By Alexander Chipman Koty
Following a series of bold political reforms beginning in 2011, Myanmar has sprung onto the radar of foreign investors as one of Asia’s last frontier markets. For decades, Myanmar was an isolated and overlooked pariah state dominated by a repressive military government that crushed dissent and participated in illegal drug and jewels trades. However, the military government’s unexpected democratic reforms, which culminated in the rise of Nobel Peace Prize winner Aung San Suu Kyi to power in 2015 and the removal of American economic sanctions in 2016, quickly changed the narrative surrounding the Southeast Asian nation.
Historically one of the region’s wealthiest countries but presently among its poorest, Myanmar has long been underperforming its vast economic potential, as the military regime’s ineffective political and economic policies hamstrung the country’s development. Favorable demographics, an advantageous location, and rich natural resources – along with the introduction of substantial economic reforms – make Myanmar an intriguing destination for adventurous investors who were previously blocked from entering the market.
However, despite its rapidly liberalizing political and economic landscape, Myanmar remains a daunting investment destination due to high risks of political instability, corruption, lack of legal enforcement, and logistical hurdles. While Myanmar has made substantial progress in restructuring its political and economic environment, and is poised to post some of the world’s highest GDP growth rates, investors looking to enter the promising but challenging market must take considerable precautions when establishing on-the-ground operations.
Opportunities for growth
The World Bank projects Myanmar’s real GDP growth to hit 7.8 percent in the 2016-17 fiscal year, an increase from the disappointing seven percent growth in 2015-16, while averaging 8.2 percent growth over the medium term. Given Myanmar’s plentiful natural resources and lack of infrastructure – only about 30 percent of the population has access to electricity – energy and telecommunications are expected to be immediate areas of growth. Indeed, foreign direct investment (FDI) in oil and gas and electricity comprise about 65 percent of total investment, while mobile penetration has already catapulted from seven percent in 2013 to 63 percent by early 2016. In the medium to long term, Myanmar will look to move away from extractive industries and develop its manufacturing sector, taking advantage of its sizeable and young population. To accomplish this, the government hopes to attract US$140 billion worth of FDI between 2014 and 2030.
Myanmar’s population of almost 54 million, over 60 percent of which is under the age of 35, immediately offers a young, large, and previously untapped labor pool, and a potentially significant consumer base farther down the line. The country’s demographics make it ideally suited for labor-intensive factor-based manufacturing, particularly given the fact that its average minimum wage is the lowest in ASEAN at US$73.80 per month. Further, Myanmar is ideally located at the center of the world’s fastest growing region, bordering both China and India, and is part of the 625 million ASEAN bloc.
Under Myanmar’s stifling military regime, the country was unable to develop its latent economic potential. As the country began to open up after years of isolation with 2011’s political reforms, however, a series of economic reforms followed suit – particularly after Aung San Suu Kyi’s liberal-minded National League for Democracy (NLD) took power in 2015. In 2012, Myanmar adopted the Foreign Investment Law, which functioned alongside the 2013 Myanmar Citizen’s Investment Law. The two laws governed investments by foreigners and Burmese nationals, respectively, and at times both parties thought the laws unfairly benefited the other. Due to criticism about the laws’ inconsistencies and a desire to further streamline investment regulations, the two were recently combined into the new comprehensive Investment Law, which comes into effect in April 2017, to provide investors with a more cohesive and modern legal framework. Although these changes are welcome, the speed of reforms and the short lifespan of newly introduced investment laws demonstrate Myanmar’s immature and still developing legal and regulatory environment.
Along with the introduction of the Investment Law, the NLD released a 12 point economic plan outlining the new regime’s reform agenda. The points include developing more transparent fiscal management, privatizing some state-owned enterprises, and developing financial systems to support small and medium-sized enterprises (SMEs). Other measures include enhancing education and infrastructure, and ensuring the balanced development of the agricultural and manufacturing sectors, while also creating a fair taxation system and protecting intellectual property to attract FDI. Coming out eight months after the NLD came to power, the plan was widely criticized for being overly general and lacking specificity on what the implementation and timeline of the policies would look like in practice. However, at a minimum they represent a further signal of the new government’s willingness to adopt liberal economic reforms and attract FDI.
Throughout 2017, Myanmar’s government is expected to publish clarifications of the Investment Law and introduce associated by-laws, as well as release more details about the implementation of the broader economic agenda. For instance, the Myanmar Investment Commission (MIC) and the Directorate of Investment and Company Administration (DICA) recently released a briefing paper outlining the rules of the Investment Law. The briefing offers clarifications about the specific mechanisms of the law’s application, such as the conditions under which a permit from the MIC is required. However, the guidelines are still in the developmental stage, as the government consults with various stakeholders to form concrete rules. Therefore, many provisions come with the caveat of what is “likely” or “expected”.
The development of the Investment Law is indicative of how Myanmar’s reforms will likely progress. In 2017, the World Bank ranked Myanmar 170 out of 190 economies for ease of doing business, including a woeful 188th for enforcing contracts, while Transparency International ranked it 147 out of 168 for corruption. These rankings are reflective of the country’s immature legal system, both in terms of comprehensive legislation and on-the-ground enforcement. As Myanmar develops its legal framework, it is likely that new legislation will be introduced and continually tinkered with, particularly since the effective implementation of laws may differ from what is formally written.
Removal of US sanctions
To reward Myanmar for its significant political and economic reforms, in October 2016, the US government removed longstanding economic sanctions that it used to pressure the military regime towards democratization. The lifting of the sanctions removed all of Myanmar’s 111 blacklisted individuals and entities from the US Treasury’s Specially Designated Nationals List, unblocked various property and interests, eliminated the ban on US import of jadeite and rubies, and ended banking and financial transaction restrictions set by the Office of Foreign Assets Control. While some sanctions remain in place, such as restrictions on arms sales and limits on individuals involved in organized crime and connected to North Korea, the most significant ones affecting foreign investment have been removed.
The removal of US sanctions marks a significant moment in Myanmar’s opening up and reform, as the restrictions either outright blocked financial institutions and foreign investors from investing in the country, or presented such high due diligence and compliance costs that an investment would not be worth the risk. The elimination of sanctions not only removes these extra compliance requirements, but also adds to greater investor confidence in Myanmar’s stability and prospects going forward. While goods in Myanmar still must meet other international standards in order to be accepted, such as the Generalized System of Preferences, the removal of American sanctions reduces a significant measure of risk and opens up previously blocked opportunities.
Political instability and challenges going forward
Although Myanmar has made progress in transitioning towards democracy and a liberalized economic environment, it remains a challenging and risky frontier market going into 2017. Investors should keep in mind that the democratic transition is far from consolidated and that economic reforms might not continually progress, while the potential for political backsliding or stagnation is high. The former military regime still has a significant influence in Myanmar’s politics, owning extremely potent state of emergency powers and a guaranteed presence in parliament that can obstruct constitutional reforms. Similarly, although sanctions were removed, current and former members of the military have an outsized presence in the economy, either through crony capitalism or involvement in state-owned enterprises. This gives military interests an influential voice in the direction of the economy, and means that any potential dealing or joint venture with a Burmese company has to involve measured due diligence to assess the potential risks involved.
This is particularly true given Myanmar’s ongoing armed conflicts, including what many observers call ethnic cleansing of the Rohingya minority by the government, and potential crimes against humanity done by the military. Many organizations have criticized the American government for removing sanctions too soon, as repression of minorities and curtails on freedom of speech have arguably increased rather than decreased under the NLD. With increasing conflict and mounting international condemnation, many of the issues that plagued Myanmar under the military regime persist, and the military itself could find its way back into power if the NLD fails to meet the Burmese people’s high expectations – both politically and economically. Though Myanmar has made tangible progress in becoming Asia’s next magnet for foreign investment, it remains an unpredictable frontier market that offers tantalizing potential alongside significant risks, challenges, and human rights concerns.
Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email firstname.lastname@example.org or visit www.dezshira.com.
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