46 March 2012 Sea GLOBe Sea GLOBe March 2012 47

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os: A

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By Philippe Beco

Further reforms are needed for ‘new Myanmar’ to trigger a gold rush

MYANMAR

from embargo to eldorado

Western investors will heavily depend on the outcome of the country’s current political reform process.

Initially, Western countries responded cautiously to the unfolding situation, but recent visits from United States Sec-retary of State Hillary Clinton, Britain’s Foreign Secretary William Hague, and French Foreign Minister Alain Juppé, exhibit clear signs of diplomatic revival. Talks have been accompanied by action in some quarters, with Australia remov-ing certain Myanmar citizens from a list of individuals subject to financial and travel restrictions, and the EU suspend-ing visa bans against senior government officials earlier this year.

The goodwill only extends so far, however. Both the EU and the US have retained rules that block most compa-nies from doing business in Myanmar. They may not be lifted until at least April, when Myanmar is scheduled to hold a parliamentary by-election, but business-friendly decisions may then follow quickly. A first sign of encour-agement came from Norway, which has announced the end of a late-1990s policy that officially discouraged investment in Myanmar by Norwegian companies, though the country added it would continue to abide by EU sanctions.

As a result of the sanctions, only a handful of Western companies are doing business in Myanmar today. Largely deprived of Western relationships, Myanmar turned to its Asian neigh-bours to conduct business. According to the Directorate of Investment and Company Administration, the country attracted $40.4 billion in foreign invest-ments between 1988 and the end of 2011. A third came from China, fol-lowed by Thailand with $9.5 billion and Hong Kong with $6.3 billion. Foreign investment has been mostly concen-trated in the hydropower, oil and gas, and mining industries.

Today, however, several Western busi-nesses seem keen to enter Myanmar to tap into its vast potential.

Nine thousand kilometres from Naypyidaw, the news trick-led through from the snowy slopes of Davos. One par-

ticular announcement was intended to whet the appetite of investors exploring opportunities in Myanmar’s previously hermetic market.

During the annual World Economic Forum in Switzerland earlier this year, Myanmar Industry Minister U Soe Thane declared the country’s ongoing union parliament would consider a bill amending its foreign investment law, a reform that could include an eight-year full tax exemption for foreign investors.

The announcement has been welcomed as the latest in a string of signs the country is opening to the outside world and positioning itself to reap financial rewards for recent political reforms.

However, not everyone is convinced of the value of the expected amendment. “It is a mistake often made by politi-cians to think that foreign investors are attracted by tax incentives. They aren’t,” Edwin Vanderbruggen, a tax law special-ist at DFDL Mekong, says. “What they look for is a stable, predictable and rea-sonable tax regime as demonstrated by several international studies. There is no point to invest in a country based on lower original tax rate if you’re going to have a horrible tax audit with arbitrary provisions, discriminatory measures and unreasonable claims by the authorities that could make your effective tax rate reach 100%.”

Tax issues rank sixth or seventh position in a potential investor’s check list, behind domestic market, cost structure, and logistical considerations, he adds.

However, Evelin Petkov – a director at Bagan Capital, a Myanmar-dedi-cated investment and advisory firm, as well as the founder of Myanmar Busi-ness Network, a platform dedicated to facilitating investment – is optimistic the country’s willingness to attract business will prompt more reforms, boosting the state’s investment climate. q

Source: Myanmar Central Statistical Organisation, Ministry of National Planning and Economic Development

Foreign investment - FY 2010-11 ($ million)

Mining

Oil and gas

Agriculture

Other

138.75

10179.311575.377

1396.077

Source: Myanmar Central Statistical Organisation, Ministry of National Planning and Economic Development

Export destination 2008-09 (%)

Thailand

China (including Hong Kong)

India

Singapore

Africa

Japan

EU

Other

42.2

20.6

13.3

8.9

5.02.30.5

7.2

“I believe that more measures will be implemented, such as simplified proce-dures for repatriation of profits, simpli-fied immigration procedures for inves-tors – an e-visa system has recently been flagged – the development of new special economic zones, the opening of the financial sector and currency exchange reform,” Petkov says.

Indeed, currency exchange is crucial to the country’s economic future. As well as contributing to unpredictable inflation and fiscal deficits, Myan-mar’s multiple exchange rate system has strangled its economy. The current

system grossly overvalues the local cur-rency, the kyat. It is not uncommon for the official exchange rate to be five or six kyat to the dollar while the black market offers about 800. As such, cur-rency unification is vital to the country’s entire reform programme.

The economic future of Myanmar also remains largely subject to the lifting of economic sanctions imposed by the West in response to a brutal 1988 military crackdown, followed by years of human rights abuses. The return of

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Myanmar is a potential market of 55 million people and has a labour force esti-mated at 32.5 million, the 19th highest in the world. It is also home to a young popu-lation that could be tapped by companies growing increasingly worried about rising labour costs in nearby China. Indeed, after remaining steady for a number of years, Myanmar’s garment exports jumped one-third to $378m in the 2010-11 tax year.

In further good news for potential investors, the International Monetary Fund estimates GDP growth of 5.5% for the year ending March 2012, and a 6% growth projection for 2012-13.

To unleash its growth potential, the country will need to undertake more reforms in a number of areas, from legal and regulatory to customs frame-works. What may help is that the laws of Myanmar are based on the business-friendly English common law.

Petkov sees this as a significant advan-tage over other nations in the region but cautions that much more needs to be done. “The reforms are taking place, but even after new laws are passed it takes time for the application of those laws to filter down through the bureaucracy and for change to take place,” he says.

“A general speeding up of all administra-tive processes, as well as increased trans-parency, will be important for attracting foreign capital,” he adds. “Currently, holders of business visas and foreign employees are required to exit the country every three months, and this is a signifi-cant inconvenience when attempting to build a business in Myanmar.”

“Foreign investors will be looking for signals that their investments will be treated in a manner that they are accus-tomed to,” says DFDL’s Vanderbruggen, who estimates the number of enquiries

In addition to energy and mining, Myanmar has myriad valuable assets. A country of great natural beauty and cul-tural high spots, Myanmar welcomed 350,000 foreign tourists last year, a number it is now keen to multiply. At Davos, Minister U Soe Thane said hotels in the country were already struggling to cope with demand – a situation that seems set to be exacerbated by the e-visa system due to be launched this month. Starwood Hotels & Resorts – which runs the Westin, Sheraton and Le Meri-dien hotel chains – and Marriott Inter-national have said they hope to start running hotels in Myanmar.

“Large infrastructure project devel-opment, such as energy projects, sea ports, special economic zones, roads and railways will also be the other important drivers of economic growth,” believes Petkov.

Located between two economic giants – China and India – Myanmar could also become a vital access point to India for the rest of Asia. Last November, Japan pledged to heavily contribute to the Asean ‘southern corridor’ project with an investment of $26.1 billion. The project aims to connect Ho Chi Minh City with the Dawei Seaport in Myanmar, provid-ing an alternative to the tricky sea route of the Malacca Straits.

Linked: sea ports are key to Myanmar’s growth

Foreign employees are required to exit the country every three

months, a significant inconvenience to building a business

from clients seeking Myanmar invest-ment advice has increased 150% since the political reforms began. “It would be important, for example, for Myanmar to adhere to international accounting standards or improve the implementa-tion of the double taxation agreements it has signed with several countries.”

The country’s future economic devel-opment model remains to be seen. From free market Cambodia to heavily

regulated Vietnam, Myanmar’s govern-ment has a smorgasbord of regional examples from which to take inspiration.

“It is likely to be a hybrid model that will adopt many of the economic policies that benefited neighbouring countries,” says Petkov. “But at the same time it will be Myanmar’s own unique economic model, as it will take into consideration the country’s distinctive cultural, ethnic and other geopolitical factors.” ¡

Evelin Petkov, Myanmar Business Network