Myanmar’s recently elected parliament, which is ensconced in the remote capital of Naypyidaw, passed a new foreign investment law in September. It paves the way for a new wave of inbound direct investment, as economic and business sanctions that have kept most foreign companies out of Myanmar for the past decade or more are suspended, partially lifted, or removed altogether. 

Few anticipate that the sanctions will be re-imposed, and the likelihood is that most of the remaining selective sanctions – such as the US’s list of Specially Designated Nationals and its Myanmar import ban, authorised under the Burmese Freedom and Democracy Act – will be gradually phased out. Similarly, the EU’s one-year suspension of economic sanctions will almost certainly be extended, if not completely lifted.


Sanctions easing support

Crucially, Nobel laureate Aung San Suu Kyi – or ‘the Lady’, as she is affectionately known in Myanmar – has supported the latest moves to lift sanctions, having previously called on the international community to isolate the former military regime, which she and many others deemed to be illegitimate. Numerous governments around the world responded to her call, prompted in part by images of soldiers firing live rounds at Buddhist monks protesting against the army's role in the running of the country.

But the utility of such a stance became less and less convincing over time, as Myanmar’s international isolation only served to push the country closer to a dependent relationship with China. And as the military leadership issued first a new constitution and then held national elections, the abstention of the National League for Democracy (NLD) in the political process started to become self-defeating. The high moral stance taken by Ms Suu Kyi, the NLD, and her international supporters was turning them into irrelevant bystanders in a rapidly moving transition in Myanmar.

It was in this context that Ms Suu Kyi and 43 of her NLD members ran for parliament in the March 2012 by-elections, and all but one of them are now part of a government that is actively re-engaging with the outside world. In a stroke, that served as the green light for Myanmar’s re-entry into the international fold. The military regime’s pariah status was effectively declared over.

There are myriad attractions to Myanmar for investors. A largely untapped market of 60 million people and potentially huge natural resources – conveniently positioned between the two growth poles of China and India – is now open for business for the first time in 50 years. The business prospects for foreign companies, across a wide spectrum of sectors, is mouth-watering. But market entry timing will be critical, as the obstacles confronting the ‘early bird’ investors are just as daunting as the prospects. Yet to wait for a more conducive host country platform to come about runs the risk of being left behind.

Due an upgrade

Myanmar’s infrastructure is extremely weak, as a result of decades of under-investment, although the international donor community is likely to play a key role in funding much-needed improvements to the country's ports, roads and utilities. In advance of this, Tokyo is seeking to restructure Myanmar’s outstanding debt arrears with multilateral funding agencies, having already written off $3.7bn of bilateral debt that the country owes Japan. And in Washington, DC, in late September, the US Senate voted to remove legislation that previously prevented the US from providing financial aid to Myanmar through the World Bank, the Asian Development Bank and the International Monetary Fund.

Based on a recent survey of businesses, Myanmar FDI expert Jared Bissinger says that electricity – or more precisely, the lack of it – is the most commonly recited problem for firms right now. This is due to “a regressive and money-losing pricing structure, and a national grid that covers only about 26% of the country's population”, he notes.

The banking and financial sector is also in dire need of upgrading, as it is not able to serve effectively in its role as a financier of trade, nor as financial intermediator for the economy as a whole. Almost no long-term lending is done in Myanmar, so there is neither debt nor equity finance options for businesses looking to fund investments, other than through their own cashflows. Savings products offered by banks are also uninspiring, meaning that many keep their wealth in other (non-productive) assets, such as property.

Risk factors

Corruption is also an issue in Myanmar, as is the bureaucracy and institutional capacity weaknesses of most government agencies, including those responsible for overseeing investment and key business sectors. Romain Caillaud of Asia-focused corporate advisory firm Vriens & Partners believes the single biggest challenge facing the country is the “lack of capacity in government, and weaknesses in the legal sector”. Looking further ahead, Mr Bissinger believes that “workforce skills, especially in highly skilled positions, could emerge as an even more acute problem in the economy”.

There are also considerable political risks in a country that is taking its ‘baby steps’ in a transition process towards more democratic governance. The lower house of parliament has already started to test its authority with president U Thein Sein and his executive, as well as the nine-member Constitutional Tribunal. All nine members of the tribunal resigned in September, after parliament sought to impeach them in a dispute over a legal ruling on the status of some committees. And while political risk factors are relatively high, they will only increase in the run-up to the next national elections, due in 2015.

A key requirement for the pace of economic reform to be sustained in Myanmar will be the delivery of a “material dividend”, as Myanmar expert Sean Turnell of Macquarie University calls it. The livelihoods of the country’s citizens will need to improve in order to “bring about a constituency for reform, which might protect the process against the backsliding of the interest groups. The latest swings and roundabouts over the new FDI law was really between vested interests and reforming elites,” he says.

Law revisions

Following the commerce ministry’s first draft of a broadly liberal FDI law, various lobby groups sought to inject a range of limitations in subsequent drafts that would constrain market access for foreign investors. These included a minimum capital requirement of $5m for all FDI projects, and the imposition of joint-venture formats and other constraints for foreign investors seeking to operate in specific business sectors. 

For some, the proposed revisions in the law were legitimate attempts to protect domestic firms from the anticipated onslaught of foreign capital and know-how that will render local firms uncompetitive. For others, this was a cynical exercise by entrenched lobbies dating from the previous regime to protect, or cleverly ‘cash out’ from, lucrative monopoly businesses.

“There is a significant amount of ‘creeping protectionism’ in the country, and the battle over the FDI law exemplified that,” says Mr Bissinger. But James Finch of Myanmar Thanlwin Legal Services believes the version of the law that was finally passed was ultimately “a fair compromise between foreign and local interests”.

This is because common sense prevailed, and most of the ‘protectionist’ revisions to the law were ultimately rejected by legislators. But expect to see similar debates on future laws pertaining to business, including those governing banking, telecommunications, resources and energy, among others. This is just the beginning, and managing expectations in the future will be an important factor. As Mr Turnell gently cautions firms considering entering the country: “Investing in Myanmar, and staying there long enough to yield some profit, is likely to require a degree of fortitude.”

Nick Freeman reports from Yangon.