Myanmar's FDI boom put on hold
14/02/2017 3:16 pm
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Myanmar Foreign Direct Investment 2012-2017
Foreign
Direct Investment in Myanmar increased by 320.25 USD Million in August
of 2016. Foreign Direct Investment in Myanmar averaged 534.35 USD
Million from 2012 until 2016, reaching an all time high of 3821.91 USD
Million in March of 2016 and a record low of 3.14 USD Million in June of
2016.
Myanmar's new government, led by de facto leader Aung
San Suu Kyi, is pushing through a number of long-awaited reforms and
has welcomed the end of US trade sanctions. Observers are confident
these are steps in the right direction, although they create room for
uncertainty in the short term. Jacopo Dettoni reports.
A feeling of uncertainty lingers among investors
ahead of the political transformation Myanmar is undergoing. The 2015
elections, the first contested vote after a civilian government put an
end to 50 years of military rule in 2011, saw a landslide victory for
the National League for Democracy, led by Nobel Peace Prize winner Aung
San Suu Kyi, and was hailed as a landmark moment in the country’s recent
history.
The new government made a number of key
reforms straight after taking office in March 2016, and even prompted
the end of US trade sanctions, but it has yet to win hearts and minds of
the business community: investors are hitting the brakes waiting for a
quickly changing regulatory landscape to crystallise.
“Ask
anybody in this room. Nobody has a clue on the new investment rules,”
one US investor commented on the sidelines of a Myanmar business forum
in London in November 2016.
The waiting game
A
new investment law approved in October 2016 is supposed to make it
easier for local and international investors to develop projects –
Myanmar is behind only the Philippines and China for barriers to foreign
investment, according to OECD figures – but its implementation is still
in progress. That leaves investors in an uncomfortable limbo between
the accommodating incentives introduced by the civilian government
between 2011 and 2016, which are being phased out, and new investment
rules, the details of which have yet to be finalised.
Besides,
a number of other antiquated laws and regulations are in being updated,
including a companies’ law that dates back to 1914. Long thought
necessary, this regulatory overhaul has nevertheless cre
ated doubt and
uncertainty, at least in the short term, making investors cautious.
“Investment
is a bit slow this year because investors are in a wait-and-see mode,”
says U Aung Naing Oo, secretary of the Myanmar Investment Commission
(MIC). “This is a very new government and they want to understand more
about its economic policies.”
A level playing field?
The
new investment law distinguishes between ‘permitted’ and ‘approved’
business, granting the former preferential treatment to bypass an MIC
approval as opposed to the previous legislative framework, where any
investment had to be greenlit by the MIC. Although it keeps in place
some privileges for local businesses, the new law also ensures more of a
level playing field for local and foreign businesses.
At
the same time, it turns the page on the previous, automatic five-year
tax break regime for approved investment to introduce more calibrated
tax incentives targeting specific sectors, first and foremost
labour-intensive manufacturing and infrastructure, as well as
geographies. However, the exact detail of the new tax break regime will
be known only once the full set of implementation rules are ready,
supposedly by the end of the fiscal year in March 2017, which remains a
cause of uncertainty among investors.
Another
major uncertainty concerns the list of sectors that will be partially or
fully restricted to foreign investment, with government authorities
generally refraining from giving insights on this until the new rules
are finalised.
Besides, the government is working
on a new companies law that should further liberalise the economy by,
among other things, opening up the local stock market to foreign
investment and introducing a 35% foreign ownership threshold defining
what constitutes a foreign invested company subject to
foreign-investment regulations. Today, any foreign capital
participation, no matter how little, is defined as a foreign investment
company. The bill is expected to be discussed in the first half of
2017.
In the right direction
“The
new investment law is a great step forward,” says Giulia Zino, senior
consultant at global risk consultancy firm Control Risks. “The companies
law may be even more important, as the current version traces back to
1914. This alone shows how challenging the regulatory environment is.
There are elements introduced in the past five years of civilian rule
[2011-2016], others by the military junta [1961 to 2011], others during
the British period [1824 to 1948]. All of these reforms have been
streamlined by the government, but we have to be realistic on how long
it will take to implement all this evenly across the country."
While
waiting for new rules, foreign investment is tailing off. Approved FDI
amounted to $3.5bn in the first eight months of the fiscal year from
April 2016 to December, down from $4.9bn in the same period of 2015,
according to figures from the country's Directorate of Investment and
Company Administration. If investment into manufacturing and transport
and communications infrastructure showed resilience, growing by 22% and
2%, respectively, from a year earlier, regulatory uncertainty hampered
investment in the power sector (-16.4% year on year) and completely
dried up investment in oil and gas, from $2bn a year earlier. The two
sectors combined account for almost two-thirds of the accumulated stock
of foreign investment at the end of 2016.
At the
same time, the end of trade sanctions sealed by the US in October will
take time to produce tangible benefits because local financial
institutions, which were heavily affected by sanctions and now represent
the link between Myanmar and the global market, have a long way to go
to upgrade their operations after years of isolation.
“For
the financial sector as a whole, we have positive perspective, but we
don’t see tremendous improvement at this moment,” says Win Lwin,
managing director of Yangon-based KBZ Bank. “In the financial industry,
everything is compliance. We are not used to it. Banks need much more
compliance enforcement, they need to hire more professionals, set up
financial crime units, transnational monitoring. Today we are still
lacking all these things we were not familiar with before.”
Progress report
The
volatility in the foreign exchange market is not helping either, with
the kyat depreciating by 12.7% against the US dollar since the new
government came to power, and foreign reserves are reportedly running
low because of growing current account and fiscal deficits.
Despite
these headaches, international observers remain confident the ongoing
reforms will eventually gain traction in the medium term and add new
momentum to the country’s development. Economic growth will remain at
about 7% in 2017-18, above a regional average of about 6.2%, shored up
by “a pick-up in foreign and domestic private investment”, the World
Bank highlighted in its latest Global Economic Prospect in January.
“Myanmar
is a country with so many challenges, but at the same time there is so
much progress that has been done in the past five years, and that
continues to be done,” says Control Risks’ Ms Zino.
“The
challenge [for investors] is to stay on top of regulations that are
changing all the time, some of which have got big gaps, loopholes, but
also relate to everything that is operational, dealing with the
infrastructure network, the banking sector, and so on. No matter how
fast the progress is coming, it’s still going to take years [to fully
materialise]. Overall it’s very promising, but it’s a difficult market,
not for everybody.”
Ref:http://www.fdiintelligence.com/Locations/Asia-Pacific/Myanmar/Myanmar-s-FDI-boom-put-on-hold
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