Investment Adventures in Emerging Markets

Myanmar: Opening the Door to Democracy

Myanmar, once known as Burma, has democracy standing on its doorstep.

For decades under Myanmar’s former military regime, Aung San Suu Kyi led the fight for democracy as head of the National League for Democracy (NLD). A Nobel peace laureate, she retained her popular appeal over two decades while she was either imprisoned or under house arrest. Now free, on April 1, 2012 she won a landslide victory in Myanmar’s parliamentary by-elections. Drawing cheering crowds, her supporters call her “Amay Suu,” or “Mother Suu.” Hopes are high she will nurture this formerly troubled nation into a new era of democracy and personal freedom.

The world has been watching as these developments have unfolded.  In the eyes of the democratic West, Myanmar’s reputation has improved, along with the reputation of the ASEAN (Association of Southeast Asian Nations) grouping. I’m watching Myanmar too, and am encouraged by what I have seen so far.

This recent election is a significant representation of the progress that could shift the international community closer to the easing or lifting of economic sanctions on Myanmar. Before the election, we had already witnessed an improvement in Myanmar’s relations with the rest of the world, signaled by a visit from U.S. Secretary of State Hillary Clinton, an exchange of ambassadors with the U.S., and collaboration with the International Monetary Fund (IMF) on currency reforms. Post-election, more nations have expressed interest in the possibility of full diplomatic relations and further ties with Myanmar. Easing economic sanctions should help bring foreign investment, more trade, and rising wealth to the people of Myanmar.

However, I believe the real litmus test will come in 2015 when most parliamentary seats are up for election. Suu Kyi’s ability to exert influence on the government is a story in progress and seems likely to play a part in those elections. 

For the time being, democracy in Myanmar is in its infancy. The recent by-elections have been as much about democracy as the reform of the country’s institutions. I believe some key institutional reforms are needed to put it on the path to modernization. On the first post-election business day, Myanmar attempted to revamp its financial system with the launch of a new foreign exchange regime. A new stock market, greater central bank independence and the introduction of tax holidays for foreign investors are among the government’s other recently announced reform plans.

For Myanmar to unleash its full potential, it must get out from being under Western sanctions, bring in foreign direct investment and carry out infrastructure development. Investment is essential to the reform process, and successful reforms should generally raise economic productivity, and in doing so should help bring more goods and services to the public. From what I have seen in Myanmar, this institutional reform process is in its earliest stages, and it will take time.

I think the potential investment opportunities in the country should, in time, be wide. The timeframe will likely depend on several factors, including how fast the currency can be normalized. Myanmar’s currency, the Kyat, is now under a managed float system, which means the currency’s value is market-driven rather than fixed. On April 2, Myanmar’s central bank set a reference rate of 818 Kyat against the U.S. dollar.1 Prior to being floated, the Kyat had an official as well as a black market rate (i.e. the actual rate that was used when anyone exchanged the Kyat). The official exchange rate was very different from the actual exchange rate and the differences between the two could at times be significant. Foreign investors should be encouraged by the new system.

Despite its recent progress, corruption remains one of the persistent challenges in Myanmar. It has been ranked in the “Worst” category according to perceived levels of public sector corruption.2 The country also currently lacks a proper legal structure, something we have and will continue to keep in mind in our analysis.

Myanmar’s history is certainly troubled, and perhaps the biggest unknown is its military. In 1988, non-violent, pro-democracy protests were met with a brutal military crackdown that led to thousands of deaths. The NLD won over 82 percent of the legislative seats in the 1990 elections, but the military junta disregarded the results and retained its chokehold on the people.

What the military makes of the recent by-elections remains a grey area which should become clearer during and after the 2015 general election, when the recent democratic advances may be affirmed or scaled back.

With these risks in mind, I believe Myanmar has a lot of potential. It is rich in natural resources, including timber, tin, copper, lead, coal, natural gas and hydropower.3 Its geographic location in Southeastern Asia, between Bangladesh and Thailand, is ripe for cross-trade among those countries. Its real GDP growth is expected to increase, with predictions by the IMF of 5.5% in 2011-2012 and 6% in 2012-2013.4 Supported by credit growth and improved business confidence, I believe this growth should be driven by commodity exports and greater investment. 4

As I have always maintained that with opportunities come risks. Myanmar is no exception. At this moment there is a lot of euphoria and excitement about the possibilities, but investors should try to avoid getting caught up in emotion. It’s important to realize that the development of capital markets (bonds and stocks) takes time. One should be cautious about potential over-speculation, which tends to run high in the early stages of development. Investors often try to rush in early and can potentially push the price of stocks too high, which can in turn make valuations expensive.   

One of the reasons I spend some 250 days on the road each year is to look for individual investment opportunities at the ground level. I look forward to seeing the changes and potential opportunities in Myanmar develop first-hand. 

Myanmar appears to be on the cusp of political and economic change. I expect modernization should clear many of the obstacles to the country’s growth, deepening the investment climate and liberalizing trade, foreign direct investment and the financial sector.

I look forward to watching Myanmar’s progress as it opens the door to democracy.

1Source: Bloomberg, “Myanmar Sets Kyat Reference Rate as it Adopts Managed Float,” April 2, 2012.

2Transparency International, Corruption Perceptions Index 2011.

3CIA World Factbook, March 19, 2012.

4IMF, Mission to Myanmar, January 25, 2012.

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