After two decades spent punishing Myanmar with economic sanctions, now Western countries cannot seem to ditch them fast enough. Aung Suu Kyi's party, the National League for Democracy (NLD), romped to victory in 43 out of 45 by-elections held across the country on April 1st. Australia, EU and America have lifted travel and financial restrictions on hundreds of members of Myanmar's establishment. The Americans have also promised to ease sanctions on some business sectors, while allowing in American humanitarian groups. Britain's Prime Minister, David Cameron, recently in Myanmar, says that the European Union should suspend all sanctions, while maintaining an arms embargo.
This is the first of my series of articles on Myanmar as events being to unfold. The new civilian government has already implemented some economic reforms, and more could follow. The most significant amongst them include:
Currency unification: Burdened with multiple exchange rates, Myanmar has floated its currency. The official kyat rate, MMK6.4/USD, was more than 100 times the market rate of MMK818/USD. The reform is expected to make the resource-rich Southeast Asian country more inviting to foreign investors following decades of pariah-nation status and corruption. The idea is to unify the country's multiple exchange rates so that businesses and the government can more easily handle accounting and convert money. With the help of the IMF, the government this month moved the official rate to a level close to the market rate. It is not entirely clear how the new currency mechanism will work, but a managed float like China's appears most likely.
Central Bank reform: The Central Bank has historically been under the control of the Finance Ministry. The Wall Street Journal has reported that the government is considering legislation to give the bank more independence, but we do not know whether it would get full policy independence or merely operational independence.
Telecommunications licensing: At present, cellular penetration is just 1% and cell phones can cost 10 times or more than in other countries. Blackberries and foreign cell phones do not work in Myanmar. To improve the telecommunications infrastructure, the government is considering issuing operating licenses to foreign companies.
What political reforms mean for Myanmar:
A Peace dividend: The previous military junta had spent around 23.6% of the entire fiscal 2011 budget for military purposes. The new government has bought down military spending down to about 10 percentage points in the fiscal 2012 budget. With civilian control being established, these funds could be diverted to infrastructure and education. Exchange rate unification has already been implemented, and reforms to the central bank, the telecommunications sector and financial sector are under consideration. Reduced military expenditures and less grandiose white elephant projects represent easy wins for the economy
Fewer white elephants to feed: The prior military government had a penchant for extravagant, wasteful projects. According to IMF estimates, the construction of the new capital Naypyidaw is projected to have cost 2.4% of GDP, while one academic observer places the price tag at US$3-5 billion, or 10% or more of GDP. No outsider knows for sure why the capital was moved from Yangon, but some observers believe it was due to fears of a U.S. invasion or for astrological and numerological considerations. Under a democratic government, taxpayers would probably prevent such wastage.
Investability - a decade away
Rapid political liberalization, improved prospects for a lifting of Western sanctions and the initiation of economic reforms could be setting Myanmar on a higher growth path, but the country's significance for equities investors remains limited. Although much welcome change is coming, a host of issues will likely keep Myanmar a marginal destination for institutional investors. Myanmar is the second-poorest country in Asia after Afghanistan, with an economy probably only 14% the size of Thailand's. Purchasing power is low, and the official growth figures appear exaggerated. A huge human capital deficit, an overvalued currency and weak institutions pose daunting development challenges.
I will write on the challenges that Myanmar faces in my next article and why it is about a decade away from investability.
Investment Options for U.S. investors
U.S. investors can seek exposure to this market by investing in iShares MSCI Thailand Investable Market Index ETF (THD). This Thailand ETF has companies in the mining space which have business interests in Myanmar. PTT Exploration and Production Public Company Limited (PEXNY.PK), Italian-Thai Development (THDF.PK) and PTT PCL are the three major companies with exposure to Myanmar in the index construction.
I shall also write more on these stocks and other positive stories on the country's huge natural resources potential in the coming days.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
