Nation undergoing financial transformation
THESE are early days still in Myanmar, the “final frontier.”
In the 30 months since the new regime assumed power, Myanmar has undergone a remarkable transformation. Rich in oil and gas and minerals, investors are equally interested in what Myanmar does not have, which is pretty well everything else. So far, change has come largely to the centre – Yangon. Around the periphery, home to numerous ethnic groups that make up two-fifths of the population, little has changed.
Since I last wrote in this column: “Myanmar: Not the Burma I Used to Know” (April 7, 2012), I revisited Yangon a month ago. What really surprised me was the enormous traffic – full of jams, too many cars, and just not enough roads and bridges. Considering cars are not cheap, it’s quite unbelievable. Except for the magnificent Shwedagon Pagoda, lovingly reguilded for the benefit of visiting pilgrims and tourists, most of the city seems to have remained untouched for decades – other than demolitions at strategic locations to make way for new shopping malls, offices and high-rise residences, as well as hotels. But my yearning was for a bowl of arguably Myanmar’s national dish, mohinga (mont-hin-gar) – a luxuriously rich and creamy fish-based broth with thin rice noodles (vermicelli), usually served steaming hot from massive cauldrons along the roadside (that’s where I had my first taste of it in the 1960s).
I found it again at Inya Lake Hotel’s champagne buffet lunch – just as I had remembered, as best described by Nobel laureate Aung San Suu Kyi in her 1995 Letters from Burma: “A steaming bowl of mohinga adorned with vegetable fritters, slices of fish cake and hard-boiled eggs and enhanced with the flavour of chopped coriander leaves, morsels of crispy fried garlic, fish sauce, a squeeze of lime and chillies is a wonderful way of stoking up for the day ahead.” That made my day.
I had wanted to taste it once more after spending the next day at Naypyidaw (the gaudy new capital built by the generals) as I checked in at the grand lady of Yangon, the Strand – originally built in 1901 by John Darwood and then, acquired by the legendary Sarkies Brothers (of Singapore Raffles fame) as one of South-East Asia’s grand colonial hotels, made really famous by the likes of George Orwell, Somerset Maugham, Rudyard Kipling and Sir Peter Ustinov.
The hotel has been mostly restored to its elegant old self, but it was a great disappointment to find that mohinga was not on its dining menu! The new manager, Philippe, has since emailed that it’s now back-in where it should be.
There has been remarkable change. For years since the 1950s, Burma was a blank space. The generals ran it to the ground under the quasi-Marxist, “Burmese Way To Socialism” since 1962. Now it’s finding its own space at a nexus between two giants (China and India, with a total population of 2.6 billion) and South-East Asia (with some 600 million people). Its neighbours are its largest investors (Singapore, Vietnam, China and Malaysia), putting in a lot of foreign direct investment (FDI) cash to work, while generals joke that Japan joined Nato instead: No Action, Talk Only!
I don’t blame the Japanese for being prudent. My sense is that the leadership is sincere in its desire to tackle poverty, modernise the economy and advance the democratic process. But much time is diverted to managing expectations – much of which is not realistic, bearing in mind that Myanmar hasn’t had a proper business system for 60 years. Signs of ossification are everywhere, from on-off access to electricity to physical infrastructure shortcomings to the lack of skilled labour.
After all, less than 30% of the population (mostly in cities) is connected to the grid; while Internet and mobile phone access is only about 10%. The nation’s once excellent education system was all but destroyed. This left Burmese with poor language and quantitative skills. There is also too much reliance on cash for most settlements. ATMs are rare and banks’ branch network is sparse. In an economy dominated by well connected “cronies” with close ties to the still dominant armed forces, it is not difficult to understand why motorcycles are banned in Yangon for security reasons.
Nevertheless, we see economic reforms are beginning to pay off. “The genie is out of the bottle.” World Bank’s January 2014 global updates place Myanmar’s growth at 6.8% in 2013 (6.5% in 2012 and 5%-5.6% in 2010-11). Basic reforms will take time to filter through and distortions, unbundled. According to U Myint, the president’s most senior adviser: “It has not been the lack of resources but rather misconceived ideas and flawed policies that have been our undoing.” But the basic shifts are taking place – military’s share of the national budget is down to 12%-15% (against more than 22% in 2010); while education and health budgets have nearly trebled from below 3% each.
The third wave of reforms will focus on prudential financial regulation and land rights. More difficult to gauge is the building of a nation that can celebrate religious and ethnic diversity and put an end to decades of conflict. The difficult part is to build trust between different religious and ethnic communities.
No turning back
Most of the reform emanates from the nondescript “Ministry of the President’s Office” in Naypyidaw, 320km north of Yangon. This is the “super ministers” headquarters led by two former military officers known to outsiders as the reformers: U Soe Thane, who oversees the economic ministries and the powerful Myanmar Investment Commission; and Aung Min who leads peace negotiations with the ethnic groups. Together with two other ministers – Tin Naing Thein (co-ordinates reform strategy) and Hla Tun (budget reform and decentralisation) – these four form the president’s inner circle.
I find U Soe Thane, a former commander of the navy, urbane, dynamic and a no-nonsense doer: “We have been planning for two years; we have changed many things. But this is our year of implementation, particularly for economic reform.
Things are moving fast… you cannot tell us to stop or slow down now… The Lady is the democracy icon, the president is the reform icon… we must deliver for them, especially in critical things like infrastructure and electricity.”
I sense there is this transformation also taking place among some generals, viz. from uniformed junta members to civilian reformers, comfortable in suits or flowing longyi sarongs. Their mindset now reflects a keener appreciation of public expectations and needs, in the face of a combative parliament resistant to change, and of ever growing demands by investors and businessmen. While not losing sight of the fight against entrenched corruption at the same time.
What’s done and still to do?
Dr Aung Tun Thet, an economic adviser to the president, believes the economy is heading in the right direction and will keep the momentum. GDP per capita, at about US$900, is 6% above the estimates provided for 2012 and 2011 for a population of 64 million (of which 46 million are of working age). As at the end of the first half of 2013, FDI totalled more than US$42bil, mainly in power, oil and gas, mining and manufacturing. At the rate things are moving, Aung believes the economy will have its best year yet in 2014-15. This simply means ordinary people will begin to see real improvements in their daily lives.
This is needed to develop an inclusive political culture, based on the rule of law and respect for human rights. Six critical reforms have since taken place:
·Accession to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, ’58 on July 15, 2013 to protect foreign investors’ interests in the resolution of disputes.
·Passage of the new Central Bank of Myanmar law, 2013 to enable the bank to become autonomous of the Ministry of Finance, and opens the door for the entry of foreign banks to spur competition.
·> Enactment of the Securities Exchange Law, 2013 to provide the needed framework to establish the stock exchange under the Securities and Exchange Commission, which will supervise and regulate the securities market.
·Passed the land-use bill in 2012 to improve the rights for farmers, who comprise three-quarters of the population.
·Enactment of the Foreign Investment Law, 2012 to establish the Myanmar Investment Commission to regulate and approve all foreign investments, giving foreign investors most of what they had wanted. Approved projects can apply for tax incentives, including five years of tax holiday.
·Unification of multiple exchange rates and scrapping the 35-year old fixed exchange rate on April 1, 2012 by implementing a market-based exchange system of managed floating for the Kyat, Myanmar’s currency. Work is in progress to free up capital flows and establish a monetary policy framework. Gross official reserves rose above US$10bil in 2012-13, up from US$3.1bil in 2007-08, according to the International Monetary Fund.
Together, these measures form the frontline of bold reforms taken. The European Union and Australia have since lifted their sanctions and US has eased theirs. Despite these, World Bank’s 2013 “Doing Business” index ranked Myanmar poorly – among the very worst in the world to do business. Starting a business involves 11 different procedures, takes 72 days and costs nearly US$1,500, in addition to a US$58,000 deposit to get the final go-ahead. Long and costly approval procedures hamper much-needed construction work to rebuild dilapidated infrastructure.
Myanmar’s electricity is the priciest in the region. A long road lies ahead. Although many reforms were taken, implementing them effectively remains a problem, given the chronic shortage of trained staff and professionals. There are also too many laws, including outdated ones still in the books, e.g. the 1914 Companies Law and even older, the 1872 Evidence Act.
It will take time to sort things out, says Aung: “Investors need to be patient.” Myanmar also faces a general election in 2015: The transition period gets shorter with so much more to do.
The rush into Myanmar to fill a business vacuum carries many risks. This is reminiscent of the Vietnamese experience a generation ago. I recall the 1986 opening of Vietnam when it rolled out “doi-moi” – its renovation programme. Hanoi reduced trade barriers, showered FDI with attractive incentives, and adopted many reforms, including elimination of subsidies & allowing the private sector to compete along SOEs (state owned enterprises). It proved an early success: from 2005-10, Vietnam was a hit with FDIs. Yet, Vietnam floundered and squandered early advantages as a result of lost reform momentum.
The Vietnam case study showed up (i) high failure rates, as early investors’ tastes turned sour (as high as 90%), (ii) too much FDI chased too few good partners, and (iii) too optimistic on potential consumption growth. So Myanmar needs to heed the lessons: (a) sustain economic reforms, (b) aggressively pursue transparent & competitive privatisation, & do so without undue delays, and (c) tear down bureaucracy and corruption. Ultimately, investors like strong rule of law and a vibrant private sector to drive sustainable growth.
What then are we to do?
Myanmar reminded me very much of China during my second visit in 1979 (my first was in 1974 during the cultural revolution) – then, I recall, Deng Xiao-ping was reported to have said: “We have to do something new.” And China did. Myanmar too, is doing something new. After all, it has a good size population, massive natural resources, agriculture, even rare metals – it has everything including natural beauty and a wealth of Buddhist monuments and pagodas (notably in Bagan, considered by many as equal to Cambodia’s Angkor Wat). IMF saw “high growth potential.” It starts from a low base – its GDP is one-seventh Thailand’s size and Vietnam’s is three-times larger.
Malaysia, which has one-half its population, is six-times bigger. Experts at global consultants McKinsey estimated that Myanmar can quadruple its GDP to US$200 billion by 2030 if it presses on with reforms and embraces technology (lucky to have started reforms during the digital era). In the process, it can add 10 million jobs and lift 18 million (28%) of its population out of poverty.
This plan calls for investment of US$650 billion, 50% in infrastructure alone. Well and good on paper. Sure, there is a new sense of optimism amid an air of high expectations. But it’s tinged with caution. Hopes have been dashed before. Everything remains in a state of flux.
A lasting political solution still seems a long way off.
As I see it, everything hinges on 4 factors to get the job done: progress towards democratisation; success at resolving ethnic conflicts; sustaining political & economic reform efforts; and marshalling enough skills and professionals when everything is in short supply. Beneath the thin veneer of expertise at the very top, I am told, is an ex-militia based bureaucracy that is provided with sinecures – they make-up the “green ceiling” which simply means that getting anything done takes a long time. Add to this, corruption. Everyone wants a piece of Myanmar – Western and Japanese businesses are keen to access its rich resources.
Asians are definitely positioning for much greater access. But the path towards change depends critically on ethnic diversity – it has to end decades of conflict.
The nation is split into 135 ethnic groups, many speaking different languages & practicing different religions.
The army has engaged in border wars with the Rakhine, Kachin, Shan and Karen. There has been no political settlement. Key to real change, however, rests on the behaviour of the army. Building trust thus becomes critical.
These are difficult issues. To really transform, Myanmar has to bring-about key political changes; the presumption of impunity has to end; and violent & hatred, cease. Until then, the gap between expectation and reality will persist. It must be bridged. All I can say now is that perhaps, “the beginning of the beginning has begun.” Until then, investors will continue to flock to Myanmar and follow the popular “4 Ls”: Look, Listen, Learn and Leave.
- Former banker, Tan Sri Lin See-Yan is a Harvard educated economist and a British chartered scientist who speaks, writes and consults on economic and financial issues. Feedback is most welcome; email: email@example.com