Burma, ASEAN's next "new frontier"

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Romain Su's picture

Burma, ASEAN's next "new frontier"

In November 2012, a couple of weeks after his re-election, President Barack Obama decided to make a short halt in Yangon, Burma/Myanmar, on his way to the ASEAN (Association of Southeast Asian Nations) summit in Cambodia. The visit, which was the first of its kind for an American president in power, has attracted a lot of attention as it has been interpreted as an additional sign of support to the democratic process in Burma, after the US administration agreed in July to lift investment restrictions.

Other Western countries or blocs such as Australia, Canada, France, the United Kingdom and the European Union have taken similar steps, appointing new ambassadors, unblocking development aid and technical assistance or resuming direct lending in the case of Japan . Although all these initiatives officially aim first and foremost at encouraging the Burmese government to continue on the road to democracy, they have tremendous economic consequences for a country which is one of the world's poorest.

Yet Burma is far from being deprived of resources. Often appearing as a “new frontier” for investors, it is one of the few big countries that has remained until today largely untapped. With immense reserves of minerals, wood, oil and gas as well as a huge potential for hydroelectricity generation , Burma can technically become a new powerhouse for her energy-hungry neighbours such as China and India. Her population of 60 million inhabitants and her ASEAN membership status also make this destination attractive for foreign firms looking for new markets and a cost-competitive bridgehead to the future ASEAN Economic Community and giants like Indonesia.

On the other hand, if Burma is to transform these opportunities into cash, she needs considerable amounts of investment which are more likely to come from abroad. Up to now, she has no railroad or highway connection with any of her neighbouring countries and energy exports require adequate infrastructures like pipelines and ports. In turn, maintaining a high level of reliability for these networks goes hand in hand with stable electricity supplies, a condition far from being always satisfied in Burma.

The lift of Western economic sanctions affecting trade and investment has already started to drive fresh capital to Naypyidaw in order to finance the modernization of the country, with tangible effects for the population. ATMs are blooming along the streets of large cities , credit cards are being introduced , big consultancies are coming back and new contracts are being signed with foreign firms like Japanese Mitsubishi , French Total or Thai PTT to exploit gas fields, build power plants and erect factories. These investments worth several billion dollars represent a real shock for a country whose GDP hardly exceeds US$ 50 billion .

In the short run, the regime can also count on more revenues coming from gas sales and transit fees thanks to the first outputs of the Shwe and Zawtika fields . These additional resources, which have been partly earmarked for health and education spending, should help smoothing the effects of political transition and increase living standards for Burmese people, currently very low. Improved economic prospects may thus contribute to repatriate back a diaspora assessed between 3 and 6 million workers, often the most qualified . In parallel with the rise of education levels, Burma would then have a chance to escape the “resource curve” and develop a more balanced economy, which would not just be based on extractive industries.

To achieve this goal however, a favourable international environment and the abundance of natural resources and market opportunities created by the modernization process will not be enough. Business climate also depends on factors such as access to credit, quality of regulation or a competitive tax system, all fields in which Burma still remains rooted to the bottom of global rankings . Although accurate information available is limited due to the long closure of international economic organizations, Burma is believed to be one of the most expensive countries in the world to start and run a business .

Burmese authorities have started to tackle this problem by abolishing the artificial exchange rate of the kyat. The national currency used to be overvalued, in consequence of which exports from industries exposed to foreign competition were penalized. The introduction of a floating regime should draw the kyat closer to a fitter value for the national economy, even if the lack of competences at the central bank may hinder the return to equilibrium.

The legal framework for foreign investments is also being overhauled to attract more capital. The issue has even led to a confrontation between the Parliament, more conservative over foreign ownership aspects, and President Thein Sein who wants to ensure money will flow. Foreign investors will e.g. be allowed to fully own businesses in Burma, to lease land and they will enjoy greater protection against nationalisations . In addition, they will benefit from tax incentives. At the same time, more horizontal measures are being introduced, such as the build-up of a real central bank and an interbank money market. IMF assistance is essential on this issue and has been made possible by the lift of international sanctions.

For these three sets of reasons — improved international environment, increased exploitation of natural resources and economic liberalisation — , analysts forecast for Burma very high growth rates in the near future, up to 8 per cent . In other words, Burmese GDP could double over the next decade and catch up the level of countries like Vietnam, heralded as one of the success stories of the region. While Burma may still not be the fastest growing ASEAN economy with the Philippines also achieving impressive performance, it has undoubtedly been experiencing, in relative terms, the biggest improvement in her business environment.

Can it last? Three factors indicate that one can rather be optimistic about Burma's economic prospects. First, its geographical location, being on a potential trade route for goods and energy commodities between China and the Indian Ocean, is an inalienable advantage. With adequate infrastructure, Burma could therefore substitute Singapore as one of the main hubs in the region . Second, the regime has understood its vulnerability in regard to overreliance on China and its decision to follow Western injunctions has more to do with this than with a sudden conviction in the virtues of democracy. Evidence of the geopolitical turnaround can be found in the government's decision to suspend the Myitsone dam project, provoking the ire of Beijing . Third, ASEAN neighbours and more remote powers like Japan and the United States are seeking to contain the expansion of Chinese influence and the development of Burma is instrumental in supporting that policy. As long as these three pillars stand firm, Burma will not be left on the side of the road.

References: 

Reports

 
  1. ASEAN Secretariat, Selected key basic ASEAN indicators, Jakarta, 14 January 2013, http://www.asean.org/images/2013/resources/statistics/Selected%20Key%20I...
  2. ASEAN Secretariat, ASEAN Investment Report 2011: Sustaining FDI Flows in a Post-crisis World, Jakarta, November 2011, http://www.asean.org/images/2012/publications/ASEAN%20AIR%202011_Nov2011....
  3. Asian Development Bank, Myanmar: Energy Sector Initial Assessment, Mandaluyong City (Philippines), October 2012, http://www.adb.org/sites/default/files/myanmar-energy-sector-assessment.pdf.
  4. David O. Dapice, Anthony J. Saich, Thomas J. Vallely, Michael J. Montesano, Appraising the Post-Sanctions Prospects for Myanmar’s Economy: Choosing the Right Path Prepared for Proximity Designs, Harvard Kennedy School – Ash Center for Democratic Governance and Innovation and Rajawali Foundation Institute for Asia, 20 January 2012, http://ash.harvard.edu/extension/ash/docs/appraising.pdf.
  5. International Crisis Group, Myanmar: The Politics of Economic Reform. Asia Report N°231, Jakarta/Brussels, 27 July 2012, http://www.crisisgroup.org/~/media/Files/asia/south-east-asia/burma-myan....
  6. Lex Rieffel, The Myanmar Economy: Tough Choices, Global Economy & Development, WP 51, September 2012, http://www.brookings.edu/~/media/research/files/papers/2012/9/myanmar-ec....

 Press

  1. Ben McLannahan, “Japan to resume lending to Myanmar”, Financial Times, 12 October 2012, http://www.ft.com/cms/s/0/e6858c92-13a0-11e2-9ac6-00144feabdc0.html.
  2. Alan Raybould, “Myanmar drafts new foreign investment rules”, Reuters, 16 March 2012, http://www.reuters.com/article/2012/03/16/us-myanmar-investment-idUSBRE8....
  3. Gwen Robinson, “Thai energy group PTT to invest $3bn in Myanmar”, Financial Times, 18 July 2012, http://www.ft.com/intl/cms/s/0/14074a42-d013-11e1-bcaa-00144feabdc0.html.
  4. Gwen Robinson, “Reforms could make Myanmar 'rising star'”, Financial Times, 20 August 2012, http://www.ft.com/intl/cms/s/0/2ec4481a-eb09-11e1-afbb-00144feab49a.html.
  5. Gwen Robinson, “MasterCard first to grant licence Myanmar”, Financial Times, 5 September 2012, http://www.ft.com/intl/cms/s/0/ce48e8b8-f7a3-11e1-ba54-00144feabdc0.html.
  6. Gwen Robinson, “Myanmar set to ease investment restrictions”, Financial Times, 24 October 2012, http://www.ft.com/intl/cms/s/0/19302740-1dcb-11e2-901e-00144feabdc0.html.
  7. Gwen Robinson, “KPMG opens office in Myanmar”, Financial Times, 31 October 2012, http://www.ft.com/intl/cms/s/af1e9096-2359-11e2-a66b-00144feabdc0.html.
  8. Olivia Rondonuwu and Jason Szep, “ASEAN gambles on Myanmar's regional leadership”, Reuters, 17 November 2011, http://www.reuters.com/article/2011/11/17/us-myanmar-idUSTRE7AG0QQ20111117.

Comments

Burma has around 10% mobile and internet penetration, much lower than even tier III emerging markets like Thailand. Lots of opportunities to deploy capital there.

Hello Henry,

Thank you for your comment. I obviously agree with you, African examples show it is relatively easy and fast to deploy mobile phone networks and it unlocks very interesting features like weather forecasts for farmers or payment & loan services. I presume this is already taking place though I'm not right there to check.

Yes those SMS bases services are provided by Google.org in Africa. Singtel is already in Myanmar doing due diligence. Myanmar govt has also been auctioning off natural gas blocks since 2011'.

Wouldn't be surprised if special situations or PIA at large banks are looking at opportunities there.