Myanmar opens new stock exchange – beginning of new economic era?

On December 9, 2015, Myanmar’s new stock exchange – the Yangon Stock Exchange (YSX) – opened with big expectations. However, despite the grand opening and the US $24 million investment, the bourse will not be operational until February of 2016, or later. So is this really the beginning of a new economic era, or is the new move by the administration being rushed before the country is ready?

Myanmar has come a long way from being isolated from the world community under a military regime, to becoming an attractive investment destination. In fact, during the fiscal year 2014-2015 Myanmar managed to attract US $8 billion in FDI despite some economic sanctions still being in place. However, the fact remains that there are still many factors that can keep the country from reaching its full economic potential. Still optimism is prevalent, and with many favorable factors aligning Myanmar seems to be at the right place at the right time for investors.

Further Reforms and Ease in Sanctions Needed to Avoid Stagnation

The success of YSX will ultimately depend on the implementation of further reforms, especially financial regulations. Liquidity will become the biggest issue to solve, if Myanmar wants to avoid the fate of Laos (LSX) and Cambodia (CSX). Since opening for business in 2011, both CSX and LSX have failed to attract investors due to their lack of liquidity. Currently, only three companies are listed in CSX and five in LSX. Myanmar suffers from some of the same issues, given that local banks don’t have enough lending capacity. This means that local companies must rely on foreign cash reserves, which slows down growth.

Another factor needed to ensure the success of YSX will be the easing of U.S. sanctions. Removing sanctions would improve liquidity by allowing U.S. lenders to finance American and foreign companies seeking to invest in Myanmar. Additionally, many of the companies on the list of sanctioned entities are also some of the most important economic players, without whom YSX may fail to gain traction. Finally, and more importantly, state-owned Myanmar Economic Bank which has a 51 percent stake in YSX is also affected by sanctions, making the ease on sanctions all the more necessary.

Further economic reforms and the ease in sanctions have the potential to be achieved under the newly elected government. The NLD and Aung San Suu Kyi enjoy a favorable reception by the US government. The smooth transition that has been signaled and the expected reforms have many actors hopeful that sanctions will finally end. This sentiment is shared even among businessmen with ties to the former military junta. From their point of view they are the ones with the most experience in the market and thus natural partners for foreign companies looking to enter the market.

Growing Optimism and the Need for External Support

This growing optimism is widely shared by the country’s leaders. In October, Aung Tun Thet economic adviser to the current administration predicted 10 percent GDP growth by the end of the fiscal year; as well as a 25 percent increase on FDI to USD $10 billion. Furthermore, Deputy Finance Minister Maung Maung Thein said during the opening of YSX that he expects the exchange to catch up with Ho Chi Minh Stock Exchange (HOSE), currently the strongest in the region, within three years. This goal may prove too ambitious, considering that HOSE has a market capitalization of US $19.2 billion, a feat achieved over 15 years since its launch in 2000.

Foreign investment remains crucial for the success of YSX, and the economy as a whole. In fact, this untapped market of 53 million has become very attractive for multinationals like Coca-Cola, Telenor, Colgate Palmolive and Mitsubishi; which have been flocking to the country. Myanmar’s population is expected to reach 56 million in 2020; while its affluent middle class is projected to reach 10.3 million. Confidence on this market can be underscored by Daiwa Securities Group and Japan Exchange Group’s investment in YSX, which helped finance the opening of the bourse, with both companies holding a combined 49 percent stake in the exchange.

The need for external support will continue driving reform. On December 15th, the Central Bank of Myanmar announced that it will be opening a second round of foreign bank licensing early next year. The bank cited the success of the previous bidding process that saw banks from Australia, Singapore and Japan, among others set up operations in the country.  This process aimed at attracting “additional neighbors and important trading partners” shows great potential for the banking industry, where services are still limited. Additionally, the presence of more lending institutions will alleviate liquidity issues and help ensure the success of the Yangon Stock Exchange.

This article was first published on ASEAN Briefing here.

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