From pariah to emerging market

Since the inauguration of a nominally civilian government in March 2011, Myanmar (also known as Burma) has undertaken a series of political and economic reforms aimed at facilitating its gradual reintegration with the world economy.

These efforts have been rewarded by the international community with the lifting or easing of sanctions while aid levels have been increased and around 60 percent of the country’s total debt (about $6 billion) has been written off by its creditors. Foreign direct investment (FDI) is now 15 times greater than it was in the last year of military rule and, after a long absence, development finance institutions have started to re-engage with the country.

International companies, with Japanese, Thai and Chinese firms leading the way, have responded to these positive developments by seeking local partners and exploring business opportunities. Their Western counterparts, while slower off the mark, have made significant investments in certain areas of the economy, such as the oil and gas and telecommunications sectors.

OPPORTUNITIES AND RISKS
Myanmar has significant national resources and its 50 million-plus population represents a largely untapped market for international companies. The country has a youthful and low-cost labour force. Sandwiched between three drivers of global economic growth – China, India and Southeast Asia – Myanmar is in easy reach of some of the world’s most dynamic economies.

Despite Myanmar’s recent positive steps, the country is still very much a transitional ‘frontier’ market. It has suffered from decades of under-investment in education, healthcare and infrastructure. Its financial institutions are weak and the government agencies tasked with drafting and implementing reforms are over-worked, underfunded, and lack technical skills and capacity. There is no reliable electricity supply. And finding skilled labour may depend on luring Burmese home, as some companies have done.

Alongside this shortfall in business-supporting development, multiple risk management challenges remain. Corruption is one of the most prevalent difficulties, in particular for those with exposure to anti-corruption compliance laws such as the Foreign Corrupt Practices Act (FCPA). Corruption is entrenched in business-to-business relations and facilitation payments (known as ‘tea money’ in Myanmar) are often solicited by low-level government officials to speed services.

However, while the country also ranks on graft perception surveys as deeply corrupt, our own anecdotal research suggests that foreign businesses are less exposed to high-level graft, or direct requests for bribes for licences or permits, than in other countries in Southeast Asia. What is more, in Risk Advisory’s work supporting foreign parties’ bids for privatised infrastructure and participation in the offshore oil and gas licensing round, we did not detect any unethical business practices afoot and the processes were generally transparent.

Yet investors still need to exercise discretion when choosing local partners. Under the former military government, the economy was dominated by a small group of businessmen known colloquially as ‘the cronies’. Some of them now sit in Myanmar’s parliament, while others head up influential business associations.

These individuals retain control of key sectors of the economy, particularly capital-intensive industries. They also have the capital and expertise that make them seemingly ideal local partners. But many of them continue to be subject to targeted sanctions by the US government and/or could pose reputational risk.

For example, three of the country’s largest companies which have significant exposure to infrastructure projects, Asia World Group, Max Myanmar and the Htoo Group, are subject to targeted US sanctions. Doing business in conjunction with the military or military-controlled companies in Myanmar also brings compliance and reputational risks, not least because most human rights abuses in the country, such as forced labour and child soldiering, have occurred primarily in relation to the military or other armed groups.

These were clearly a factor in comprehensive sanctions being implemented by Western countries in the first place and, in the relatively recent past, international companies faced pressure from activist groups through ‘name and shame’ campaigns to divest their interests in Myanmar.

The outlook is perhaps brighter. It is expected that the number of companies targeted by sanctions will be reduced over the coming months. There are also numerous successful businesses that are not sanctioned and do not pose any significant reputational risk.

Choosing wisely is particularly important as investors will find little recourse for claims over deals ‘gone bad’. Myanmar’s legal system is one that is best avoided as far as possible. The judiciary is one of the country’s most corrupt institutions, featuring bribery at almost every level. Several foreign businesses in Myanmar say it should be turned to only as a last resort.

Since the transition to a nominal-civilian rule, Myanmar has taken steps to reduce legal risks for investors. The revised Foreign Investment Law provides guarantees against nationalisation of assets. In July 2013 Myanmar acceded to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. There is also a bill before parliament to implement the Convention.

But in general, policymaking has lacked both stability and clarity, with the government often leaving foreign companies to interpret the practical consequences of any policy change unaided. Well into the fourth year of the reform process, the many scattershot or imperfect reforms and policymaking are often attributed to a lack of government capacity. Recent economic policy trends suggest that these excuses are now less significant. Rather, the policy shortfalls are influenced by domestic protectionism that is focused on securing the economic interests of the powerful military companies and ‘the cronies’.

DIVERSIFYING INVESTMENT
Despite these pronounced compliance and operational risks for foreign business, Myanmar has so far succeeded in broadening and deepening foreign investment. When the military junta freed Aung San Suu Kyi in 2010 and disbanded itself the following year, political reforms were a necessary step to spur national development.

The country needed to broaden participation in an economy that had been dominated by Chinese investment, accounting for 90 percent of total FDI in 2011-12 alone. Diversification was necessary to ensure Myanmar’s longer-term stability and preserve the preferential position of the army in politics and the economy.

It has proceeded apace. The Directorate of Investment & Company Administration (DICA) data released in October indicated more than $4 billion in FDI has entered the country so far in FY2014-15, exceeding the annual target in the first six months of the fiscal year.

Yet, despite the relaxation or removal of US and European Union sanctions since the reform process began, much of the recent FDI inflows into Myanmar are coming from countries, such as Singapore and Thailand, with existing long-term economic interests in the country.

Long-standing relations and, in the case of Japan and South Korea, cultivation of government relations with Naypyidaw have proved significant in determining FDI flows. One local contact told us: “Myanmar won’t forget the partners and countries that stood by it during the years of Western isolation and sanctions.” Foreign firms looking to invest in recent years have often asked whether nationality is among the criteria used by the government to evaluate investors.

In key infrastructure areas – telecoms, energy and aviation – the result of major tenders last year show considerable diversity. Firms from Norway and Qatar won a telecoms bid round. Korean, Singaporean, Malaysian and Japanese firms won tenders to upgrade Myanmar’s airports. UK, US, Australian, Italian and Indian firms were among those who took control of oil and gas concessions. These outcomes suggest the government is developing a strategic mix of international political and economic partners, as well as ensuring the acquisition of relevant technical expertise and rewarding long-standing friends.

INTO 2015: AUNG SAN SUU KYI FOR PRESIDENT?
Ahead of landmark elections in October or November 2015, key questions about political reform remain unanswered. In particular, whether the electoral process will be changed to prevent Aung San Suu Kyi’s National League for Democracy (NLD) taking a majority, and if ‘The Lady’ herself will be allowed to stand as president, a post selected by parliament.

The prospects for substantive political reform to limit the military’s influence in politics seem to have diminished in the past year – despite roundtable multi-party talks in late October focusing on national reconciliation and political reform.

Even if reform pushes ahead, many things are likely to stay the same – in particular, the networks of influence and patronage created by the military and ‘the cronies’. Sean Turnell, a professor at Macquarie University and economic advisor to Aung San Suu Kyi, argues that we are seeing “a repositioning of elements within the existing elite, whatever emerges in 2015”.

The current range of complex compliance, operational, commercial and security risks ensure Myanmar will remain a challenging investment destination for years to come.