The investment prospects in Myanmar have taken flight in recent years, and although the burgeoning nation is partway through a phase of economic transition, investors remain guarded in light of the inherent pitfalls of committing to a developing nation. World Finance spoke to Aung Ko Win, Chairman at KBZ Group of Companies, about the investment landscape in Myanmar, the reasons underpinning recent economic growth and the many opportunities to be realised there in the near future.
What is your position within the local Myanmar economy?
KBZ Group is a Myanmar-based and local-owned conglomerate, which was founded over two decades ago and represents market leaders in the fields of banking, insurance, aviation, mining, agriculture, infrastructure, trading, manufacturing, healthcare, hospitality and so forth. Our core business, however, is in the financial and transportation sectors.
We represent Kanbawza Bank (KBZ Bank), which is the largest privately owned bank in Myanmar in terms of capital base and branch network coverage. McKinsey & Company reports that KBZ Bank represents 51 percent of the overall private bank market share, and in 2013 KBZ Bank accounted for 36 percent of loans from domestic private banks, according to the Central Bank of Myanmar.
Due to our charitable activities, people in Myanmar have great trust and confidence in the KBZ brand and, as a result, we are able to leverage this reputation in expanding upon our market share. For example, we also represent Myanmar’s leading insurance provider, iKBZ (insurance Kanbawza), which is the first private insurance company of its kind to exist after 50 years of monopolisation by the government.
In the transportation sector, we have two airlines – AirKBZ and MAI. Established in 2010, AirKBZ (Air Kanbawza) is a domestic airline that spans 30 destinations and represents 30 percent of the domestic market share, according to Reuters, whereas Myanmar Airways International (MAI) is a legacy airline and the national flag carrier of Myanmar. KBZ Group recently acquired a 100 percent stake in MAI, and as a result occupies a dominant position in the region in terms of travel routes and destinations across East Asia.
KBZ Group is also known for its various CSR initiatives and, due to its contributions to various causes in the health and education sectors, along with religious, social and disaster relief, KBZ Group has come to be recognised as the most charitable enterprise in Myanmar. Moreover, the company demonstrate a willingness to strengthen transparency and accountability in Myanmar, and has been recognised as the highest national taxpayer for several years running now.
Myanmar in pictures
A man is seen farming land in Myanmar. The country has a strong agriculture sector ripe for investment.
A gem dealer examines the quality of a jade stone before purchasing it at a market in Mandalay, Myanmar. The country generates considerable income from the mining of precious stones.
KBZ Group employees seen assisting customers in its flagship bank.
Leading by example, I was awarded the first ever State Excellence Award on April 30, 2013 in Myanmar. The award is conferred by the President of the Union of Myanmar for being the highest tax-payer for successive years and the largest contributor to the welfare of its people and societies. This is a very progressive movement from the Myanmar government to encourage the CSR initiatives in Myanmar and acknowledge me as a role model for future generations.
What are the challenges that KBZ Group faces on a daily basis?
At KBZ Group, we uphold an entrepreneurial spirit in the face of adversity, which is why we see challenges as opportunities to excel. On a group level, we need to make sure that our existing businesses continue to be the market leaders in their respective sectors. We also focus heavily on corporate development activities – structuring partnerships into new areas of lucrative businesses; and we are finding ways to create synergies via internal M&A activity and restructuring.
On the portfolio company level, we focus on a few key points, which include how we can maximise our profitability and the interests of our stakeholders. We also look into how we create a good corporate culture, how we build an outstanding management team, and how to create enterprises with strong corporate governance.
We want to serve the interests of all our stakeholders, including our employees, suppliers and customers. We believe doing good for the people is excellent business practice, and will pay dividends in the long run. In order to do that, we want to create a strong corporate culture based on meritocracy, accountability and transparency. With a strong corporate culture we can instil strong corporate governance so that we can institutionalise our businesses and transform them from SMEs to public companies.
What is the corporate culture at KBZ Group?
True to our roots, KBZ Group has always focused on serving the people of Myanmar. Although we have grown in size, we are still very much focused on giving back to the communities in which we work. All of our businesses revolve around a simple core mission, and that is to provide quality services to the people of Myanmar.
We want to serve the interests of all our stakeholders, including our employees, suppliers and customers
The company has a relatively flat corporate structure. Even at our portfolio company level, senior management are actively involved in managing the day-to-day operations of their respective businesses.
On the group level, we also actively monitor the performance of our portfolio companies. We believe such an approach facilitates faster and more efficient decision-making by leveraging the synergies of our diverse businesses and our sector-based specialisations.
At KBZ Group, we consider every one of our employees a part of our extended family, so we go out of our way to show that we care. For example, we provide one of the most comprehensive compensation package programmes in Myanmar, which includes daily transportation, subsidised rent and mobile purchase, educational assistance, meal and uniform allowance, generous pension and healthcare plans, and an annual bonus.
How do you position your firm in such a transitional period?
At KBZ Group we are well aware of the challenges at hand. After being isolated for half a century, we have had to catch up with a lot of things and for this reason our core strategy is to focus on our people. For example, at our KBZ Bank, we have hired expatriates at key positions and our banking executives come from regional banks such as MayBank and United Overseas Bank (UOB), as well as international banks such as UBS, Citi, and Bank of America.
Through our correspondent banking partners such as Japan-based Sumitomo Mitsui Banking Corporation, Thailand-based Siam Commercial Bank and Singapore-based UOB, we have been sending our local executives for extensive training on a regular basis.
We will no doubt continue to depend on foreign experts until the local talent pool is capable of providing services of an international standard, although I believe our progressive hiring practices will allow us to be better positioned to negotiate future challenges.
An equally important component of our strategy is to strengthen our financial position. We believe that it is essential that we be fully prepared to take our portfolio companies for initial public offerings.
As a result, to remain competitive, we will need to raise additional capital to fuel our expansion in the next five years. Taking our companies public will not only provide capital, it will also allow the participation of strategic investors whom we can partner with to take our portfolio companies to the international markets.
We will also be able to structure more competitive compensation packages, which will include performance-based stock options to attract and retain key employees across all of our portfolio companies.
Has Myanmar progressed recently?
A newfound openness in Myanmar is bringing a new breed of traveller. Instead of the regular tourist crowd, we are seeing more businessmen in expensive suits, striking deals in crowded business lounges at various five-star hotels across Yangon. There is good reason for their interest in Myanmar.
This country boasts many green-field investment opportunities across various sectors and, despite the numerous challenges associated with newly developing nations, we are cautiously optimistic that Myanmar will prove a financially rewarding investment proposition in the long term.
This country boasts many green-field investment opportunities across various sectors
First of all, the global investment landscape favours positive development in Myanmar. With China’s transition from export-driven to consumption-based economy, the southeast Asian region as a whole will benefit.
More importantly, ASEAN’s commitment to move towards the integration of one regional market will benefit Myanmar via export opportunities to more than three billion customers in ASEAN countries and markets.
As a newly appointed developing nation, Myanmar harbours huge potential for growth. Between 1990 and 2010 Myanmar’s GDP growth averaged 4.8 percent – still significant growth in a new world order of sluggish global economies hit hard by worldwide recession.
Once Myanmar opened its doors, it grew 5.3 percent, 5.5 percent and 6.5 percent respectively for FY2011, FY2012 and FY2013 respectively. The World Bank estimates that Myanmar will grow 6.8 percent for FY2014 and the Asian Development Bank (ADB) has also reported similar figures of 6.8 percent for FY2014 and 7-8.0 percent for every year until FY2030.
This forecast coincides with McKinsey’s predictions that Myanmar’s economy will quadruple in size by FY2030 (see Fig. 1). We believe, given the rapid and positive pace of reforms, Myanmar could continue to grow in this way, fuelled by a steady inflow of foreign direct investment (FDI). The World Bank previously reported that FDI accounted for 3.7 percent and 5.2 percent of GDP respectively for FY2012 and FY2013, and FDI continues to increase as Myanmar rolls out the red carpet for foreign investors and drafts more investor-friendly laws.
Most importantly, in July of this year, Myanmar acceded to the New York Convention on the Recognition and Enforcement of Arbitral Awards, which was another significant legislative reform. This allows the government to move ahead with ratifying domestic legislation in line with the New York Convention.
We believe that the scale of opportunity far outweighs the challenges associated with developing nations. First of all, Myanmar needs to have the right regulatory framework in place to create a favourable investment landscape and, in the meantime, such changes should not come at the price of compromising the interests of the people in Myanmar.
Capacity building is also another pressing issue in rebuilding the country. Myanmar must take into consideration the required infrastructural developments that so often coincide with economic growth, but most importantly, the country needs to focus on corporate governance and transparency in order to keep on winning confidence from foreign investors.
What type of companies would benefit the most by investing in Myanmar?
In terms of growth sectors, McKinsey has highlighted seven key areas for consideration. These range from energy and mining, manufacturing, agriculture, infrastructure, tourism, financial services and telecommunications.
Manufacturing, agriculture, infrastructure, energy and mining in particular will be the essential catalysts in driving growth, as when they’re combined they represent 85 percent of the total growth opportunity.
Myanmar offers a comparative cost advantage in manufacturing, which is unusual in that high labour-intensive industries are so often relocated to a country with lower labour costs. Therefore, the manufacturing sector will be another key driver for Myanmar in sustaining economic growth and boosting employment.
Currently, the manufacturing sector constitutes less than $10bn in GDP and employs fewer than 1.8 million people. However, if labour intensive companies were to move their operations to Myanmar, manufacturing could contribute as much as $69.4bn in GDP and employ more than 7.6 billion people.
Of the various sectors, we believe that the agriculture sector will continue to play an important part in the development of Myanmar. We estimate that this sector employs more than 52 percent of the total workforce, accounts for a significant share of total exports (see Fig. 2), and contributed 44 percent of the $21bn GDP in FY2010.
The extractive industries also represent an important area for consideration and due to half a century of economic isolation, Myanmar still harbours significant reserves of oil and gas. Of all the country’s exports, natural gas has been the key economic contributor in that it accounts for the single largest export item on Myanmar’s books. Natural gas exports surpassed the $4bn mark in FY2013 and exhibited 14.3 percent growth on the previous year, which accounted for $3.5bn.
The World Bank expects natural gas production in Myanmar to increase significantly in FY2014 as new fields come online. Currently, major offshore oil and gas operations are taking place in Yadana, Yetagun, and Shwe, while Zawtika is in the pipeline. Moreover, major onshore oil and gas operations are centred on Yenangyaung. These resource bases account for 67 percent of Myanmar’s total exports income. Similarly, Myanmar is the world’s largest producer of jade and is also the world’s top producer of ruby and sapphire. For the FY2010, official data shows that a government auction sold $1.7bn in value on jade alone.
The telecommunications, media and technology industries offer tremendous opportunity for growth, being a sector that will allow Myanmar to leapfrog into the 21st century and move towards more sustainable development. The penetration rate of mobile subscribers stands at less than 10 percent of the total population.
However, the government has recently awarded two mobile telecommunication licenses to Norway-based Telenor and Qatar-based Ooredoo, which will pave the way for IT vendors and suppliers to participate in the sector. As a result, this industry could see dramatic changes made to areas of government, banking, health and education.
The infrastructure sector is also promising, yet it is unable to support the current rate of economic growth, especially in accommodating the gross scale of urbanisation. Currently, Myanmar’s urban population remains very low; however, we anticipate a demographic change in the near future, requiring that investment be made in infrastructure to accommodate a growing urban population.
What advice would you give to a firm considering investing in Myanmar?
I believe that macroeconomic and geopolitical factors will make investing in Myanmar very lucrative in the long run. Most importantly, we believe that for many green-field investments, the government is willing to make major concessions (for example extended tax breaks, 50+10+10 land leases), which will ensure investment opportunities are made extremely accessible.
As with any developing markets there are risks, including the operational risks for many firms without the experience of operating in Myanmar. However, a lot of the risks can be eliminated by means of embarking upon a joint venture with a local partner who is reputable, profitable and accountable.
Under KBZ Group, we have over a dozen businesses which have been operating successfully for a long period of time. Our partners can capitalise on our experience and expertise in expanding their presence in Myanmar.
Due to the progressive nature of our group, we have already hired a significant number of foreign executives, including investment bankers, who are well versed in structuring intricate deals that can be mutually beneficial to us and to our partners.
What would benefit the country’s economy?
We believe that it is a classic catch-22 scenario. The regulatory framework is not ready to accommodate all the needs of foreign investors, while at the same time regulators cannot create regulations for industries that are yet to exist in Myanmar. We also understand that it will take a bit of time to come up with a comprehensive regulatory framework.
A lot of critics have been commenting that the changes happening in Myanmar are too slow. In pursuit of economic growth, some of the developing countries have completely ignored political reform, which could have adverse effects on the country as the developing nation transforms into a developed nation.
Within the last 24 months, we have made significant progress with regards to political reform and once we have laid the foundations in our political system, economic reform will become more effective and easier to implement.
What do you think of the Yangon Stock Exchange at the moment?
Other than investing in land, there are no venues to channel investment in Myanmar. This is one of the reasons why the land prices have been skyrocketing in Myanmar. A stock exchange in Myanmar will drive down the land price and make investing in the country more viable for a greater portion of investors. Furthermore, with the availability of capital markets, more SMEs will receive the funding they so desperately need to grow their companies to the next step.
What are your final thoughts for the readers of World Finance?
China took 30 years to become a world-class economy. Due in large part to increased globalisation and technological advancement, Myanmar can cut that time frame by half. For this reason I believe that companies should take heed of the first-mover advantage in Myanmar and take advantage of concessions that may well not be available down the road. Of course there are challenges, but in the case of Myanmar, I do believe that ‘better late than sorry’ might be a questionable judgement.