In 1962, Myanmar (then called Burma) was the richest country in Asia. Following its military coup that same year, its growth and development declined rapidly. The generals who ran Myanmar are accused of gross human rights abuses, including the widespread use of forced labour and harsh crackdowns on any sign of dissent. They closed its economy and adopted socialist policies that have been the downfall of so many other military backed isolated governments. It now finds itself in 2013 as one of the poorest and most underdeveloped countries in Asia.
Growth at a Snail's Pace
60 million people live in Myanmar, with a massive 46 million of working age. It isn't surprising however to see that the unemployment rate is almost 40%. The alleged human rights abuses brought heavy sanctions from the international stage and while the world's GDP grew by 3% per annum between 1900-1990, Myanmar's crawled behind at 1.6%. Since 1990, it's estimated Myanmar's GDP has grown by 4.7% a year, a good improvement, however this is attributed simply to a booming working-age population rather than booming productivity.
It is this weak productivity that is causing Myanmar's GDP to lag behind its peers. One reason for this is the country's reliance on the agriculture sector as a main contributor to GDP; 35% in 1965 has increased to 44% in 2010. Traditionally, agriculture has been a low productivity industry. Its vulnerability to any damage to its agricultural sector was seen in 2008 when Cyclone Nargis brought production to a halt and wiped an estimated $4 billion from the economy.
Compounding the poor GDP growth further, is the desperate poverty of the citizens. A booming consumer class (daily income >$10) worldwide has driven global economic growth as people earn more and can then spend more. 35% of the world's population belongs to the global consuming class, with 40% of them, or 1 billion people, living in Asia. Out of a population of 60 million however, only 4% of Myanmar's citizens are regarded as a consumer class. Myanmar households, spend over 70% of their income on basic necessities, leaving very little to be saved. Prior to China's economic opening in 1985, Chinese households spent 62% on basic necessities. Since then, this number has fallen to 27% of income, showing the potential that awaits economic openings and foreign investment in Myanmar.
Through significant reforms and attempts to inch towards democracy, over the last number of years the country has made significant steps towards getting back on its feet. I believe the country is now poised to become one of the fastest developing nations in the world, as it catches up.
2010 saw the transition to democracy begin in earnest with the first general election in decades - despite being boycotted by the main opposition National League for Democracy. A nominally civilian government was installed the following year. In 2012, the national budget was debated for the first time in parliament and printed in private newspapers. Hilary Clinton made a landmark visit in December 2011 and this was followed by Obama visiting in 2012, who then reciprocated by entertaining President Thein Sein in Washington in May of this year. In April 2012, the EU lifted the last of its non-military sanctions on the country and offered $100 million in developmental aid. The US have stopped short of lifting economic sanctions right now, which has placed on hold any attempts by US citizens to invest in Myanmar.
Aung San Suu Kyi is at the forefront of her country's attempt to democratize. She has been awarded the Nobel Peace Prize (1991), and the Congressional Gold Medal (2007). International support for democratic reforms has been solid over the last 2 decades, with both the UN weighing in countless times as well as Myanmar's Asian neighbors. Despite a quarter of the seats in parliament being reserved for military, the country is on the cusp of ending decades long isolation and opening up to foreign investment, with President Thein Sein signing a foreign investment bill last November, aimed at enticing overseas firms to set up businesses. Foreign direct investment (FDI) has increased fivefold since 2012.
Relations and integration with its neighbors have been gathering momentum. Earlier this month Myanmar hosted a 3 day World Economic Forum. This coming December it will host the 2013 Southeast Asian Games. It is a member of the Association of South East Asian Nations (ASEAN) and will chair the group in 2014. Internationally, Myanmar has big support. In January of this year, it had $6 billion granted in debt relief, with the Asian Development Bank, the World Bank, Norway, Japan and the Paris Club at the forefront of the decision. In a somewhat trivial sign of how far the country has come in recent years, Coca-Cola (KO) has resumed its presence in the country after a 60-year hiatus. International consumer-goods giant Unilever has announced plans to open up its second factory there, before its first has even begun operating.
Areas Containing Opportunities
Location wise, it is a developing country's dream. It borders India, China, Bangladesh, Thailand and Laos; a corner of the world's home to 40% of the earth's population. The McKinsey Global Institute estimates that by 2025, over half of the world's consuming class (daily income >$10) will be no more than a 5-hour flight from Myanmar.
Myanmar has large natural gas, oil, and precious stone resources. BP estimates their natural gas reserves to be worth $75 billion. Dozens of international companies have secured rights to explore offshore gas and oil fields. It is also a densely forested country, accounting for 90% of the world's teak exports along with 90% of the world's jade production and high proportions of the world's sapphires and rubies.
It is a possibility that its lagging behind over the last 5 decades could now be an advantage to its growth. Sectors such as banking, retail, education and healthcare do not need the same level of 'physical' infrastructure that developing countries needed in the second half of the 20th century. Myanmar can harness the digital age it finds itself developing in, and avoid some of the costs and harsh lessons that its predecessors had to pay and learn.
McKinsey Global Institute believes a GDP exceeding $200 billion by 2030 is attainable, if Myanmar realizes significant growth across a diversified economy. This goal would represent a 400% increase in GDP in 22 years. It is not unreasonable to believe Myanmar is about to explode over the next 2 decades. Incomes in developing countries are rising faster than ever before. Indonesia quadrupled their per capita GDP from Myanmar's level in 14 years, Thailand did the same in 13 years. China did one better and quadrupled its per capita GDP in just 12 years. It is vital though, that Myanmar does not rely on its natural resources alone to fuel its growth and development. McKinsey point out 7 sectors (I included an eighth) that will be the pillars of Myanmar's economic future:
1) Agriculture - Despite being the 38th largest country by total area in the world, Myanmar has the 25th largest endowment of arable land. Output per worker is only $1,300 a year compared to $2,500 per worker in Thailand. Low levels of fertilizer, machinery and seeds form significant barriers to growth. An increase in output per worker coupled with investment, would be well timed to meet the soaring global demand for food.
2) Energy & Mining - A lack of technical capacity, international sanctions and little foreign investment have left Myanmar's oil and natural gas fields virtually untouched. As already pointed out, Myanmar has upwards of $75 billion worth of natural gas reserves. With regards to oil, production has increased from 13,000 barrels p/day in 2000 to 21,000 barrels p/day in 2011. However, a very limited refining and production infrastructure has in fact made the country a net oil importer as it cannot meet global demand. Projects such as the Shwe natural gas pipeline and onshore terminal are merely the tip of the iceberg with regards to the possible projects that could maximise the utilisation of Myanmar's natural resources. The government has signaled its willingness to such a path by its commitment to the Extracting Industries Transparency Initiative.
3) Manufacturing - Labour productivity is holding back the manufacturing sector, which is only 20% of that in China and Thailand and less than 15% of that in Malaysia. Labour costs are low, affording the country an opportunity to capitalise on labour intensive manufacturing sectors such as textiles, furniture and toys, at a time when these industries are relocating outside of China. The average daily wages of a Myanmar factory worker is $3, compared to $4 in Indonesia, $5 in Vietnam and $18 in China and Thailand. Labour intensive manufacturing requires only slightly more advanced skills than those needed for agriculture, which will ease the transition of the population from an agricultural based economy to an urban-based economy (see below).
4) Infrastructure - This will be a serious Achilles' heel in the country's attempts to develop. It is in no way suitable or prepared for the rapid growth that seems imminent. McKinsey estimates that $320 billion will need to be invested to support a rapidly developing industrial sector. Roads, rail networks, water treatment plants, power plants will all be needed and offer good investment opportunities. Only 13% of the nation's population has access to electricity, compared to 24% in Cambodia, 98% in Vietnam and 99% in Thailand, Malaysia and China. A national, reliable grid is essential to any hope of development and will be a considerable feat for the government to achieve.
5) Urbanization/Real Estate - In line with the need for serious investment in infrastructure, Myanmar's population is on the cusp of a great migration to its cities, creating ample opportunities for real estate investment. The percentage of Myanmar's population that live in cities of over 200,000 is 13%, far smaller than the ASEAN average of 39%. As the agriculture sector loses its importance and manufacturing takes off, this number could double by 2030 - meaning an extra 10 million people would be living in Myanmar's cities. Apartment blocks, amenities, supermarkets and hotels etc. are all going to be in great demand. It is estimated that right now in the whole of the country, there are but 27,000 hotel rooms of all categories. Hotel rates have more than tripled in Yangon alone since 2011 as tourism has increased. Office space was $13 a square metre in January 2012, that had increased to $30 by January of this year.
6) Tourism - Myanmar has an abundance of both natural attractions and historic temples. However, tourism is a sector that has been all but untouched due to the closed-off status enforced by the military dictatorship of the last 5 decades. Less than 800,000 visitors came in 2010, but over 1.5 million are expected this year. It has the highest tourism growth rate of ASEAN nations. Over 22 million people visited Thailand in 2012 and almost 4 million visited Cambodia - both countries with similar natural attractions and cultural heritage. These numbers show just how closed off Myanmar has been but also the potential the tourism industry there holds. How quickly and effectively the country develops its infrastructure will be the main factor in the growth of its tourism sector, with more liberal visa requirements also necessary.
7) Financial Services - Currently this sector yields $200 million to the GDP and 7,000 jobs. McKinsey examined the penetration of banking products in the rest of ASEAN and estimate that this sector could contribute over $11 billion to GDP in 2030 as well as 400,000 jobs. Lack of telecommunications restrict the flow of capital and the largely rural population are often forced to rely on informal moneylenders who charge obscene rates. Finance regulation in Myanmar is almost non-existent, and will need to be created from scratch if international banks are to be enticed to set up shop. At least 17 foreign banks already have representative offices in the country, in anticipation of the Financial Institutions of Myanmar Law expected in 2015. Plans remain on schedule to open a stock exchange in the capital Rangoon, also by 2015. In January of this year, the Thai Stock Exchange signed an agreement with the Central Bank of Myanmar, promising to support the development of the Myanmar stock exchange.
8) Telecommunications - Less than 3% of the population had a mobile phone in 2011. In February of this year, a SIM card was costing upwards of $30 in Rangoon. By April, this had fallen to $2, a trend that is going to improve access to mobile phones for millions and increase telecom penetration into a country that is largely unconnected. Foreign investment will be crucial to this sector as homegrown communication companies simply will not have the resources to keep up with the development of the other sectors. Irish owned telecom firm Digicel have promised a $9 billion investment in a mobile phone network if its bid for one of two highly sought after licenses is successful. They plan to create 7,000 jobs if they get the go ahead. The liberalization of the telecom/mobile phone market is seen as a corner stone to the future development of Myanmar, a country seen as one of the last frontiers with regards to mobile phone penetration.
- Education/Training Workforce - Myanmar has one of the lowest average years of education in the world today, at just 4 years. Only 15% of the working population have secondary education. Given how rural its society has stayed while the rest of the world urbanized, this isn't surprising. Massive training schemes would be required to bring soon to be industrial 'urbanites' up to decent levels of standard literacy as well as technological literacy. Being able to use other developing countries' experiences from the past 20 years in this regard would be an advantage, allowing Myanmar to somewhat 'leap frog' over the conventional problems associated with educating such large numbers at once. Myanmar has a large diaspora of upwards of 5 million people (10% of its current working age population) working abroad in semi-skilled, labour intensive jobs. With political stability and economic opportunities beckoning, this diaspora could be enticed to return home where they would contribute heavily to the low/semi-skilled labour force that Myanmar will need in the coming decades of development.
- Ethnic Tensions - Decades worth of Burmese dominance over minority ethnic groups has led to much civil unrest and many separatist rebellions, further fuelled by severe government intervention in response. However ceasefire deals in 2011 and 2012 signaled a new era of work towards peace, strengthened by Chinese brokered talks this year between the government and Kachin rebels. However, the country's recent attempts and steps towards reform and development have been mired by viscous sectarian based violence over the past few months between minority Muslims and the Buddhist majority, videos of which have been viewed by millions on-line. The seemingly laissez-faire attitude of the police force visible in some of these videos makes for grim viewing and there is no doubt, nothing short of a complete overhaul of the law and justice system is needed to ensure civil stability.
- Opium Production - While its location has the possibility to be a great asset, Myanmar is also in the Golden Triangle of opium producing, and ranks 2nd behind Afghanistan in opium production. Organised drug crime is a major issue. The UN reported last November that illegal production had risen for the 6th successive year, fueled by rising global heroin demand. Farming the crop is the main source of employment and income for many families in Myanmar. It is an unfortunate fact that most of the opium farming occurs in the Kachin and Shan; states which have seen some of the heaviest insurgency. Accusations were rife in the late 1990s regarding collusion between illegal opium producers and the military but in recent years it has been observed that the government has made significant steps towards eradicating the poppy fields.
- Corruption - Despite its efforts of late, an international report on corruption last year ranked Myanmar 172nd out of 176 countries, which is par for the course for a country emerging from decades of military rule. However, reform is happening. President Thein Sein has brought in anti-corruption measures, requiring ministers and officials to declare their financial assets and interests. A committee with the power to investigate corruption in the judicial system has been approved by the Lower House. Now that there are multi-billion dollar investments/licenses at stake, it is crucial that there is a level playing field for all potential firms.
- Control of Foreign Firms' Transactions - To entice multi-national firms to enter Myanmar, the current preferential treatment afforded to domestic firms must be lowered if not eradicated completely. Right now, there is a withholding tax on foreign remittances and a ceiling on the repatriation of profits, which are considerable deterrents. The following examples demonstrate what a difference the removal of such constraints would make; Indonesia saw a 6-fold increase in its FDI between 2000 and 2011, after it allowed foreign investors to repatriate their earnings. FDI in Estonia was 14 times higher in 2005 than its 1995 levels - the year it removed all control on capital account transactions.
How To Invest
It's all very well seeing where the opportunities are, but knowing how to invest in them is another story altogether. Watching what companies get awarded what licenses for the oil, gas, logging, telecom, construction, road building etc. industries is a good place to start but not all of these will be publicly traded. There is no Myanmar stock exchange (yet) to get exposure to the whole economy, nor is there a Myanmar focused ETF that would allow sufficient opportunities, making it difficult for foreign equity investors. As such, investors should consider looking at firms who are hinting at their plans to enter Myanmar; Ford Motors, Starbucks, KFC, Coca-Cola and McDonald's to name but some. With 60 million people about to get a whole lot richer (assuming no catastrophic natural disaster/war occurs) over the next 2 decades, any consumer focused company would do well to be positioned in Myanmar, ready for the new discretionary spending class.
American investors should also consider an option that is being touted a lot recently as the most direct of all the indirect routes; the iShares MSCI Thailand Capped Investable Market Index Fund (THD). While not a model country in terms of stability, Thailand is one of the more prosperous countries of the region and shares a border with Myanmar. Enhanced trade between the two countries over the coming decades is almost a given, provided relations remain friendly. This ETF allocates almost 40% of its weight to financial services names, and one would imagine it will have significant exposure to any of the planned developments in Myanmar's financial sector. A quick look at THD shows that it fell almost 20% in this latest global market correction, while the S&P 500 is down under 3% and the Vanguard Total World Index is down 4.5%, suggesting that in times of uncertainty, investors and funds sell their more riskier assets first.
While it has wiped out all of its gains in 2013 in the last 3 weeks, anytime over the last 3 years when the ETF's RSI has dipped under 30 (purple rings indicating the fund is oversold) it has come back with a bang. Depending on your view of the current correction we're seeing and how likely you think it is to continue, now could be a very good entry point, particularly with major support levels at $75 and $70.
Yoma Strategic Holdings, listed in Singapore, is heavily focused on Myanmar and has significant retail, automobile and real estate interests in the country. The stock is up close to 170% over the last 12 months and is being treated as a proxy for Myanmar, leading to calls that it is severely over-valued. While this may be so as it is the nearest thing to a direct investment that investors have right now, the company reported a net profit increase of just under 400% for YOY last March, showing a snapshot of what is possible for firms entering Myanmar. The company made public this month it's recent aggressive acquisitions of Myanmar's tourism businesses - including travel tours and luxury safari focused firms.
A number of factors exist right now that make investing in Myanmar very attractive. It is making significant strides in its attempts to reform and open up economically. Foreign investment is flooding in. There is a huge working age population. Its natural resources have barely been tapped. However, creating and maintaining a diversified economic base is key, simply going for broke on exporting all its natural resources will not see it maintain long-term development.
Effective urban planning and the introduction of efficient zoning laws will make the urbanization of Myanmar a lot smoother. International as well as domestic confidence in the law of the land is required for FDI to start consistently flowing in. Any more flare-ups in ethnic conflict have the potential to do much damage, these must be avoided at all costs.
The international community of foreign equity investors will be watching carefully the moves the US makes towards relaxing its current sanctions. Were these to be lifted in the next two years, Myanmar would have the last of its non-military focused shackles off in time for the 2015 national election which will tell a lot about how far the country has come.
The country has lagged behind its international counterparts in all parts of economic development for over half a century, it now stands poised to explosively catch up. Doing so in the digital age and being able to see and avoid the mistakes its ASEAN neighbors made in their development are major advantages. Urbanization is happening at a very fast rate and importantly, the proportion of a country's population living in urban areas is positively and inherently correlated to the income and GDP per capita.
Notwithstanding the problems that exist such as corruption, drug production and ethnic violence, Myanmar looks set to take off. It has the support of its neighbors in South East Asia, and the support of many of the earth's countries and leaders. Renowned hedge fund managers George Soros and Jim Rogers are particularly bullish on Myanmar's prospects and you should be too.