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Friday, October 4, 2013, 08:57
Asia Weekly: Myanmar poised for FDI take off
By Karl Wilson in Sydney

Asia Weekly: Myanmar poised for FDI take off

Tourists cycle around the ancient temples of Bagan, one of Myanmar’s most popular sites for visitors. The tourism sector has been predicted to see a compound annual growth rate of 17 percent between 2010 and 2030. (AFP)

As rules are relaxed, Foreign firms are chomping at the bit to invest in one of the world’s last economic frontiers

Myanmar sits at a crossroad between Bangladesh, China, India, Laos and Thailand, and has the potential to become the fastest growing country in Southeast Asia, servicing a market of half a billion people.

Since Myanmar’s return to civilian government two years ago, ending almost five decades of military rule, it has become a magnet for foreign investment.

Not so much from traditional sources such as Europe and the United States, where both regions have been mired in their own economic problems, but from an emerging China, Japan, South Korea and from within the Association of Southeast Asian Nations (ASEAN), of which Myanmar is a member.

Many of those going into Myanmar are small investors looking for opportunities and wanting to get a foothold before the country takes off. But there have also been a number of companies from within ASEAN that are looking at Myanmar and its potential.

Under the country’s new foreign investment rules that were published last year, the government is allowing 100 percent foreign ownership on a wide range of business activities including telecommunications, energy, services, infrastructure projects, agriculture, hospitality and non-food manufacturing.

According to a briefing note issued by international law firm Clifford Chance, only a small number of activities require a local partner. These include food and beverage production, plastics and certain chemical industries, mining, and real estate development.

“However, even for those restricted sectors, foreign investors may hold up to 80 percent of the shares,” said Clifford Chance.

While foreign direct investment (FDI) is rising overall, Chinese FDI into Myanmar is said to be slowing.

Between 2008 and 2011, annual Chinese investment in Myanmar climbed from $1 billion to nearly $13 billion, but after the transition it fell to just $407 million in 2012.

China’s largest investment projects in the country have been the Myitsone Dam on the Irrawaddy River and the Letpadaung copper mine. These two projects are worth a cumulative $4.6 billion.

Vaninder Singh, Southeast Asian economist with the RBS, said Myanmar is “still considered by many as a frontier market but one that has huge potential”.

“Since the country opened up we are seeing FDI from Singapore, Japan and South Korea making its way to Myanmar,” he tells China Daily Asia Weekly.

“There is a lot of interest in Myanmar at the moment,” agrees Harsha Basnayake, managing partner for transaction advisory services with Ernst & Young.

“We are seeing a lot of intra-ASEAN investments these days and as ASEAN becomes more integrated, investors will see it (ASEAN) as a market for 600 million people,” he says.

In the last five months alone the government says it has approved FDI projects worth more than $1.8 billion, compared with $1.4 billion for the 2012- 2013 fiscal year.

A report by the McKinsey Global Institute earlier this year forecast that Myanmar could attract as much as $100 billion in FDI over the next two decades. The report also said the country could see its GDP quadruple over the same period.

While the European Union lifted its sanctions on Myanmar earlier this year, the US is lifting theirs in stages, which is frustrating US investors.

The US, for example, bans the import of rubies and jade from Myanmar and doing business with military-owned companies. But the restriction with the greatest impact for investors is against dealings with individuals and companies on the Specially Designated Nationals list, which identifies individuals and entities linked to sanctioned governments, terrorists and drug traffickers, according to a recent report by the Associated Press.

US businessmen argue that with little information available about who owns what in Myanmar, it is impossible to know who a potential business partner is associated with. And there are other problems with the US list, which is the responsibility of the US Treasury Department.

“The list in no way names all the individuals who would be objectionable to do business with. And there are individuals on there for purely political and invalidated reasons,” says Rachel Calvert at the consulting company IHS, who helps advise US companies on investing in Asia.

Resource rich and with a population of about 60 million, the potential size of Myanmar’s economy is comparable with Thailand and Vietnam.

The list of companies going into Myanmar so far includes Thai corporations such as PTT Exploration and Production; Ratchaburi Electricity Generating Holding; and Hemaraj Land and Development.

These are likely to benefit from large infrastructure and border economic development projects, analysts say.

Japan’s Toyota and Honda have expressed an interest in locating a production base in Myanmar.

Mitsubishi, Mitsui and Sumitomo, all from Japan, along with Malaysia’s Petronas, American conglomerate General Electric, Danish shipping line Maersk and Indian group Jubilant Energy are also planning to invest.

“Myanmar is unique in terms of a country being isolated for many decades and opening up, trying to make changes very fast,” Heang Chhor, a McKinsey director in Southeast Asia told Bloomberg recently.

“The $100 billion would come only if Myanmar keeps its credibility and support with the international stakeholders, investors in particular.”

President Thein Sein has allowed more political freedom and loosened controls on the economy following 49 years of military rule, attracting companies including Ford and Coca-Cola.

Myanmar’s economy may grow 6.75 percent this fiscal year, led by natural gas sales and investment as the country moves to modernize its financial system, the International Monetary Fund said in a report in August.

Peter Birgbauer, a consultant for Johns Hopkins University SAIS in Yangon, said in a paper recently: “Companies from multinational corporations to private equity firms seem to be chomping at the bit to get into Myanmar, hoping to establish a first mover advantage in one of the world’s last economic frontiers.”

Many firms, he said, send in teams to conduct market research and to establish relationships with potential local partners.

“However, very little American capital is actually being deployed inside the country. There are many potential reasons for this but taking a look at some large multinational corporations might give potential investors a better understanding of the current marketplace.”

Birgbauer gave the example of Coca-Cola and Pepsi, which have in fact been widely available for many years across the country, with the products being smuggled in from Singapore and Thailand.

Auto companies are among those who have actually opened operations in the country.

“Ford Motor Company recently became the first American automaker to launch operations in Myanmar with the opening of a new showroom and service center in Yangon. Ford entered the Myanmar market through a partnership with Capital Automotive, a subsidiary of one Myanmar’s largest companies,” Birgbauer said.

“Companies like GE, Chevron and Caterpillar have operations in Myanmar and are competing for market share with Asian counterparts who have been in the market much longer,” he added.

Myanmar’s economy remains heavily dependent on agriculture, contributing to a low productivity rate, according to the McKinsey report. Diversifying the economic base and increasing competition would allow Myanmar to boost productivity, it said.

The financial services and telecom sectors could each grow at a compound annual growth rate of 23 percent from 2010 to 2030, McKinsey said. That compares with 17 percent for tourism, 10 percent for manufacturing and 8 percent for infrastructure, it added.

“Economic development and foreign direct investment in Myanmar will take off only if all parties remain committed to the reform agenda and if there is domestic political stability and security,” the McKinsey report said.

karlwilson@chinadailyapac.com

 
 
 
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