Myanmar: South Asia’s other ‘Small Miracle’?

After the LTTE was defeated, a campaign designed to promote Sri Lanka as a leisure and investment destination labelled ‘The Small Miracle’ was shot down, ostensibly on the ground that the miracle was in no way ‘small’.

The marketing value in Sri Lanka’s compact size, our rich biodiversity, the diversity of leisure locations and physical attractions, the rich cultural diversity, fuelled by a geographical location at the cross current of the trade winds, the unparalleled natural beauty in an island our size and the unique characteristics of our diverse peoples, were all glossed over, like water flowing off the proverbial duck’s back.

Now Sri Lanka is being marketed as the ‘Wonder of Asia’. Without doubt some very wondrous and wonderful things are happening here, just at this time, as even a cursory glance at the daily newspapers headlines clearly indicates, especially in the share market, exchange rate management, import tariffs, financial services sector and presidential pardons.

But there is also a miracle of some proportions taking place in another South Asian country, which is a potential rival to us as a destination of Foreign Direct Investment (FDI).

It has been estimated that FDI inflows into Sri Lanka have to be increased from the current US$ 2 billion to at least a sustained US$ 6 to 8 billion in the coming years to achieve our economic growth target of 8%. The attractiveness of other South Asian nations as a destination of FDI is an important factor for us to take note of, in this regard.

Milestone in Myanmar

On 1 April 2012, by unfortunate coincidence also known as ‘April Fool’s Day,’ the people of Myanmar, formerly known as Burma, had for the first time in years the opportunity to cast a free and fair vote at an election. That was a milestone in the country’s democratic awakening.

But there were only 45 seats up for election. Myanmar’s legislature consists consist of 440 seats in the lower house and 224 in the upper house, even with the opposition won all 45 by election seats up for grabs, (they actually won 43) their representation in the Parliament will still be miniscule, as 80% of them are occupied by the military’s proxy party the Union of Solidarity & Development (USDP).

The de facto leader of Myanmar’s opposition National League for Democracy (NLD), the iconic Aung San Suu Kyi, also contested the election, from the constituency of Kawhmu; this is in the region badly affected by the cyclone Nargis in 2008 in the Irrawaddy Delta which killed 138,000 people.

At that time, the military junta running Myanmar did not permit international aid agencies free access to this region to carry out humanitarian relief work and there is still resentment among the local population regarding the ineffective disaster mitigation measures.

The MLD has won by a landslide, including the 11 seats in the new national capital Naypyidaw, where the majority of voters are Government employees. Aung San Suu Kyi’s party first balked at entering Parliament by taking the oath to ‘uphold’ the constitution, which the MLD has campaigned against it, pledging to overthrow it, as it gives a permanent built in majority for the Myanmar military.

However, after intense negotiation with local politicians and foreign diplomats, the MLD decided to accept the mandate of their voters and overcome their distaste for the constitution and take their oath and enter Parliament.

Burma’s decline

Suu Kyi’s father, the revered Aung San, was an icon of Burma’s freedom movement and was assassinated, when the Burmese military dictatorship under General Ne Win took power decades ago. Since then, Burma has been in decline, cut off from the world, run by a corrupt military junta, in a virtual time-warp.

The world community, led by the European Union, has imposed economic sanctions on Myanmar in an attempt to get the military to open up to a democratic process, which are hurting. ASEAN on the other hand has been engaging with Myanmar and trying the soft touch approach, to get the military to alleviate the harshness of their regime.

The pressure by these external forces has increased after the military junta refused to accept the result of the 1990 general election, which Aung San Su Kyi’s MLD won by a landslide. There is a well-organised, visible and articulate Burmese Diaspora, keeping a constant high volume attack on the junta’s corruption and violation of human rights.

The People’s Republic of China and India on the other hand have kept on good terms with the junta in Myanmar, as they do not want destabilisation on their borders and also they are eyeing Myanmar’s rich natural resource bonanza. Both countries have entered into contracts with the Myanmar Government for exploitation of hydro electricity, natural gas and crude oil.

When Suu Kyi was asked about her views of India’s relations with the military junta, she said that she expected the world’s largest democracy to do more to create democratic conditions within a neighbouring country.

Minority Burmese such as the Karens, Shans and many others have been fighting a separatist struggle on Myanmar’s western border for decades, and the related displaced people, gem and jade smuggling and arms and drug trade problems have spilt over Myanmar’s borders into neighbouring countries.

Moves to attract FDI

Myanmar is taking some very aggressive steps to attract FDI. As long ago as 2002 there were FDI exceeding US$ 7,460 million and Singapore was the biggest investor at that time with 71 investments. Today India and China are very big.

A new set of laws and regulations which will govern FDI are under consideration and being discussed with investors. Special economic zones which offer tax exemptions for different sectors, for e.g. five years for production, eight years for high technology industries, two years for agriculture, livestock breeding and forestry and one year for financial services and banking.

Six such free trade zones are under construction: Thilawa Port in Yangon, Mawlaminye in Mon State, Myawaddy and Ha-n in Kayin State, Kyaukphyu in Rakhine State and Pyin Oo Lwin in the Mandalat Region.

In terms of the Special Economic Zone Law, homesteads and farms presently located in the proposed zones have to be relocated and compensation paid. While a deep sea port is being also developed to serve these zones by a joint team of Italian and Thai investors, an international standard airport is also planned.

Keen investor interest

Investors are showing keen interest. Recently David Bonderman, co-founder of US private equity group TPG, visited Myanmar and met up with senior political and business figures. His professed aim was to ‘get a sense of new investment opportunities and the emerging regulatory framework’ in Myanmar.

TPG has a reputation as one of the boldest American private equity investors. Where TPG leads others follow. TPG was one of the investment pioneers in Russia and Vietnam, and has a longstanding presence in Indonesia.

In a connected development five or six Western- and Asia-based investment firms are drawing up plans to launch Myanmar focused investment funds. They include Cambodia-based Leopard Capital, which specialises in emerging market funds and whose CEO Douglas Clayton said the group hopes to set up US$ 100 million investment fund, Hong Kong-based Bagan Capital, which is targeting a US$ 50 million fund, Yangon-based E&O Capital, which aims to raise a US$ 30 million fund and Indochina Opportunities Fund – a joint venture between Asia-based Dragon Capital and Frontier Fund, which has allocated a portion of its new US$ 250 million fund to Myanmar.

The trigger that all the investors are waiting for is, in the words of Clayton of the Leopard Fund, the lifting of US sanctions: “We’ve been waiting for 23 years for Myanmar to become ‘investable,’ this is an exciting time… there will be some great returns for people who get in early and get it right.”

Investments in property, tourism and infrastructure are sectors the Leopard Fund is looking at. On the other hand, according to Chris Loam of the E&O Group, they are looking at a pipeline of projects, including property, industrial, telecommunications and agribusiness, for which they are seeking investments for private placements.

US sanctions

The US has suspended some of the sanctions imposed on Myanmar after the recent elections; investors are hopeful that further easing of sanctions will follow. Analysts feel that Myanmar could very well be the next frontier, if the Government remains on track with political and economic reforms.

The country has the potential to be an amazing growth story, with all manner of mineral resources being available.

Murray Hiebert of the US Centre for Strategic and International Studies has stated that “an increasing number of US company representatives are visiting Yangon these days but so far they are only window shopping. They are clearly worried that they will be left behind by the US Government’s slow pace of easing draconian sanctions , and will lose out on contracts for mining oil a, construction equipment and airplanes if the US stands firm too much longer.”

In May 2012 Myanmar’s Foreign Minister Wunna Maung Lwin, was invited to Washington DC. It was the first official visit by a Burmese Cabinet Minister in over a decade. US politicians, human rights groups and business groups are lobbying their Government to relax economic sanctions imposed on Myanmar during the military dictatorship.

For example Republican Senator John McCain, a long time supporter of sanctions against Myanmar’s military dictators, has recently urged the US to lift sanctions , saying the President Thein Sein and his allies are “sincere about reform and they are making real progress”.

On the other hand Democratic Senator Jim Webb also expressed the view that all US sanctions should be removed, saying that “the President has the power to lift sanctions, it’s time for him to act”.

The US Chamber of Commerce has also lobbied hard to have sanctions lifted, warning that US businesses are losing out in Myanmar due to the sanctions. Suu Kyi on the other hand has advised caution, saying that although she was not opposed to such a move, she warned that Myanmar could very easily ‘slide back’ on reforms. She has said that the US “should not reward the Government’s nascent and untested changes by allowing an unregulated business bonanza”.

Responding to these pressures on 16 May, President Obama suspended the ban on investments by US companies in Myanmar. President Obama’s exact words are enlightening: “As an iron fist has unclenched in Burma, we have extended our hand.”

This effectively removes one plank of the complex and overlapping series of sanctions that have kept US investors out of Myanmar. It is seen as an effort to reward the Myanmar Government for its steps to democratise the county’s political system, while still having some leverage to re-impose sanctions if there is a retreat.

Some investors felt that the current step is more symbolic than practical; Jeremy Kloiser-Jones of Bagan Capital and emerging market investor who is planning a US$ 75 million Myanmar fund said “it would take some more time to eliminate US regulations to enable direct investment”.

International community’s response

The European Union suspended some of their sanctions for one year in April 2012. Japan waived US$ 4 billion in debt arrears. Australia also lifted some restrictions. The Obama administration also has named Derek Mitchell, currently the State department’s special envoy for Myanmar, as its Ambassador to the country.

The international community is promoting the setting up a Commission for Responsible Investment in Burma, which would formulate a series of principles that investors would be encouraged to adhere to when trading with and investing in Myanmar.

Institutions like the World Bank, OECD, Group of Eight, the corporate community and human rights campaigners feel that liberalised trade and investment should benefit all Myanmar’s people and not only a select few.

The British Government has announced that Suu Kyi will visit Britain and Norway in June, her first trip outside Burma in 24 years. Since first being detained by the military dictatorship in 1989, she has refused to leave the country, even to visit her late husband dying of cancer in Britain, for fear of being not allowed to return.

Suu Kyi will address a joint session of both houses of Parliament in London, an honour bestowed on the likes of Nelson Mandela and Barack Obama in the recent past.

Salutary

Whether it is the harshness of economic sanctions or the soft touch of ASEAN, which is tempting the Myanmar rulers with the Chairmanship of ASEAN in 2014, if they democratise their system, or the pragmatic influence of the regional powers China and India, that has caused Myanmar to hold these by elections and allow Aung San Suu Kyi and the MLD to contest, or a combination of all these factors, it is salutary.

Suu Kyi has gone on record saying that she thinks as genuine the intentions of Myanmar’s current ruler retired General Thein Sein’s statements that he desires political reform.

The Government has been acting in a more responsive way recently to people’s aspirations. Chinese-funded projects which were earmarked for implementation, notwithstanding local people’s opposition, have been put on hold, causing concern in China, but Myanmar’s President seems to want to show that he is responding to people’s aspirations. This is a sea change for Myanmar.

For Myanmar to get back on the economic development and democratic governance track, many things are required, but the three matters of highest priority are:

1. Increased FDI must flow into Myanmar and the easing of sanctions is the key for this

2. The power structure within Myanmar has to be altered to make it more representative and

3. Anti corruption measures and human rights must be given priority

If Aung San Suu Kyi and the MLD in Parliament can achieve these, Myanmar has the hope of being South Asia’s real small miracle. Myanmar will also then provide an operating example for the rest of South Asia on attracting FDI as a catalyst for economic development.

(The writer is a lawyer, who has over 30 years experience as a CEO in both government and private sectors. He retired from the office of Secretary, Ministry of Finance and currently is the Managing Director of the Sri Lanka Business Development Centre.)