but permission to build cell towers is a chronic obstacle.

The IMF in a February visit projected economic growth the current fiscal year will slip below 8% on agriculture weakness as inflation picks up to 6%. Currency depreciation will continue with the strong dollar and 5% of GDP trade deficit, with foreign reserves down to $4.5 billion at end-2014. The budget gap is at the same 5% level, with proposed public sector salary hikes pre-empting education and health needs as tax collection lags, the Fund admonished. The central bank finances spending directly but issued a pilot Treasury bill, as private sector credit continues to grow at 30% annually from a low base.

Financial sector modernization is a main reform priority receiving Asian Development Bank support. In a May paper it noted that half the 25 authorized banks were state-directed with foreign direct investment still barred, although licensed representative offices have been approved to conduct hard currency business with international customers. Lending is collateral-based and must follow strict official allocation mandates. Private banks are part of larger business conglomerates posing contagion risk, and payment system automation has just begun.

Interest rates are determined administratively with a fixed- structure limiting competition. A new central bank law aims to boost supervision capacity and establish formal auditing and deposit insurance frameworks which can aid in consolidating existing players. Capital market development should go in stages with government securities first although they are “years away,” according to the ADB. Stock exchange work has begun with Japanese technical assistance, and preliminary plans impose a 30% foreign ownership ceiling on listings. A handful of venture capital funds have launched to target startups, but for now the main company equity channel is through the Singapore bourse which hosts the powerful Yoma conglomerate with interests in real estate, retailing and tourism.

The neighbors’ disappointing experience the past decade with exchange rate and financial sector reforms may help explain premature enthusiasm. An IMF report on Laos at the same time at Burma’s again urged a break from the currency peg and monopoly government banking which put debt in the 60% of GDP “distressed” zone. Vietnam’s bank cleanup and stock market state enterprise privatization continue at a glacial pace. Myanmar is trapped by the same history and the next administration can best make up for 50 years’ lost time with a 50-day bold overhaul plan re-opening the lapsed credit and monetary policy agenda to date.

Gary N. Kleiman is an emerging markets specialist who runs Kleiman International in Washington, D.C.

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Gary Kleiman
Pioneer and recognized expert in the field of global emerging economies and financial markets. Founder of first consulting firm dedicated to providing independent analysis and advice to public and private sector clients in 1987, and research coverage and firsthand experience covers 75 countries in all developing regions. Advisor on financial vulnerability issues, risk management, portfolio allocation, and financial sector and capital markets strategy and development.
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