Big Year for Myanmar Economic Reforms

Can the country maintain the reform momentum ahead of elections?

By Philip Heijmans

January 28, 2014

Myanmar’s parliament reconvened on January 13 with some 30 crucial proposed bills on the table, among them the establishment of a special economic zone law, mining regulations and the revamping of the foreign investment law. One thing was abundantly clear, 2014 is going to be a busy year.

The stage for continued economic reform in this once isolated country was set by a series of unprecedented milestones last year, including the announcement of two international telecommunications firms as winners of a tender to develop Myanmar’s mobile infrastructure, and the implementation of guidelines for the Foreign Investment Law. Now, with global firms across all sectors waiting in the wings for the passage of new investment rules that would allow them to do business in Myanmar for the first time in 50 years, the pressure is on the government to keep its promise of opening the economic borders by 2015.

The success of Myanmar’s economy in the lead up to general elections next year, international finance institutions have stressed, will hinge on addressing growing political concerns, including media and human rights as well as faltering efforts to maintain a ceasefire with ethnic groups entrenched in the far reaches of the country.

“The economic transition faces momentous challenges, but holds even greater promise and opportunities,” Ulrich Zachau, Myanmar country director for the World Bank, said at the end of last year. “Continued fundamental reforms, sustained with patience and commitment by all, hold the key for Myanmar’s…transition to reduce poverty and tangibly improve the lives of people throughout the country.”

If successful, foreign investment into Myanmar’s economy is expected to continue to grow to the tune of 6.8 percent this year, as the quasi-civilian government moves into its third year at the helm, according to the World Bank. Foreign direct investment (FDI), meanwhile, is on pace for a record year, after reaching $1.8 billion in just five months of the 2013-14 fiscal year, according to government data. This significantly outpaces $2.7 billion in FDI for all of 2012, which in itself was a 42.1 percent increase from 2011.

One of the government’s priorities this year is to issue operator’s licenses to Norway-based telecommunications firm Telenor and Qatar’s Ooredoo, the winners of June’s tender to build a countrywide mobile network in Myanmar. Allowing the two firms to begin building the network, the licenses are now expected before the end of January, despite delays, Myanmar Post and Telecoms (MPT) said. Once issued, thousands of communications towers would be constructed with the hopes of reaching 80 percent of Myanmar’s population of 60 million by 2015. As of July 2013, only 7.08 percent of the country had access to mobile phones, according to government data.

“We will deliver on our commitment to launch services six months after the effective license date and roll out our network as quickly as possible thereafter,” Ross Cormack, CEO of Ooredoo Myanmar, said in an e-mail. “We have seen very progressive and promising signals from the government that … [legislative reform] will happen and we continue to support and encourage them in their bold and ambitious efforts to create such a framework for the industry.” Ooredoo has pledged to spend $15 billion on its network infrastructure throughout its 15 year license.

The June bid was only one of several maneuvers by the MPT in 2013, which also saw the first stages of establishing a telecom law as well as an open appeal to public contractors to develop the necessary infrastructure.

One of the country’s largest development projects, the Thilawa Special Economic Zone (SEZ), also broke ground in 2013. Although plagued by delays and controversy over forced relocations and unsettled compensation, experts agree that the 2,400-hectare, $150 million joint-venture project with a Japanese consortium of conglomerates, including Sumitomo and Mitsubishi, is one of several new developments that will help draw much needed foreign investment.

“It is important that job opportunities can be created by receiving investments from abroad, so that the people of Myanmar can enjoy the fruits of its reforms,” Japan’s parliamentary vice-minister of economy, trade and industry, Yoshihiko Isozaki, said during the groundbreaking ceremony on November 30, adding that the project is slated for completion by next year.

With the bait set and new legislation being addressed, 2014 will prove to be a crucial test for new companies coming into the market for the first time.

“I believe in 2014 we will start to see some action in the banking and insurance industries in terms of JVs [joint-ventures] and new financing from overseas,” said Alessio Polastri, managing partner at Yangon-based legal advisory firm, Polastri, Wint & Partners. “New rules will make it easier for foreigners in those industries to operate in Myanmar.”

At present, foreign banks and insurance firms are not allowed to operate in Myanmar, although the government has said that it will allow both to enter the market as wholly independent entities come 2015, with some banks expected to arrive as soon as this year. Several foreign banks already have representative offices, including Malaysia-based CIMB Bank, Singapore’s DBS Bank and Japan’s Sumitomo Mitsui Banking Co, while even bigger names in the insurance sector now have offices in Yangon, including ACE, MetLife and Prudential.

“People won’t come to Myanmar for the sake of investing in Myanmar, they’ll come because there are opportunities to exploit,” Polastri observed.

This year, the government will also fine-tune the recently enacted Foreign Investment Law, which will make it easier for foreign businesses in the service and manufacturing sectors to start a business.

With Myanmar’s admission to the European Union’s generalized system of preferences last April, garment exports in the 2013-14 fiscal year are already on pace to nearly double the $700 million generated in the year before drawing the eye of foreign brands. Manufacturers Heineken, Carlsberg, Siam Cement Group and Nissan Corp, among others, have meanwhile poured millions into new plants in Myanmar that will open by 2015.

“The trading sector has been thrust into the lime light with recent developments [over ambiguous import regulations], so clarification and legislation could be quite immediate,” said Jeremy Rathjen, vice president of research at Yangon-based investment group Thura Swiss.

In the energy sector – the country’s most promising and potentially most lucrative – the Ministry of Energy in 2014 will continue to whittle down the list of applicants currently bidding for tenders on the 30 offshore blocks. As of the latest round of applications in November, 30 companies were still in the running, including global energy giants such as Daewoo, PTTEP, TOTAL, Chevron, GAIL India, Hawkley and Petronas. That list will get smaller with the next bidding round expected in April.

For all of Myanmar’s efforts however, some foreign companies are hesitant to enter the market, as laws are often rushed and capricious, while passage of other laws are taking longer than promised, Polastri noted.

There are other risks to Myanmar’s growth, too, and experts point out that continuing the trend of reforms in 2014 will be decisive ahead of the formation of the ASEAN Economic Community in 2015.

“In particular, one challenge could be maintaining the current momentum of reforms. Externally, risks include a continued decline in global commodity prices which would hurt commodity exporting countries such as Myanmar, and a slow-down of investment in China,” the World Bank stated recently in its Myanmar Economic Monitor report. The World Bank warned that the country would also need to address worsening exchange rates against the greenback as well as high inflation, which reached 7.3 percent in August 2013 on higher food and housing costs. “The nominal exchange rate between the Myanmar kyat and the U.S. dollar … raised concerns about its negative impact on Myanmar’s export competitiveness especially as inflation was also rising,” observed the report.

Meanwhile, only 29 percent of the population has access to electricity, and major cities like Yangon experience frequent rolling blackouts. To make matters worse consumption is growing annually at 15 percent and costing the government $190 million per annum in subsidies, despite recent loans totaling $200 million from the World Bank and Asian Development Bank to develop several power plants.

This year may prove to be a turning point for consumers as the government announced it would raise electricity prices 43 percent for most households come April. The announcement follows a prior attempt in October to raise prices, a plan that was shelved following a massive public backlash that resulted in nationwide protests. Activists have said that any increase in electricity costs would lead to more of the same.

“In order to ensure the financial viability of the power sector … either tariff rates need to be increased, or even greater government subsidies, paid for by taxpayers, will be required,” said Jong-Inn Kim, lead energy specialist at the ADB.

With so much reform still on the table one year before general elections, Rathjen likens 2014 in Myanmar to that of the night before a big boxing match. “I see 2014, as the preparation stage before the main event. We could see a lot of volatility as people start to prepare for the elections,” he said, adding that investors will have to assess the risk of getting in on the ground floor of Southeast Asia’s last frontier country.

Philip Heijmans is a Yangon-based journalist.