Thai companies should advance in Myanmar to stay relevant in Asean

Thai companies should advance in Myanmar to stay relevant in Asean

Doing business in Myanmar is far from easy, but Thai companies should consider it a blessing to be located so close to the last major untapped market in Asia, rich in natural resources, with vast potential for tourism and a large, young populace.

Myanmar’s gross domestic product (GDP) is expected to expand by nearly 7% this year according to forecasts by the International Monetary Fund and Asian Development Bank, qualifying Myanmar as one of the fastest-growing economies in the region, driven by production of natural resources such as oil and gas, and the inflow of foreign direct investment (FDI).

It is therefore necessary for Thai companies that want to operate on a pan-Asean basis to afford to neglect this land of opportunities.

FDI into Myanmar will more than triple by 2015 when the Asean Economic Community takes effect, according to a recent forecast by the Centre for International Trade Studies of the University of the Thai Chamber of Commerce.

Take for example the fact that during 2013, the Myanmar Investment Commission approved many new investment projects. Most were from Asian companies and will operate in special economic zones. The projects approved represent a diversity of industries.

A highlight among infrastructure projects was the awarding of two 15-year licences to install and operate nationwide wireless networks, won by Ooredoo of Qatar and Norway’s Telenor, announced in June.

Asian countries will continue to play a major role in placing investment in Myanmar. Japan, for example, has maintained a close relationship with the Myanmar government to pave the way for more Japanese companies to enter the market.

Tokyo is undertaking several government-to-government initiatives that will provide soft loans and other forms of support to improve basic infrastructure.

Investment from China has dropped, however, falling to just $407 million during 2012, way down from $8.2 billion in 2010. Myanmar’s domestic politics and public sentiment have stymied Chinese investors since the controversial Myitsone Dam project was suspended in 2011 for environmental reasons. The Sino-Myanmar oil and gas pipeline proceeded to completion, but met with significant local criticism.

We expect that Chinese FDI will rise again, however, because Myanmar cannot afford to be unfriendly with big neighbouring investors for too long. China will continue to provide political and commercial support to Myanmar as a strategic gateway to Asean and South Asia.

Since the United States eased sanctions in July, American investors have begun preparing to enter the market, focusing on such industries as natural gas, machinery, power generation, infrastructure, banking and consumer goods. GE became the first US company to re-enter Myanmar.

The big question is whether Thailand will stay a top player in Myanmar. We believe that Thai companies might already be falling behind, slowed down by concerns over the many hurdles. The challenges include high prices for land, inadequate banking and financing services, severe lack of infrastructure, and unclear regulation. Many Thai companies have been struggling to find the right local partners to form business alliances.

KEY FACTORS TO WATCH

We have identified five factors that investors need to keep in mind when making plans for doing business in Myanmar during the next several years.

1. Market entry will become tougher. Competition to do business in Myanmar will intensify. FDI projects increased by 240% in 2011 and 517% in 2012, and new reforms are likely to sustain the momentum. But as the Chinese experience illustrates, investing in Myanmar is no longer just about bringing in money and knowhow.

Companies need to take care regarding the sharing of profits and other benefits, and to be mindful of environmental factors and corporate social responsibility. The local mindset is that Myanmar should not repeat the same mistakes that other emerging economies did over the course of reform and liberalisation. Resistance by the public can make it harder to do business.

2. Land prices will not fall. The cost of land in prime areas of Yangon is higher than in Bangkok, and plots in industrial areas are not especially cheap. The government has tried to control land price inflation by imposing very high land transfer taxes, but this has proven ineffective because most property in Yangon is under the control of the city government or business tycoons. Prices will remain high, under pressure to rise further.

Measures to increase supply are not robust enough to meet booming demand. And local investors are in no rush to sell property because they have few other options for parking their money and importantly the leverage in the system is zero.

Given these circumstances, foreign companies should lock in rentals for the next few years. Investors should look for local businesses that own land and want to work with a foreign partner to increase the value of the property or to gain transfers of know-how.

3. Financial sector liberalisation will be gradual. The government is considering allowing foreign banks to set up operations in Myanmar as early as this year. But policymakers have to balance this change against the need to ensure that local banks can compete.

Liberalisation might be limited by the weak existing condition of banking infrastructure and a lack of regulatory capacity. The local lending rate is exorbitant, at 13% per year. Officials are considering implementation of a deposit insurance scheme. This would create room to eventually reduce interest rates, as depositors gain confidence in the local banking system. A new Financial Institutions Law, due for passage in the near future, needs to be monitored closely.

While the banking sector remains off-limits to foreign banks, overseas investors can work with commercial banks in their home countries that have strong partnerships with financial institutions in Myanmar. Several Myanmar banks are investing substantially in IT systems to provide transaction services for corporate clients.

We expect that even after foreign banks are allowed in, most financing will still be done via offshore structures, because local interest rates will remain very high in the foreseeable future.

4. Baht convertibility is just a matter of time. At present, Myanmar only allows its currency, the kyat, to be directly exchanged for three other currencies: the US dollar, the euro, and Singapore dollar. We believe that the baht will be added to this list during the next year or so.

In the meantime, the Central Bank of Myanmar is focused on drafting the Financial Institution Law.

The question is how to implement policy to avoid dollarisation of the economy, as happened in other countries in the region, so that Myanmar will be able to maintain monetary autonomy.

5. Next year’s election is pivotal. Most local businesspeople remain optimistic about prospects in Myanmar, but say that the pace of reform has slowed somewhat due to differing opinions among key policymakers. One growing concern is whether key sectors are being opened so fast that a lack of proper regulation will lead to environmental problems, unfair competition, and so on.

The general election set for 2015 will be the first test of reform under the new democratic system. Many local observers view it as a two-horse race: Thura U Shwe Mann versus Aung San Suu Kyi. But for Suu Kyi to stand as a candidate, the constitution will need to be amended. This will depend on support from the army. The military is expected to decide this matter soon, which will provide an indication of whether or not the government is confident about advancing the reform agenda.

Regardless of which side runs the country after the election, the key factor for businesses is what happens in terms of domestic policies regarding FDI, infrastructure development, banking and monetary regulation, and participation by ethnic minorities. Another important issue is how Myanmar will manage its international role, amid changing geopolitics.

THE NEED FOR SPEED

Thai investors cannot afford to wait for all the uncertainties to become clear and for all risks to recede. A good way to start in Myanmar is to explore opportunities to trade or to invest with manageable size. The sectors that are suitable for direct investment right away are ones characterised by severe under-supply and that do not need comprehensive logistics support. These opportunities range from basic consumer products to large-scale infrastructure projects.

Whatever the business, the keys to sustainable growth in Myanmar are having good partners, offering quality products and services, and making meaningful contributions to society. Good business practices travel well.


EIC, a unit of Siam Commercial Bank Public Company Limited, offers in-depth macroeconomic outlook and sectoral impact analyses. For more information, please visit www.scbeic.com or contact eic@scb.co.th

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