Despite some optimism, many businessmen say that for all Burma’s opportunities, significant challenges remain if Burma is to become another “Asian Tiger.”
RANGOON—Despite the recent suspensions of Western sanctions and the government’s claim that Burma is moving the country toward a market economy, foreign investors are not going to rush into the country anytime soon, say business people and analysts.
After a implementing a series of political reforms since taking office in March 2011, President Thein Sein announced earlier this week that Burma would focus on economic change over the coming year, hoping to triple the country’s lowly GDP by 2016.
But optimism about Burma’s largely untapped market of around 60 million people is coming up against the hard realities of a country where poverty is widespread and where business has been stifled for many years by a combination of sanctions, government mismanagement and corruption.
Despite the country’s strategically-pivotal location between India and China and relatively low labor costs, investors should be cautious, say analysts. “There does not seem to be a ‘master plan’ for economic development in Myanmar yet,” said Alessio Polastri, the managing partner at P&A Asia, a law firm advising investors looking at “emerging markets.”
Overcoming the Past
Authoritarian rule and human rights abuses saw Western sanctions applied on Burma during the 1990s and 2000s, while the Burmese military junta was widely criticized for its economic incompetence. In turn, foreign investment into Burma has been low, relative to the size of the country, and has been largely limited to natural resources
According to the government’s cumulative multi-year investment statistics from 1989 up to May 2012, oil, gas, mining and “power” made up 92 percent of all foreign investment into Burma, coming to a combined value of almost US $30 bn. During the 1989-2012 period, foreign investment in Burma was below $100 million during eight separate years, but spiked to $6 bn in 2005-6 and $20bn in 2010-11.
Times—and policies—are changing, however, the government now says. “The way forward to a market economy is on track,” said government official Dr Kan Zaw, speaking to around 300 local and foreign business people at the New Myanmar Investment Summit 2012, organized by Singapore-based CMT and taking place in Rangoon on June 20-21.
Though the Burmese government expects continued investment in oil, gas, hydropower and minerals, it says it wants other investment in sectors that will generate more jobs for the estimated 60 million Burmese, 75 percent of whom work in agriculture and tens of millions of whom live on one or two dollars a day.
“We want to create an investor-friendly environment,” said Kan Zaw, who is deputy minister at Burma’s Ministry of National Planning & Economic Development, pointing to recent announcements by Coca-Cola and 7-11 that they would open operations in Burma after the US and EU suspended economic sanctions in response to government reforms.
Kyaw Zaw Maung, the director of the Directorate of Investment and Company Administration, the government agency that handles applications from foreign investors, talked up Burma’s “mega-port” projects as evidence that the country is gearing up for significant foreign investment.
Three multi-billion dollar ports and contiguous special economic zones (SEZ) are currently being developed in Burma: at Kyaukpyu in Arakan State; at Thilawa, 18km from commercial capital Rangoon; and at Dawei (Tavoy) on the southern coast.
These ports, along with a draft foreign investment law and proposed revisions to Burma’s recently enacted SEZ laws will make Burma a more attractive investment proposition than in the past, said Kyaw Zaw Maung.
Officials and Burmese businesses spoke at the investment gathering about “finding local partners” as a way for unsure foreign investors to find their feet in a relatively unknown market.
So for some Burmese business people, foreign investment means an opportunity, rather than competition, it seems. One, Aung Zaw Oo, who is managing director at Aung Naing Thitsar, said that “the government is encouraging investment in rice, sugar, cotton.” This will mean foreign investors could have “an opportunity for manufacturing farm machinery and joint ventures,” he said.
And despite the government aiming to pull in labour-intensive investment, Burmese energy companies are jockeying for position before Western energy firms return to Burma, likely later in 2012 when the government fields bids for 25 offshore oil and gas blocks.
“We are waiting for this to happen,” says Thu Rein Aung, the managing director of Asia-Pacific Exploration Mining and Production, which is a “small Yangon-based energy company,” he says. “We are hopeful we can join up with these companies.”
Similarly, foreign companies working as suppliers to the oil and gas extractors see the likely involvement of Western energy giants in Burma’s energy sectors as an opportunity to do business. Amir Araabi, a Singaporean working with Sharjah-based OMC Ship Management, says, “We are trying to get involved with the local and international companies for any lifting with pipelines in the sea.”
However, despite some optimism, businesses at home and abroad say that for all Burma’s opportunities, significant challenges remain if Burma is to become another “Asian Tiger,” and emulate growth achieved by nearby Thailand and Malaysia over recent decades.
“There is a concern over lack of transparency in the government’s plan for development in various sectors, such as infrastructure,” warned Alessio Polastri.
Zach Wilson is managing director of Alfatech Vestasia, a Singapore-based consultancy that checks out emerging markets for high-tech US clients, and he too believes that the lack of big-plan clarity is a worry.
“Everybody makes fun of China with their 5-year plans,” he says. “But it would be good if they [the Burmese government] came out and said for the next five years we’re doing X,Y and Z, and then companies outside would know it’s time to go.”
Other businesses looking at Burma say that the local political and business culture is a challenge, after Burma’s years of relative isolation from the West. Counseling against working through typical Western business practices, Burma-based lawyer James Finch advised potential investors that “it is a question of establishing relationships with people, at all levels. It’s about the relationship. They don’t want to have piles of paper thrown in their faces.”
There are other, more short-term and less abstract hurdles for possible investors, however, some of which are a side-effect of a much-anticipated Burma boom. Moe Kyaw, a UK-educated Burmese and founder of the Myanmar Marketing Research Development Co, says that a 5-6 fold increase in the cost of office space in Rangoon over the past year could deter investors. Burma’s jade exporters are inflating property prices, he said, adding that “most of them aren’t educated and just put the money into property.”
Other pitfalls are a legacy of Burma’s long years of top-down economic mismanagement. The country’s physical and communications infrastructure is run-down, with regular electricity shortages and poor cellphone coverage. “The telecoms network is extremely underdeveloped,” said Polastri, while Zach Wilson says that to convince many potential investors, Burma “needs to have good Internet, reliable power, you have to be able to use a visa card.”
Wait a While?
So, for the high-tech stateside companies with which Wilson’s firm deals, it is too soon to think about opening operations in Burma. “If you look at the development clock, it’s like 7.30 in the morning here. Most of my clients won’t come until the afternoon,” he assesses.
Waiting might be a better option, it seems, for some investors, said Alessio Polastri, due to the size of Burma’s untapped market. He told the CMT conference that “the [Burmese] market is too big to suffer ‘early train syndrome’ for a few years yet.”
Waiting might be an option too for Nathan Pflaum, an executive with Singapore-based FJ Benjamin, which does retail distribution for Western fashion houses and timepieces.
He says that the suspension of Western sanctions means that US and European brands are hoping to sell their wares in Burma. However they too might have to wait for a later train, according to Pflaum. “It is quite hard to judge whether they are that ready for retailing and how we are going to do it,” he says, adding that “it might be a while before higher brands can come in.”
But doubts and timetabling aside, Burma hype is unlikely to fade anytime soon. According to Erika Nolan of The Sovereign Society, a US-based free market research firm, “newly opening markets like this [Burma] are where the growth is nowadays.”
And, despite listing several of the challenges to doing business in Burma, Zach Wilson acknowledges that the country offers massive opportunities for “its 63 million people who could buy products. It has the natural resources, and it’s at a significant crossroads at the heart of Asia.”
Moreover, despite outlining that for some investors, it might be more prudent to wait until Burma’s laws change and infrastructure improves, a country of around 60 million people nonetheless offers a “first mover” advantage, according to Alessio Polastri. With scant investment to date in most sectors of the economy, “there is little competition for whoever takes the plunge,” he said.Show
Pingback: Investing in Burma? This tiger needs to earn its stripes – The Irrawaddy « Emerging Frontiers Blog