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Baker Tilly Myanmar wanted to share with you a great article on Myanmar which talks about its past, its future and what the set backs have been. Its a very clear and well researched article that shows why everyone is getting so excited about Myanmar, while at the same time not forgetting it's history and acknowledging the risks and difficulties involved.

The original article was written by Grant Williams and can be found here at Maudlin economics as part of their September Newsletter.

Myanmar Shadow 

Some time ago I wrote a piece on Myanmar, in response to which I received a landslide of emails during the weeks after its publication. At the time, I promised to write further about this amazing country; but, as is so often the case, time has intervened and taken me in ever-different directions.

However, this week a chance meeting with an old friend during a truly epic Singapore rainstorm brought Myanmar firmly back to the front of my mind; and so, after a long overdue catch-up with that friend, I find myself once again marveling at what is happening in the country that represents perhaps the last true frontier market in Asia.

In my original piece I laid out a little of the history of Myanmar; and so it may make sense to refresh old memories and enlighten the many new readers amongst you with an excerpt from the earlier piece, which will lay the foundation for some truly eye-popping statistics from a place which offers golden opportunities for investment over the medium to long term:

(Things That Make You Go Hmmm... August 2012): The names of such places as Rangoon, Mandalay, and Irrawaddy evoke memories of a bygone era when the once-mighty British Empire included many far-flung outposts that inspired not only adventure but poetry.

One such outpost was Burma, a country of tremendous strategic importance that was conquered by the British after a series of Anglo-Burmese Wars between 1824 and 1885.

With the fall of Mandalay in 1886, Burma’s last monarch, King Thibaw Min, abdicated, setting the stage for a little under 60 years of British rule, during which time the city of Rangoon was anointed the country’s capital and grew into an thriving port along the trade routes between Calcutta and Singapore.

Many of those years were fraught with unrest as cultures clashed and seemingly insignificant differences, such as the refusal of the British to break with their own tradition and remove their shoes when entering pagodas, were enough to cause severe rioting and the loss of many lives; but the quid pro quo was that Burma became the most-developed and wealthiest country in Southeast Asia under British colonial rule.

In April 1937, Burma became a separately administered colony of Great Britain and Ba Maw was installed as the country’s first prime minister. Amazingly enough, Ba was a very outspoken opponent of British rule in Burma (begging the question of how that little fact escaped those in Britain conducting the vetting process); and, after strongly opposing Burmese participation in WWII, he resigned from the legislative assembly in 1940 and was arrested for sedition.

It was at this time that an exiled Burmese activist with a family pedigree of resistance (his great uncle had fought against the British annexation of Burma in 1886) named Aung San formed the Burma Independence Army from his base (located, curiously enough, in Japan), and these displaced Burmese took up arms against the Allies.

Burma would be decimated by WWII as it became a major battleground due to its geographical significance and the richness of its resources. Though many Burmese initially fought on the side of the invading Japanese army, the vast majority switched allegiance by 1945; and it was in the aftermath of the war that Aung San negotiated the Panglong Agreement, which guaranteed the country’s independence and firmly established him as the father of modern Burma.

Aung San was tragically assassinated by political rivals six months before his dream of an independent Burma was finally realised; but despite this setback, on January 4, 1948, Burma finally became an independent republic with Sao Shwe Thaik as its first president and U Nu as its first prime minister.

The next 14 years were relatively stable and reasonably peaceful after the turmoil that had gone before. It was during this time that Burma’s U Thant became Secretary General of the United Nations (a position he would hold for ten years), taking with him to New York a young woman named Aung San Suu Kyi, daughter of Aung San, as an administrative assistant. This young woman was later to win the Nobel Peace Prize in 1991 and play an enormous role in shaping the country — but that is a story half-written, to which we shall return shortly.

In March of 1962, however, darkness descended upon Burma when a military coup d’état, led by General Ne Win, overthrew the government, plunging the country into decades of violent misrule by an oppressive junta. In 1974, a new constitution of the Socialist Republic of the Union of Burma was adopted, which instituted a one-party socialist system. The good news? It led to the resignation of the military rulers. The bad news? They continued to rule anyway, through the Burma Socialist Programme Party (BSPP), and virtually destroyed the country, turning it into one of the most impoverished nations in the world through their rule based on the toxic combination of Soviet-style central planning and superstitious beliefs. I know, I know... how could a system that combined two such brilliant ideas possibly go wrong?

Periodic protests during this period were swiftly and brutally suppressed; but on the 8th of August, 1988 (in perhaps something of a harbinger for those currently attempting to “fix” Europe — pay attention mesdames et messieurs), a bizarre piece of economic mismanagement was undertaken by Ne Win that would finally lead to his downfall and the installation of a new military regime. He abruptly and foolishly decided to demonetize large-denomination kyat bills — a move that instantly affected Burma’s middle class, turning many of them into paupers overnight and sparking what became known as the “8888 Uprising” (8th of the 8th ‘88). The bloody protests that sprang up across the country were eventually quelled after yet another military coup in September by the State Law and Order Restoration Council (SLORC), which imposed even more draconian conditions upon the poor citizens of Burma than those they had endured under Ne Win.

But amidst the turmoil it was the formation, in September 1988, of the National League for Democracy (NLD) under the leadership of that young lady who had left her home for New York a decade earlier, Aung San Suu Kyi, that was to mark this period of upheaval as a crucial turning point for Burma, as it turned away from socialism and inched towards a more democratic structure. Inched being very much the operative word.

The following year, the SLORC officially changed the country’s English name to The Union of Myanmar; and, in a move that would make them the laughing stock of repressive regimes everywhere, they promised that in 1990 they would hold free elections for the first time in 30 years.

In March of 1962, however, darkness descended upon Burma when a military coup d’état, led by General Ne Win, overthrew the government, plunging the country into decades of violent misrule by an oppressive junta. In 1974, a new constitution of the Socialist Republic of the Union of Burma was adopted, which instituted a one-party socialist system. The good news? It led to the resignation of the military rulers. The bad news? They continued to rule anyway, through the Burma Socialist Programme Party (BSPP), and virtually destroyed the country, turning it into one of the most impoverished nations in the world through their rule based on the toxic combination of Soviet-style central planning and superstitious beliefs. I know, I know... how could a system that combined two such brilliant ideas possibly go wrong?

Periodic protests during this period were swiftly and brutally suppressed; but on the 8th of August, 1988 (in perhaps something of a harbinger for those currently attempting to “fix” Europe — pay attention mesdames et messieurs), a bizarre piece of economic mismanagement was undertaken by Ne Win that would finally lead to his downfall and the installation of a new military regime. He abruptly and foolishly decided to demonetize large-denomination kyat bills — a move that instantly affected Burma’s middle class, turning many of them into paupers overnight and sparking what became known as the “8888 Uprising” (8th of the 8th ‘88). The bloody protests that sprang up across the country were eventually quelled after yet another military coup in September by the State Law and Order Restoration Council (SLORC), which imposed even more draconian conditions upon the poor citizens of Burma than those they had endured under Ne Win.

In March of 1962, however, darkness descended upon Burma

But amidst the turmoil it was the formation, in September 1988, of the National League for Democracy (NLD) under the leadership of that young lady who had left her home for New York a decade earlier, Aung San Suu Kyi, that was to mark this period of upheaval as a crucial turning point for Burma, as it turned away from socialism and inched towards a more democratic structure. Inched being very much the operative word.

The following year, the SLORC officially changed the country’s English name to The Union of Myanmar; and, in a move that would make them the laughing stock of repressive regimes everywhere, they promised that in 1990 they would hold free elections for the first time in 30 years.

Now, call me old-fashioned, but if I’m handicapping a free election between a brutal military junta and a democratic party of the people, I am concerned with only one variable: is the election truly “free”? If it is (and I think it’s safe to say that such regimes have a fairly spotty record when it comes to such things), then I’ll happily take the points and back the democrats. Of course, such elections are never truly free (no, Mr. Putin, they are NOT. We’ve discussed this before. I’m busy; leave me alone), and so the smart money always goes on the ruling party.

But a funny thing happened on the way to the ballot boxes as each of the ruling generals assumed that one of the others was going to fix the result; and, amazingly, the NLD won an astonishing 80% of the seats.

Normally that might be a problem for a regime, but not in Myanmar.

The military junta simply refused to step down, then quietly set about repressing the populist NLD, imprisoning many of its leaders and placing Aung San Suu Kyi under house arrest, where she remained for 16 of the next 21 years.

The SLORC changed their name to the State Peace and Development Council (SPDC) in 1997, but the old switcheroo failed to fool anybody. Nevertheless, the junta remained in power until 2007 under the leadership of General Than Shwe, whose claims to fame include being ranked No. 4 on Parade magazine’s 2009 “World’s Worst Dictators” list and placing an impressive No. 2 on Listverse’s Top Ten Worst Living Dictators list (seriously). Shwe was described thus by the Democratic Voice of Burma:

(Democratic Voice of Burma): He tends to be seen as being sullen, humorless and rather withdrawn, a hardliner, skilled manipulator and an opponent of the democratization of Burma.

According to his eHarmony profile he also liked long walks, 1940s film noir, and labradoodles.

But I digress.

There must be something about the heat of August in Myanmar, because nineteen years after the 8888 Uprising, the situation boiled over once again in August of 2007; and, amazingly enough, it was not just the repressive brutality of the regime, it was once again economic missteps that finally brought about an angry revolt amongst the people of Myanmar (pay attention, Brussels... pay attention).

In the wake of what became known as the “Saffron Revolution,” a constitutional referendum was held in May 2008, which promised a “discipline-flourishing democracy” and bestowed yet another name change upon the Union of Myanmar, which would henceforth be known as the Republic of the Union of Myanmar (evoking Monty Python’s Judean Popular People’s Front). But perhaps most importantly, the referendum set the stage for a full and free general election in 2010 (the first to be held in Myanmar in 20 years), which, despite being decried as fraudulent by many Western nations in the wake of a resounding win for the military ruling party, looks to have potentially been the beginning of real reform after so many false dawns.

After the 2010 election, Myanmar’s aging military rulers began a series of reforms towards a more liberal democracy and a mixed economy. Their motives were likely selfish as, after years in absolute power, they were wealthy beyond imagination, with offspring who wanted to travel the world (which was prohibited by EU, US and Swiss sanctions), and they had most likely decided that an orderly, self-determined transition into quiet retirement was infinitely preferable to the alternative.

Whatever the reasons, the generals matter little, since, if you talk to citizens of Myanmar now, the feeling is very much that the reforms are both real and irreversible; and the success of the NLD in by-elections held on 1st April of this year [2012 — I know, right?] was a graphic illustration of this profound change, as Aung San Suu Kyi’s party swept 43 of the 45 constituency seats available, and she herself took a seat in the Pyithu Hluttaw (lower house) of the Burmese parliament, representing the constituency of Kawhmu.

Such events had been inconceivable only months earlier, but with the visit of Hillary Clinton to Myanmar in December 2011 (the first visit by a US Secretary of State in 50 years), the imminent lifting of sanctions and Myanmar’s election to the chair of ASEAN in 2014, progress is proving swift and sweeping. Myanmar’s prospects haven’t looked this good in a generation.

So... there you had it, back in late autumn, 2012. Since then, things have been moving at an incredibly rapid pace, as the friend I bumped into in the deluge this week explained to me over a beer.

Billy Selig has done his time in finance. Over the last twenty-plus years, he has worked at the NY Fed and for a bunch of brokerage houses in the US and across Asia; and during that time he has always shown a willingness to go places others feared to tread. It was that pioneering spirit which led to his announcing to a group of friends in Singapore back in late 2011 that he was going to Yangon. Not for a visit — no. That’s not Billy’s style at all. He was moving there lock, stock, and barrel to try to chase down the opportunities that had captivated him after he had ventured to Myanmar to see what was going on.

Billy set up New Crossroads Asia, a boutique research and financial advisory house that quickly became an invaluable source of intelligence for foreigners looking to gain access to and knowledge of a country that had been off the world’s investment radar for 50+ years.

(In the interests of full and fair disclosure, Vulpes Investment Management was so impressed with the work Billy and his team were doing in Myanmar that the company bought a 25% stake in NCRA. This article is most definitely NOT, however, an infomercial!!)

As Billy and I chatted, I asked him about the progress being made in Myanmar:

There has been a significant amount of change both politically and economically since I arrived; however, in some instances things have now hit a speed-bump as we await some crucial by-elections which will take place in November or December and are the precursor to a general election scheduled for December 2015.

(It was here that I interrupted in order to make the point that, in the Myanmar of old, a general election was just that — a day when a whole bunch of generals got “elected” — but Billy just soldiered on...)

Those elections offer the chance to prove once and for all that there is no going back on the proposed reforms, so foreign direct investment is waiting on the sidelines in order to ascertain whether or not the new administration will carry the democratic reforms of late forward and more importantly support a pro-business environment.

I asked Billy about the major changes he’d seen over the last few years and whether there was any specific development that stood out above the rest:

When I first arrived in Myanmar, it quickly became apparent to me that the main hurdle to overcome if Myanmar was to move forward from an economic perspective was the severe lack of capital and the need for multilateral oversight and lending. Since the country had been in isolation for over 50 years, it not only lacked the capital needed to pay for reconstruction, but the infrastructure and the soft resources to manage it were also nonexistent.

My point was that, until the market developed a solid mechanism through which investment could find much-needed credit and the necessary distribution and collection channels, there wouldn’t be much change. Until the World Bank and IMF and other multilaterals entered the market, we would not see much economic development.

Now, in August 2014, we in the business community in Myanmar are very excited to see the IMF, IFC, World Bank, and other multilaterals engaging in project development and financing.

This is an absolutely crucial step.

Billy is right. You only have to look at some of the numbers to get a sense of the true scale of the investment opportunity in Myanmar.

Take the energy sector, for example.

Myanmar has huge coal reserves, significant natural gas deposits and access to hydro-power — which already supplies roughly 70% of the country’s power needs. The potential, however, is extraordinary.

With four major rivers running through the country (the Ayeyarwaddy, Chindwin, Thanlwin and Sittaung, for those of you boning up for an appearance on Jeopardy), Myanmar’s hydropower potential exceeds 100,000 MW. Currently, less than 5% of that capacity has been developed.

Only 26% of Myanmar’s 55.7 million inhabitants have access to electricity, with only 9% of the inhabitants of the country’s spectacular countryside finding themselves with power. In the capital, Yangon, only 63% have electricity, whilst in Naypyidaw (the country’s administrative capital — think Canberra to Australians) the number drops to a mere 52%. How does Myanmar compare to the rest of Asia? Take a look:

 ElectricGraph.jpg

However, investment in the power sector is by far the largest segment of FDI in Myanmar. As of the end of June 2014, roughly $13 billion had been invested in the power sector by foreign entities, with an additional $6 billion having been approved. Anybody want to take a guess at the single largest source of those FDI funds? You — the guy at the back.

“China?”

Correct.

PieChartSector.png

Hydropower, however, unlike solitaire (at least according to Andy Williams), definitely isn’t the only game in town.

Myanmar has 20 trillion cubic feet of proven (that’s proven) gas reserves, and estimated reserves are four times that. Estimates put the country’s oil reserves at 3.2 billion barrels. Domestic demand for crude is on the order of 60,000 barrels per day, and the country uses roughly 590 million cubic feet of natural gas per day. However, as a result of underinvestment in the infrastructure necessary to harness domestic supplies and the fact that previous governments sold gas to both China and Thailand to raise revenues whilst international sanctions were in place, only 33% of crude demand and 41% of natural gas demand is met from Myanmar’s own fields.

In recent years, discoveries of significant energy reserves offshore have changed the profile of Myanmar’s energy production significantly, as the graphs below demonstrate clearly.

ProductionGraph.jpeg

And, with 20 of the 30 large (and bountiful) offshore blocks which were put up for auction in 2013 being awarded earlier this year to the likes of Chevron, ConocoPhillips, Statoil, Shell Oil, and Total (along with each of their domestic partners, of course), investment into the energy sector is set to ramp up significantly.

But the power sector isn’t the only place you’ll find numbers that will make your eyes water. No sir.

Take the automobile sector for example — a place where the possibilities for further market penetration are enough to make every major manufacturer wake up feeling giddy.

 There are roughly 150,000 km of roads in Myanmar, only 35,000 km of which are actually paved (there are only 4,000 “roads” in all of Myanmar), and this translates into a startlingly low number of automobiles present in a country of 55.7 million people.

There are a total of 331,000 passenger cars in Myanmar — a penetration rate of just 0.6% — and 90% of those cars are manufactured by the Japanese giants. The government has stated that it wants this ratio of 6 cars per 1,000 citizens to double (though they didn’t give a time frame). With the average age of a car in Myanmar being 8.5 years, the opportunity for selling replacement parts alone is enough to give any hard-baked entrepreneur the vapours.

 MotoPie.png

We could dig deeper into the automobile sector, but that would cut down on the time we have for other areas where the growth in Myanmar is just plain staggering — areas like, oh... tourism, for example.

Myanmar, a breathtaking, unspoilt country of glorious natural beauty, has the lowest number of tourists of any ASEAN country with the exception of another breathtaking, unspoilt country of glorious natural beauty, Brunei.

In 2012, 589,000 tourists visited Myanmar from overseas (compared to total border crossings of roughly 1.3 million). In comparison to Thailand’s 26 million tourists in 2013, that number is tiny, and it gives you an idea of the potential for increase. Those 589,000 people, however, marked the continuation of a startling change in trajectory of the chart marking tourists entering the country (below). Industry sources suggest that total border crossings reached a staggering 2,000,000 in 2013.

Also worth noting are the demographics of Myanmar’s rapidly expanding tourist class.

ToursitsChart.png

The decline in percentage terms of tourists from poorer countries such as India, Thailand, and China has been offset by more affluent visitors from overseas — to the extent that tourists by flight now represent almost 60% of Myanmar’s visitors. And those tourists spend money. Lots of it.

The average tourist to Myanmar now spends $800 during their 7-8 day stay. This average has been steady over the last five years and compares extremely favourably to neighbouring competitors for the tourist dollar:

ToursitReceipts.png

Although Myanmar had the lowest number of tourists visiting any ASEAN country in 2010 (311,000), it also had the fastest rate of growth the following year (27%); and the government has established a tourism master plan, the aim of which is to increase tourist visitors to 7.49 million (I guess they’re not big on rounding up) and earn US$10 billion in revenue by 2020, and to help the sector reach a target of 2.3 million employees by 2030 (when it will be bringing in US$14.1 billion in revenue).

Last, but by no means least (certainly for Things That Make You Go Hmmm..., as I suspect you’ll be hearing more about Myanmar in due course), we’ll take a look at the engine of the country’s growth, agriculture.

The agriculture industry accounts for 31% of Myanmar’s GDP (estimated at US$53 billion in 2012) and employs a hefty 56.4% of the working-age population (and a fair few of those not yet old enough to officially join the work force). However, those estimates are based on a labour force survey conducted in 1990; and in the interim, as sanctions, economic isolation, and a lack of investment have bitten hard, some estimates have put the number of people forced into working in the agricultural sector as high as 66%.

It’s hardly rewarding work, though, with farm workers in Myanmar earning less than half of what their peers do in Bangladesh and Cambodia — not two of the world’s highest-paying jurisdictions:

ArigcultureIncomeChart.jpg

There are multiple reasons for the discrepancies between labour utilization and contribution to GDP. The sector suffers from low investment — both from overseas and domestic parties — and the entire industry is in dire need of mechanization, modernized warehousing, improved distribution, and logistics facilities, as well as better packaging and branding.

AnnualCropsChart.gif

Rice is the dominant crop in Myanmar, with almost 20 million acres (7.8 million hectares, if you prefer) devoted to its cultivation; and in 2013 a 57-year-old record was broken when the country exported a record 1.3 million tonnes of rice (mostly to — you guessed it — China). It’s amazing what years of isolation can do in terms of giving you a chance to set new benchmarks.

However, despite the record amount of rice exported in 2013, it realised only 27% of Myanmar’s US$2 billion in total agricultural export earnings. Like I said, the sector needs a LOT of work.

The second challenge facing the industry is the extreme paucity of credit available to farmers (and the high rates which have historically been charged for access to that credit — if it can be found). In a report published earlier this year, the World Bank laid bare the problems in this area with a case study:

(World Bank): Among the government institutions supporting the agriculture sector, the Myanmar Agriculture Development Bank (MADB) plays an important role. MADB was established in June 1953 by the Government of Myanmar to support the development of agriculture, livestock, and rural enterprises in Myanmar. MADB is currently the largest financial institution serving the rural areas and financing agriculture activities. At the end of 2012, MADB served 1.87 million customers, mostly farmers, and had a network of 206 branches (which accounted for 23 percent of all banks’ branches in Myanmar). Since its creation, MADB has played an important economic and social role by providing loans to a large segment of low-income households engaged in agricultural activities.

Despite the existing limitations in its information technology (IT), infrastructure, and operations platform, every year MADB disburses a large volume of short-term loans to farmers both during the monsoon and the winter agricultural seasons.

Moreover, despite the inherent risks of the agriculture activities and lack of financial instruments to mitigate risks in its loan portfolio, MADB has historically had a strong track-record in loan recovery thanks to the various mechanisms it has put in place with local authorities to exert pressure on delinquent borrowers.

So far, so good. But... (there’s ALWAYS a “but”):

Notwithstanding its past success, MADB is in need of a profound reform to ensure that the institution is able to contribute to the modernization of the agriculture sector in a meaningful manner. Currently, MADB faces various weaknesses, such as the following:

                lack of diversification of the loan portfolio (the portfolio is heavily concentrated on rice farmers)

                limited range of financial products to serve the financing needs of all participants in the agriculture value chains

                risk management — limited capacity to monitor, control and mitigate credit risks unsustainable funding model — high dependence on subsidized government funding through the state-owned Myanmar Economic Bank (MEB)

                inadequate financial regulation and supervision

                weak corporate governance and limited operational autonomy of MADB’s senior management

                rudimentary IT infrastructure and operations platform

 

In recent years those historically high interest rates have plummeted, and that has put the biggest source of funding to farmers on life support:

(World Bank): MADB depends on MEB funding. To deal with the drastic decline in the interest margin and avoid the bankruptcy of MADB, the government has mandated the MEB, the largest state-owned commercial bank in Myanmar and one with very high liquidity, to provide subsidized funding to MADB. Thus, the MEB places a wholesale deposit with MADB at the rate of 4.0 percent so that MADB can lend at 8.5 percent which is far below market rate (market interest rate for loans in Myanmar is 12.0 to 13.0 percent) and thus could achieve an interest margin of 4.5 percent.

The subsidized funding provided by the government through MEB has allowed MADB to remain afloat and continue its business expansion, but the bank’s interest margin is simply awful (excuse the arbitrary time scale on the X axis... this is how Myanmar rolls):

InterestRatesChart.gif

The Myanmar government is trying to shift from the heavy reliance on agriculture towards construction, financial services, and energy (amongst others) — with double-digit growth forecast for all three sectors in 2014; but that doesn’t mean the agriculture sector is dead or dying — far from it. An upsurge in productivity and new technology has the potential to make the country’s farming industry more dynamic and more profitable than ever before.

GrowthProjectionsChart.gif

So that’s a look at just some of the raw potential waiting to be unleashed in Myanmar, but time doesn’t allow us the luxury this week of being able to dig into the property market or construction (two areas which are, naturally, on fire). Nor can we take a look at the burgeoning retail sector, but we will revisit Myanmar in a later edition of Things That Make You Go Hmmm... and complete the picture we’ve begun to paint.

As Billy and I sheltered from the rain last week and chatted about all the amazing things happening in Myanmar, I was taking copious notes; but one thing Billy said that I jotted down stood out to me when I read my scribblings later that evening. It was this:

Myanmar may well be a frontier market based on the true definition of frontier markets, but it is SO much more than that. Myanmar is, in fact, a re-emerging Burma as it once was: the world’s largest producer of rice, the crown jewel of Asia, and a resource-rich land that was, thanks to the British influence, a true beacon of free trade.

Just imagine where Myanmar could be in, say, ten years’ time, should she get this right and return to her glory days.

I couldn’t have put it better myself.

Just imagine.


 
 
Baker Tilly International
Baker Tilly International