The last Asian frontier

As Myanmar makes plans for a new stock exchange, the intent is seen as a welcome change to a country that oppressively kept its economy within its own borders. Katie Richardson explores the potential outcomes of its move onto the international landscape


It was one of the most secretive countries on earth, gripped for decades by the iron fist of military rule for almost 50 years. Now, since the historic by-elections on April 1, 2012 were won almost entirely by Aung San Suu Kyi’s opposition National League for Democracy party, Myanmar is opening up, not just to a new political persuasion, but to Asia’s economic boom. Despite the army’s proxy faction, the Union Solidarity and Development Party (USDP), which is still firmly in control of the legislative body, has approved plans for the country to get a new stock exchange after the Tokyo Stock Exchange and Daiwa Securities received preliminary approval to help with its initiation. Both companies are now forming a relationship with Myanmar’s central bank to establish the exchange by 2015. The move is sign as the surest sign of a country entering a new era of democracy.
righting past wrongs

Only a few years ago, the economical situation in Myanmar was as dire as it was draconian. As stewards of a nation rich in natural resources, corrupt generals proved themselves incompetent to look after it. A climate of semi-official corruption had become so entrenched that whole swathes of the population earned their living from it. The government was unpredictable – many people fell foul of policies that seemed to change on a whim: “One minute farmers were told to grow potatoes to export to India,” said one NGO worker. “The next minute the authorities wouldn’t allow it, and all that investment had been wasted.”

07 Nov, 2010: First polls in 20 years
13 Nov, 2012: Aung San Suu Kyi freed from house arrest after 15 years
30 Mar, 2011: Transfer of power to a new government complete
19 Aug, 2011: Aung San Suu Kyi meets Burmese President Thein Sein
23 Dec, 2011: NLD (National League for Democracy) registers as a political party
12 Jan, 2012: Karen ceasefire signed
13 Jan, 2012: A series of prisoner amnesties release high-profile dissidents
18 Jan, 2012: Suu Kyi registers to run in a by-election for a parliamentary seat
01 Apr, 2012: Suu Kyi wins her seat
02 Apr, 2012: Burma sets currency exchange rate as it floats the kyat
11 Apr, 2012: Burma stock exchange planned by Tokyo bourse

The corrupt economy filtered all the way down to everyday consumerism: telephones would fetch up to $3,000 on the black market, and for many household goods, there was a two-tier pricing system – if you knew someone influential, you could buy at the government price, otherwise you might have to pay up to ten times as much on the black market. Petrol was another underhanded commodity – an ordinary citizen was only allowed two gallons (nine litres) per day at the government price – and even then, queuing could sometimes take hours.

The country once dubbed ‘The Rice Bowl of Asia’ could hardly feed itself and had gone from being the richest in the region to one of the world’s more impoverished nations. The average farm worker was earning around 1,000 kyats ($0.80) a day and the average income per capita for each individual was about $715 per person. A constitutional referendum which promised a “discipline-flourishing democracy,” was held on May 10, 2008 and the Union of Myanmar was changed to the Republic of the Union of Myanmar.

Although general elections were held under the new constitution in 2010, the UN and Western countries condemned them as fraudulent. The claim that the USDP had won 80 percent of the votes was widely disputed and it was asserted the military had engaged in rampant fraud to achieve its result.

However, somewhere along the way, new President Thein Sein has embarked on a series of reforms toward liberal democracy, mixed economy, and reconciliation. These changes include the release of Aung San Suu Kyi from house arrest, the establishment of the National Human Rights Commission, general amnesties of more than 200 political prisoners, the institution of new labour laws that allow unions and strikes, the relaxation of press censorship and regulations of currency practices, the consequences of which are far-reaching. The Association of Southeast Asian Nations (ASEAN) members have approved Myanmar’s bid for ASEAN chair in 2014, and Hillary Clinton visited the country in December 2011 to encourage further progress, the first visit by a US Secretary of State in more than fifty years.

Open for business
Myanmar is now set on introducing reforms designed to stir economic growth. The new nominally civilian-led government has started to open up a previously restricted market – car prices have been slashed by up to 80 percent and an influx of international buyers and a promise of further reform has triggered a speculative boom in property investment.

There has also been a surge of new wealth and new opportunities for the under 25s. The business world is now turning up to check it out, almost with the dynamic of a gold rush – if you don’t elbow your way in, you will miss out.

The biggest prize on offer is Myanmar’s natural resources, including timber, oil, gas and gems, and the Chinese have had a flying start. China has already invested the equivalent of nearly $14bn into the country, equal to 35 percent of Myanmar’s total foreign investments, according to a report in Eleven News in the capital, Rangoon. Their latest contribution was in November 2011, with $4bn into the power energy sector. Most of the deals are in sectors involving hydropower energy, oil and gas and mining, making China Myanmar’s number one investor, surpassing Thailand.

“A 771-kilometre pipeline that will transport oil and natural gas from Kyaukphyu, Burma, to Yunnan Province in China is expected to be completed in 2013.”

The Asian Development Bank said that Myanmar’s economy is poised for substantial growth if tough Western sanctions are lifted and the government continues to permit reforms, and it seems the EU, the US and Canada cannot ditch them fast enough. Most recently, Australia and the US lifted travel and financial restrictions, and has also promised to ease sanctions on some business sectors, while allowing in humanitarian groups, following the hordes of investors from Japan, South Korea, India, China and Thailand who had started to flow into Myanmar after the most recent reforms under President Thein Sein since he took office in 2011. David Cameron, recently in Myanmar, said the EU should suspend all sanctions, while maintaining an arms embargo, following Norway’s recent lead.

Leveled playing field
One reason why sanctions are being lifted is because of the unshackling of Myanmar’s kyat currency. In one of the biggest economic reforms that the country has seen, the government introduced a managed float policy for the exchange rate in April 2012, which will unify all the exchange rates, currently totaling about 10. The new strategy is intended to make it easier for firms to invest in Myanmar and should bring an end to the divided system of foreign exchange rates.

Associate Professor of Economics at Macquarie University in Sydney Sean Turnell says the significant move should help Myanmar in the future: “The exchange rate regime that had been in place for 50 years had been a momentous impediment to the economy, foreign investors, and foreign trade,” he said. “It had also been the most extraordinary invitation to corruption – the fact that it’s been ended with this float is very significant. It makes Myanmar a more rational and attractive place to do business.”

Turnell believes, that while there is going to be quite a considerable amount of foreign investment, the decision to float Myanmar’s currency will by no means provide a ‘silver bullet’ for solving the country’s economic problems, and the process of unifying the currency system will take some time: “Considering their financial markets are quite marginalised and isolated, it will probably be around 2013 before it will happen,” he predicted.

Luc de Waegh of West Indochina, a consultancy firm in Singapore said: ““It is difficult, it is challenging to do business to an international standard in this ‘not so sophisticated’ environment, but I believe it’s worth it and this is what ordinary Myanmar people are aspiring to. Only Myanmar’s natural resources have attracted significant investment.”

Still, early interest indicates many Western executives are keen to size up a potential market of 54 million people with an estimated GDP of $52bn. Consumer brands are also busy dusting off their marketing plans as many of their products are already distributed via Thailand and Singapore. And while US law, for the meantime, forbids all investments, European sanctions don’t apply to sodas, shampoos and sauces. This gold rush could well become a stampede.

Future investment
As multilateral lending agencies prepare to seriously re-engage with Myanmar for the first time in decades, the country should watch out for the unintended consequences of economic reform, according to The Wall Street Journal. Journalist Alex Frangos writes: “All that new openness could come with short-term pitfalls, including a large current-account deficit, an unstable currency and disruptions for big state-owned companies.”

The good news is Myanmar might be able to handle such a deficit through inflows of foreign investor capital. As sanctions ease, there will also be money flowing in from the likes of the Asian Development Bank, the International Monetary Fund and the World Bank. If it can’t attract the capital, however, the kyat could depreciate. If Myanmar attracts too much capital, it could face the opposite problem, a rising kyat, which would hurt local businesses.

The Asian Development Bank estimates Myanmar’s foreign-currency reserves are nearly $8bn – equal to nine months of exports, by economists’ reckoning, enough to withstand a financial shock. But it’s not much compared with the reserves of neighboring Thailand, which has $175bn. The critical process of the new stock exchange will depend on the government’s own priorities, and few claim to know exactly where those lay.

The opening of a stock market in the Asia-Pacific region will never really play a major role in resource allocation, as the stock exchanges of this part of the world are primarily secondary markets facilitating their portfolio construction by domestic and international investors. Market developments may affect the level of fluctuations in the national income and consequently economic stability and growth, through their influence on the aggregate propensities to consume, save and invest.

We need to ask if the Myanmar stock exchange is a genuine commitment to change, to democracy, and to human rights, or if it’s an attempt to get the sanctions lifted so that more business and investment will flow in, and certain people who are already in a position of advantage and privilege will gain even more.

Director of Policy at the Institute for Human Rights and Business Salil Tripathi believes foreign businesses face formidable challenges in making sure their investments in Myanmar are both profitable and based on international standards. “It’s clear the road ahead will be uneven,” he said. “Much will depend on how the government and the new president acts to avoid the resource curse that many countries with abundant natural resources have faced in the past. But foreign investors – potential and existing – will have to act in an accountable and transparent manner. Myanmar’s long-suffering people deserve no less.”


Above: The symbol of the Cambodian Stock Exchange

When BBC news correspondent Guy De Launey visited Cambodia recently he remarked the murky brown liquid swirling in a tank behind Phnom Penh’s barely-used railway station did not immediately seem like anything to rouse the excitement of an international investor. After all, it’s water drawn from one of the city’s main rivers, the Tonle Sap.

But the interest of fund managers and individual punters alike has been piqued by what happens to the raw water after it leaves the intake tank, and the first company responsible for a series of chemical and filtration processes to purify the liquid until it’s clean enough to drink has become the first stock to be traded on the Cambodia Securities Exchange (CSX), when the country joined the capital markets when it started trading in mid-April 2012.

“We feel very happy and proud, because we have made history in our country,” says the Phnom Penh Water Supply Authority (PPWSA)’s director general, Ek Sonn Chan. With Cambodia’s economy growing steadily at an average rate of about eight percent in the past 10 years, and the likes of the Wall Street Journal tipping it as a place to invest, there seems to be reason for optimism in a country open for business. Interest in the stock has come from Thailand and Vietnam, with the biggest demand from China, then Japan, Korea and even the US.

The nation has made great strides stabilising after emerging from the war-torn decades of the 1970s and 1980s, and the government has made foreign investment very easy – there are no capital controls, no requirements for a joint venture, so a company can own 100 percent of its business in Cambodia.

Scott Lewis, Chief Investment Officer of Leopard Capital, an investment fund that focuses on pre-emerging markets, believes opportunities are immense but warns the stock exchange could face volatility in its early phase: “I worry about short term investors,” he said. “You could have a lot of people thinking it will be a ‘buy and flip’ scenario, shares will keep going up and then all of a sudden, people start to sell and it takes a long time to recover. It may be also be a while before we see more local Cambodian companies listed on the exchange as companies need to be audited for at least three years by accredited accounting firms, approved by the government. Only a few firms have already started this process.”

While two more state-owned companies – Telecom Cambodia and the Port Of Sihanoukville – are due to follow PPWSA on to the CSX in the coming months, so far there has been little sign of any privately-held enterprises taking the plunge – and the question is whether interest and trading volume will take off.


Above: Dethphouvang Moularat, Chairman and CEO of the LSX

As a tentative experiment with capitalism, landlocked Laos opened its own stock market in the capital Vientiane in January 2011. Sandwiched between Vietnam and Thailand, the country is one of the world’s poorest nations and has been trying to attract foreign investment as far back as the 1990s. As nearly every other country has a stock market, it was impossible for Laos to avoid doing likewise as it seeks to become internationally integrated.

Initially trading in just two state-owned companies, Electricite du Laos Generation company and Banque Pour Le Commerce Exterieur Lao, the Laos exchange hopes to bring in $8bn in equity and bond sales to fund investment in the country, however, the low trading value in its first year has caused the public to wonder whether the several million dollars that went into the venture have been well spent. The funding for the set-up of the exchange came from South Korea, which has invested $9.8m, or 49 percent of the capital, for the venture. The Bank of Laos, the country’s central bank, invested the rest.

Speaking in January, Lao Securities Exchange (LSX) Chairman and CEO Dethphouvang Moularat admitted that the Lao-Korean joint venture did not make a profit in its first year of business. But he said this was of no concern because the main purpose of the stock market was to make a profit in the long term, not in the short term. “The stock market is expected to make a profit within the next 10 years or sooner if business will boom”, he said, adding that ETL, Lao-Indochina Group and Lao World Group are expected to list this year, and a number of companies have also expressed their interest. Laos is also aiming to join the World Trade Organisation and become more integrated in the global economy.

The Laos government needs the equivalent of $15bn over the next five years to secure annual GDP growth of at least eight percent, of which 50 to 60 will come from private investment. One of the problems anticipated for the country is that the majority of the population is engaged in subsistence agriculture, so there is very little infrastructure. However, Dethphouvang said the first year of the stock market had benefited Laos because in the past businesses could only obtain investment capital from banks, which could offer only short term assistance.

The government now has a number of measures in place to buffer the country against international stock market turbulence, including limiting the rights of foreigners to own shares on the Lao stock market, which would prevent the rapid inflow and outflow of foreign reserves. It also has taken steps to prevent investors from taking ownership of companies. “The Laos stock market still has an important role to play in helping the government to source investment capital for continued high GDP growth,” said Dethphouvang.

Above: traders watch the Hanoi Stock Exchange Index


Having come through what Dominic Scriven, Chief Executive of Dragon Capital, describes as “a stinking four years”, Vietnam is on the up. The Vietnamese stock market was the third-best performing in the world in the first quarter of 2012, and has seen increased activity, with daily trading volumes rising three to fourfold. Much of this comes from local investors, but foreign investors are also showing more interest.

“There were some developments last year that are starting to feed through,” says Johan Kruimer, a Managing Director at Ho Chi Minh Securities Corporation. “Most important is a change in monetary policy. The new central bank governor, in place since last year, has reined in credit growth. Previously, this stood at 28-29 percent per annum; last year it was 12 percent. At the same time, inflation fell to 14 percent last year and will come down further this year. As a consequence, for the first time in many years, the currency is stable.” In a country where people have more physical gold than anywhere on the planet because they do not trust their currency, this is a major breakthrough for foreign and domestic investors.

The big question, though, is sustained performance. Vietnam’s stocks, once a hot frontier market for investors, never fully recovered after the index plunged 66 percent in 2008, during the global financial crisis. The market needs to be broader and deeper to move well away from being an adventuresome roller-coaster ride. Nguyen Vu Ngoc Trinh, Chief Investment Officer at Manulife Asset Management (Vietnam) Co. Ltd, said that a stabilised economy with reasonable inflation level “would create a platform for growth in Vietnam”.