Myanmar – a country in an uphill marathon

The Thilawa Special Economic Zone, located on the outskirts of Yangon, is the the first Special Economic Zone (SEZ) built in Myanmar. It became fully (commercially) operational in September 2015.

The Thilawa Special Economic Zone, located on the outskirts of Yangon, is the the first Special Economic Zone (SEZ) built in Myanmar. It became fully (commercially) operational in September 2015. Image credit: AHK Myanmar

Myanmar – a country in an uphill marathon

24/03/16

By Monika Staerk

Some prefer to still call the country Burma – but when it comes to political correctness, both names share the same problem: in a multi-ethnic state riven by conflict, they both refer to the Bamar Buddhist ethnic majority only.

More important than names may be facts, trends and strategies.

What always strikes me is the persistently negative Western attitude towards Myanmar and its reform process, which is criticised as being too slow, not far reaching enough or even not trustworthy altogether.

Now that the NLD-led government has taken office at the beginning of April, let us hope that a more trusting attitude may prevail towards Myanmar in the West.

President–elect Htin Kyaw, will formerly take up the role on 30 March when outgoing President Thein Sein steps down. He and his Cabinet will have tough challenges ahead of them. Nevertheless Former Opposition leader Daw Aung San Suu Kyi, whose party NLD won the recent elections, has made it clear that she will keep the reigns – and obviously plans to do so from within the Government by taking charge of Myanmar’s four most important ministries. She will take over the post of Foreign Minister, in addition to holding the energy and education portfolios and being a minister in the President’s Office. She is barred from serving as President by the current Constitution.

But when it comes to assessing the legacy of the outgoing Government, from a perspective of someone living in Myanmar, one thing is obvious: without denying numerous shortcomings, challenges, conflicts and unsolved problems, this country has engaged in a process of reforms which is unique in the world.

They have been bold, deliberate and to a wide extent successful – at least if you compare with the numerous failures, deadlocks and disasters in other countries on the globe.

Looking into economics, does that mean that Myanmar is booming, as had been claimed by many back in 2012, when the gold rush started?

The answer is a resounding ‘No’ – real estate is possibly the only sector where we are experiencing something like a boom, and the lessons Europe has had to learn during the past years remind us that such a boom may not necessarily be sustainable.

When I am being asked to describe the situation, I call Myanmar a country in an uphill marathon: a breathtaking and exhausting process of catching up from a low level of development, on a path cobbled with unforeseeable obstacles (not least fluctuations in the global economy), without a clear vision as to exactly when this race may come to an end or at least lead into plain territory. To engage in such a race you need to have stamina, good mental fundamentals and the conviction that there is no other choice.  That is more or less how I would describe the spirits of many Myanmar people.

Fortunately, to encourage this uphill marathon struggle, significant progress has been made in some  sectors in Myanmar.

Telecommunications may be the best example. In 2012, connectivity was extremely poor – with a mobile penetration of about 25 per cent and poor Internet connection for anyone who had the privilege to own a smartphone.

Today Internet bandwidth remains weak when judged by global standards, but the country has leapfrogged ahead compared to where it was four years ago. The two foreign licence holders for mobile phone networks, Norway’s Telenor and Qatari telecommunications firm Ooredoo, have boosted mobile penetration of Myanmar beyond 70 percent and brought 3G mobile communication into many remote areas of the country. Smartphones are the preferred product these days and old handhelds (a luxury item some years back) are even been given for free these days.

Outbound data connectivity remains the most important bottleneck, but already by the end of this year, another sea cable will link Myanmar to the world.

Insufficient power supply is often cited as another impediment for economic development and another hurdle the private sector has to face. And yes, the need for expansion of power generation and transmission is huge requiring considerable investment especially as electricity from the grid is heavily subsidised.

But if you speak to the private sector, all over the country, companies confirm that the power supply has improved significantly since 2014, requiring them to run on a diesel generator during just an hour per day instead of up to six hours per day two years back.

When it comes to infrastructure, the news is filled with stories about ports and airport projects. When you travel through the country, you can assess that this is not just ‘patient paper’ as we call it in German referring to ideas on paper that never get implemented. There is development taking place.

Even in the northernmost state of Myanmar Kachin State, you encounter road expansion works linking third-tier cities.

The biggest headache right now is the rail network which is completely insufficient for passenger and cargo transportation. Upgrading is in the pipeline but we have not seen any tangible progress as of now.

Now that infrastructure has improved, does that mean that foreign investment is a cake walk? Definitely not.

A lot of impediments to foreign investment remain: regulatory frameworks need to develop further following the enactment of the quite liberal new Foreign Investment Law in 2012. Implementation of legal frameworks and administrative processes are suffering from an overstretched administration and the skills base remains weak. Human Resources experts with an international track record say that in terms of recruitment, retention and training, Myanmar is a specifically challenging territory even for big multinationals with sophisticated HR development tools.

The cost of land and rental charges are high, counterbalancing low wages when you assess the overall factor cost. The financial system is inefficient and the continuing US financial sanctions are causing further constraints and in practice hindering dollar transfers from abroad.

While the EU lifted all its sanctions in 2013, except for the Arms Embargo, the Specially Designated Nationals (SDN) List published by the American Office of Foreign Asset Control (OFAC) still lists a number of Myanmar entities. European companies may be well advised to clarify reputational risks and compliance for projects involving US supplies.

Furthermore, the physical infrastructure in terms of industrial estate is underdeveloped.

The launch of the Thilawa Special Economic Zone (SEZ), the first SEZ built in Myanmar in  2015, a Myanmar-Japanese Joint venture project near Yangon,  has been another quantum leap for the country.

The SEZ is the first industrial park at international standards, with centralised management and cost structures, power supply, water treatment etc. and it has a promising port development just next door.

Thankfully, other such projects are under development in other parts of the country. The dominance of Yangon as Myanmar’s business centre to date remains a challenge. A national urbanisation trend would be a disaster, given the already scarce population in a number of regions.

Besides the two big (but delayed) SEZ projects in Kyaukphyu in the West and Dawei in the South-East, driven by China and Thailand respectively, far-sighted investors are well advised to check places like Bago, Mandalay (the second-largest city), Taungoo and Mawlamyine.

While there is hope that regional diversification of industrial investments may happen earlier than we could expect, domestic supply chains – or rather the lack of – remain a headache.

Myanmar’s economy is resource driven. Agricultural products and natural resources (gas, oil, jade and others) are the most important export products but processing or downstream industries are almost non-existant. Light industries such as garments are hampered by weak supply chains. Myanmar can supply neither fabric nor cardboard boxes to the garment manufacturers in the country. Unlike neighbouring Bangladesh, the country has not developed a textile industry able to supply woven or knitted fabric for export processing at international standards. Privatisation of the previously state-owned textile factories has started, but it will take some time until we see supplies to the garment investors working for international brands.

As a result, the trade deficit is increasing year by year as not just construction material and investment goods but almost any raw material and preliminary product needs to be sourced abroad. This matters as for example in the packaging industry a lot of semi processed material has to be imported.

In its second phase of industrial development one can expect foreign investors to develop most of the supply chains. Currently packaging material is the focus with foreign investments being poured into cardboard boxes, PET bottles (made of polyethylene terephthalate) and aluminum cans for the beverages industry.

Actually, while other Asian emerging economies have started their growth trajectory based on export production, in Myanmar a significant share of industrial foreign direct investment (FDI) is focused on supplies to the domestic market – not surprising in a country with a population of more than 50 million.

Given the low level of consumer spending in Myanmar, FDI is being made with a long-term perspective by multinationals hoping to secure their share in a growing market at an early stage. Beer and soft drinks are the top recipients of such investments and we can expect food and more fast moving consumer goods to be next.

Construction material is another sector where we will see the trend from supplies from abroad to local production gain pace meaning that foreign brands which previously have exported to Myanmar will start production in the country.

The news is filled with images of cement plants sprouting all around the country, supplying to infrastructure and real estate developments. This is partly due to the fact that import and distribution is de facto closed for foreign companies (and in Myanmar, as of today, according to the Companies’ Act dating from colonial times, a company qualifies as foreign with just one single foreign share. Fortunately, a new Companies’ Act is in the pipeline to be voted on by the new Parliament and enacted by the new Government).

At the same time, natural resources will remain a big focus of FDI. Asian investors are leading the way but a number of Western companies have engaged in oil and gas after the lifting of economic sanctions, joining Total who was early investor in this sector.

A new mining law that includes ecological standards and compliance may also pave the way for further investment by Western companies but one has to be realistic that cleaning up this sector may still some time.

Yet as manufacturing in China becomes more costly, Myanmar has emerged as a viable alternative in the mid to long term.

Whoever engages in such project assessments needs to be aware that there is no quick win but a thorny path to tread that requires patience and stamina. Nevertheless Myanmar is emerging as a new base for garment industry manufacturing for exports and a number of Asian investors are already entering the market. More light industries need to develop, but the lack of supply chains is the hindrance.

Finally after years of sanctions, the West is back – not just as a political and development partner, but also in terms of investment. Still overall FDI is low and Asian players are entering the market far more dynamically not to say aggressively than their Western counterparts.

Japan ranks as the top foreign player trying to secure its position in Myanmar, a promising Southeast Asian market – particularly to counterbalance Chinese influence.

As in other countries at similar stages of development, foreign investment is key to job creation, infrastructure development and extension to value chains.

But in the mid-term, it is crucial that local industries develop and secure their share of the cake. To provide sound policy frameworks and effective support to them without lingering into protectionist policies will be one of the many challenges the new Government will have to tackle.

 

Monika Staerk is the Delegate of German Industry and Commerce in Myanmar. She can be reached at monika.staerk@myanmar.ahk.de