No one is disputing the huge strides that Myanmar has made since the military government gave way to a new regime four years ago. As the country engages with the world for the first time in five decades, foreign investors have been exploring the possibilities on Asia’s newest frontier.
However, there is a growing sense that the first wave of investment is coming to an end and that the next wave, which will be far bigger, won’t really take off until better conditions are in place. The first requirement is better infrastructure, both hard and soft, from roads and ports to worker skills and financial regulation.
The second requirement is the successful staging of elections next year, which could prove to any doubters that Myanmar is committed to representative government. A positive election outcome is expected to lead to the end of the remaining sanctions imposed by the United States and the European Union, which in turn could unleash a lot of new investment.
The quasi-civilian government under President Thein Sein has won plaudits for its determination to press ahead with reforms. On the business front it has passed a Companies Act, Banking and Financial Act, Special Economic Zone (SEZ) law and new tax laws to create an investor-friendly climate and enhance the country’s economic potential.
However, the fact remains that physical infrastructure in Myanmar is poor and the government lacks the money to bring everything up to standard itself. It needs private-sector help to overhaul roads and railways, power distribution, port facilities and telecommunications.
“A lot of foreign investors are waiting for the readiness of the infrastructure. The government needs to make a substantial investment in infrastructure first; otherwise foreign capital cannot come in,” said Yasuhide Fujii, the managing director of KPMG in Myanmar.
“Now it is still far behind full capacity. It will take another two or three years to have a certain level of infrastructure to accommodate foreign investment. Once that is ready, they will boost their investments.”
But even without the existence of a better infrastructure base, foreign direct investment (FDI) to Myanmar continues to show robust growth. In the first five months of the 2014-15 fiscal year that began on April 1, FDI totalled $3.32 billion, according to the Myanmar Investment Commission. Consequently, it has revised its FDI forecast for the fiscal year to $5 billion from $4 billion.
The commission said 31% of the investment so far in the current fiscal year was in the telecoms sector, 23.8% in oil and gas and 18.4% in real estate. Hotels accounted for 13.3% while 8.1% went into manufacturing, primarily garments.
FDI in the previous fiscal year to March 31 totalled $4.11 billion, up from $1.42 billion a year earlier. That compares with just $329.6 million in 2009-10, a year before the new government took office.
The country’s gross domestic product (GDP) is on track to expand by 7.8% in fiscal 2014-15, bolstered by increasing FDI as a response to the reform agenda, according to the Asian Development Bank (ADB).
Improving physical infrastructure as well as the quality of its human capital will be essential for Myanmar to reap the full benefits of reform, the ADB says in a new report “Myanmar: Unlocking the Potential”. It outlines 15 scenarios based on econometric modelling for the country to achieve its development goal.
Fully realising the economy’s potential could push annual average GDP growth as high as 9.5% by 2030, up from the pre-reform baseline of 4.8%, the report says. Growth of this magnitude could push GDP per capita to nearly $5,000 by 2030, up from about $900 today.
“Development of social and physical infrastructure is the formative base for Myanmar to be internationally competitive and to be able to produce things efficiently,” said Cyn-Young Park, an ADB assistant chief economist and one of the lead authors of the report.
The priority for improved transport will be urban areas. Ms Park said a better road system was especially important for Myanmar to integrate with regional production networks and secure access to regional and global markets.
According to the World Bank, Myanmar’s Logistics Performance Index (LPI) score places it 145th out of 160 countries, indicating the need for massive development of transport infrastructure.
Myanmar also has abundant energy resources, but the lack of investment and proper maintenance over many decades means that only a quarter of its population has access to a regular supply of electricity.
The Thilawa Special Economic Zone (SEZ) now being developed near Yangon is the focus of efforts to create a model for reliable electricity and water supplies on a scale needed by industry.
Elsewhere, the ABD report recommends a least-cost power expansion plan that increases the supply from available resources, with a focus on hydropower and natural gas, while coal- and gas-fired generation plants should also be upgraded.
Hydropower plants currently contribute nearly 70% of the total electricity generated in the country.
Apart from infrastructure advancement, Ms Park said, the primary concern for Myanmar is to ensure that reforms continue at a steady pace, up to and beyond the general election scheduled for the end of next year.
“The government has to make sure that any elections or political events will not somehow cause the country to deviate from the course of the reforms. They have to make sure that, despite any potential changes, the reforms should stay on course,” she said.
For many western companies, the election will be the decisive factor to end any hesitation they still might have about making commitments in Myanmar.
“Western countries such as the United States or European countries are still sitting and waiting for the result of the general elections,” said Mr Fujii of KPMG.
“They want to see Myanmar’s real intentions for democracy. After that, they will surely be more aggressive about investing in Myanmar.
“Things may depend on the result of the election. If they keep the current policies for FDI after the election, it will encourage investment.”
HUMAN CAPITAL
Among Asean countries, Myanmar currently positions itself as a low-cost operating centre that will appeal to businesses facing rising labour wages elsewhere. However, many of its workers have only the most rudimentary skills because the country has been an economic backwater for so long.
The new foreign investment law requires unskilled positions to be filled only by Myanmar citizens, while the number of Myanmar nationals filling skilled-labour positions should be at least 25% of the workforce in the first year of operation, 50% in the second and 75% in the third. Some investors question whether such quotas are realistic.
The ADB report suggested the government to allocate more public spending to developing human capital in parallel with the physical infrastructure.
To improve access and quality of education, the government should consider using cash transfers and scholarships to higher education, build more secondary schools or expand transport systems in rural areas, and upgrade the curriculum, the report said.
“Myanmar can unlock its economic potential by increasing its human capital. Human capital is really an input for every sector of the economy,” Ms Park said.
“The country needs comprehensive education reform immediately at every level. For the short-term adjustment, it should strengthen high school education, and also technical and vocational training. It has to provide financial assistance for people to gain better access to education.”
Myanmar has only five years of primary education compared with six in most countries. Adding another year would go a long way toward improving the quality of education and aligning with global standards.
“Over time, as the economy grows, it will require stable sources of educated workers. That means they should start working on primary and secondary education as well,” said Ms Park.