Investors, beware: It’s a bumpy ride on the new Burma Road

Quartz

Myanmar began and ended 2012 as the frontier market on everyone’s mind. As a large, populous and strategically located country, Myanmar naturally invites the imagination to marvel at its possibilities—and investment opportunities. The powers that be are keen to modernize but still cautious about how quickly they open up. When it comes to foreign investment, the powers that be are still cautious in supporting modernization. But that will increasingly give way to pent-up foreign capital as the government opens up markets. And just as the Burma Road made Myanmar the playground of exploitative colonial forces during World War II, inflows of overseas money could challenge the young country as it looks to follow a sustainable path of economic development.

Dodging the resource curse

The first item of concern is the looming threat that emerging market-watchers know all too well: “Dutch disease,” the weakening of non-resource industries that occurs when foreign investment reaps the rewards of abundant natural resources. It’s already happening: unprecedented inbound FDI and steadily growing hydrocarbon exports have made the kyat the world’s strongest performing currency of 2012, causing fisheries, farmers, and other exporters to suffer serious setbacks.

The 2012 Investment Law maintains restrictions on sectors such as agriculture and small-scale manufacturing in order to boost local farmers and industrialists, and requires foreign firms to hold at least $5 million in cash deposited in local banks. But there are more powerful forces gathering on the horizon. 2013 will be the year that the government either devalues the currency or liberalize the exchange rate regime to reconcile the government and market rates. Meanwhile, insiders are openly worried about the proposed ASEAN Free Trade Area (AFTA), expected to come into effect in 2015, which could open the floodgates to imports from more competitive neighbors. Furthermore, with such underdeveloped capital markets, the cost of borrowing for Burmese businesses is effectively 25%, while Thais and Malaysians can lever up more cheaply and expand aggressively.

The coming building boom

Then there is the infrastructure gap. Without widespread and stable electricity generation, competing economically with Thailand and Vietnam will remain a distant dream. The World Bank Group has re-focused on Myanmar, working to bridge the gap between regional investors from Japan and Korea and government agencies responsible for power, transportation and other key sectors. Hydropower projects are high on the agenda, but also power transmission to less-developed regions—which is almost the entire country.

The opportunities in addressing these needs could attract international investors, says Kevin Lu, the Asia-Pacific director for MIGA, the World Bank’s political risk insurance arm. “Investors are fascinated by Myanmar,” says Lu. “They see a country with strong economic fundamentals, strategic location, sizable population, and many industries that are starved of capital.”

But absorbing that capital is as deep a bureaucratic problem as the infrastructure gap is a physical one, though. Investors seeking to buy into existing companies face due diligence obstacles as basic as establishing ownership and titles for land and other assets, and accessing balance sheets and financial information—to say nothing of the lack of a notion of modern corporate governance. Another problem is deeply entrenched structural corruption—the country ranks 180 out of 183 on the Transparency International Corruption Perceptions Index.

Developing human capital

That suggests that, in many ways, it’s an environment still better suited to venture capitalists—investors prepared to build lasting relationships with local partners, and whose on-the-ground experience helps them appreciate the vagaries of local markets. One such investor, managing director of Andaman Capital Partners Kevin Murphy, says that investment in Myanmar requires more than just capital. A 10-year resident of Myanmar, Murphy advocates intense guidance for structuring and managing early-stage businesses combined with a lot of patience. But, like many I spoke with, he is an optimist.

One of the noblemen of the Myanmar business community, Serge Pun, also counts himself among the optimist ranks. As such, Pun, whose Yoma conglomerate spans real estate, retail, and many other sectors, welcomes foreign capital and involvement. “Government protectionism often protects something that doesn’t exist: competitive enterprises,” he says. “Instead, we need to invite in players that are filling market gaps, learn from them, work with them and profit from them. In due course, if we are good, we will be able to stand on our own and be competitive in our own backyard.”

This is true even in infrastructure—something that the experience of  Ken Tun, the repatriate head of Parami energy, can attest to. Ken Tun’s efficient oil and gas field services have made Parami the preferred partner for foreign energy majors, and it has engaged in numerous joint ventures and built its internal capacity while preserving its local identity through corporate citizenship programs.

An entrepreneurial class on the rise

While doing business in Myanmar is still an uphill battle for anyone, Yangon’s new class of young elites, comprised of both “re-pats” like Ken Tun and locals, is getting in early on the Myanmar growth juggernaut—paving the way for future newcomers. For many of these, the aim of their ventures is not merely to spark enterprise, but also to boost the skills of the country’s next generation. Their challenges are considerable. Right now, a university degree is like an “empty bag,” in the words of one start-up founder. Yangon University, once a Silk Road jewel, has suffered decades of decay at the ends of socialist mismanagement. But Myanmar’s literacy rate is quite high, and there is enormous motivation to acquire the skills needed for key vocational sectors such as hospitality, construction, IT, energy services, healthcare, and education itself.

Alisher Ali of Silk Road Management, who has raised a new venture capital fund in Myanmar, views these re-pats as crucial drivers of new growth for another reason: because so many of them lack political connections, they have to rely on their talent and skill to get things done. Ali’s Myanmar Human Capital Fund is intended to finance precisely such corruption-free ventures.

Stepping into the modern financial era

After decades of economic isolation, Myanmar’s banks are now little more than vaults with staff. That will need to change if the country hopes to support entrepreneurial growth. The demand for credit among Myanmar’s few privately run businesses is already building. Thaung Su Nyein, CEO of Information Matrix, which runs 7Day News and a range of other publications, is expanding his conglomerate into IT services and education as well. He wants to see far more of the close to three million migrant Burmese workers in Thailand and Malaysia come back home to work in new value-added supply chains, from textiles to gem processing. “Entrepreneurs here know which business models will work and how to teach skills,” he told me at his office in Yangon. “The weak credit system is our biggest obstacle.”

There are already some good signs, though. The banking system recently joined the SWIFT network, ATMs are appearing, and Mastercard recently registered its first transaction. Foreign banks such as Standard Chartered and Singapore’s DBS all covet the license to operate, expected in the coming year. Meanwhile, the country’s first stock exchange is scheduled to open in 2015.

The FDI showdown in Myanmar’s SEZs

Perhaps the sites of greatest expectations are Myanmar’s special economic zones (SEZs). The Thilawa economic zone at the mouth of the Yangon River about 25 kilometers south of the city already features a deep-water facility operated by Hutchison Port Holdings. Singapore’s SingBridge is breaking ground on one of its signature industrial estates reminiscent of its massive-scale projects such as Tianjin Eco-City and Guangzhou Knowledge Village in China. The Thailand-backed Dawei SEZ is the most expensive and ambitious to date: an $8.6 billion mega-port on the Andaman Sea that will allow for speedier transport of maritime cargo across Southeast Asia to China. But both Thailand and Myanmar are courting a different major investor to accelerate the project: Japan.

The way Japan has moved into Myanmar, one would think that its World War II imperialism has been forgotten. With a major presence in the Thilawa SEZ, Japanese contractors have plans to deepen the Yangon River’s estuary so that cargo ships can sail directly up to the city’s shores and offload more containers of cars that are already been briskly snapped up at busy dealerships. With China and Vietnam considered to be at capacity in low-cost manufacturing, and other Southeast Asian labor getting too expensive, Japan is keen to turn Myanmar into its new Thailand. For its part, the U.S. is stepping up as well with large firms such as GE scoring initial contracts for medical devices. Pepsi, Google, Caterpillar, and Johnson & Johnson are among the non-oil blue-chip companies that have already made exploratory visits.

The real winners, however, will likely be Myanmar’s fellow ASEAN members, who have patiently been scaling up through representative offices and lobbying quietly for greater access. Singapore’s SingTel, for example, is likely to be a big winner in the first round of telecom liberalization expected in early 2013. Mobile phone penetration is expected to grow from the present 3 million to perhaps 30 million (half the population) within just a couple of years as SIM card prices fall from over $2,000 to under $200. Malaysia’s MayBank, has been courting the extensive one million strong Burmese diaspora to use its remittance channels. Singapore alone has at least 50,000 Burmese expatriates, and the island nation’s Peninsula Plaza generates hundreds of millions of dollars in annual remittances to Myanmar through its restaurants, textile shops, travel agencies, and gem-sellers.

From “Burma Road” to Myanmar gateway

While major structural undermine Myanmar’s domestic liberalization and commercial opening-up, forces such as the country’s illegal narcotics trade and simmering geopolitical tensions pose big challenges to a young government. But with a new pragmatism holding firm in Naypyidaw, Myanmar seems to be deftly playing all sides, emerging from isolation and keen to maximize its strategic geography as a bridge between Asia’s giants, India and China. The Burma Road was once the snaking artery built through back-breaking labor to enable colonial Britain to deliver supplies to China during World War II as Japan marched through Indochina. Soon it will be a major axis across a thriving economic corridor, and a new gateway to Asia for travelers and investors from around the world.

We welcome your comments at ideas@qz.com.



More from Quartz

Rates

View Comments (0)