One Hundred Years of Solitude: how to earn on investment fever in Myanmar

Tuesday, 06 January 2015 11:44

Myanmar was captured by investment fever. How to earn in the country where there isn't still enough communication and ATMs?

Wide and desert prospectuses of the city of Naypyidaw, the capital built by the leadership of Myanmar secretly from the most of fellow citizens has never seen such flow of foreigners from all countries of the world before. The disturbed capital for some days turned into the center of world economic thought: In the capital of Myanmar so-called Asian Davos unexpectedly decided to hold the world economic forum. Closed country for decades became the center of world business tourism for some days in June. 

Myanmar (till 1989 Burma), a small country in Southeast Asia, opened for investors after century of economic stagnation less than two years ago. Restrictions on trade relations with Myanmar and the USA and the European Union were removed only in 2012. Sanctions still work for some high-ranking members of junta and businessmen approached to them, however their list is gradually reduced, local elite is ready to make concessions. The Iron Curtain with the population of 64 million people fell down in the country, the new management headed for reforms, and the largest corporations of the world directed to Myanmar. Now analysts of McKinsey in the special report devoted to Myanmar call it the high-growth country in the region. According to the forecast of the company, the volume of investment into national economy in the next 15 years will exceed $500 billion. By 2030 its size will grow more than in four times, to $200 billion, at annual rates on average of 8%. Myanmar — the last chance for the Russian investors to earn on growth in Southeast Asia fully, the experts interrogated by Forbes consider. 

How is it better to do it?

Low start

The investors planning to invest money in economy of Myanmar have an indisputable advantage: the country is at a low level economic development. To the middle of the last century Myanmar where most of the population professes the Buddhism, was an English colony, in 1948 found independence and endured civil war, but for many years while one military regime replaced another, it was in the international isolation. For 1900-1990 GDP of Myanmar almost didn't change, and in the world it grew in four times. Myanmar remains the poorest country as a part of Association of the states of Southeast Asia (ASEAN), GDP makes $834, it is 70% lower than on average on the region. The largest megalopolis and the former capital of Myanmar — Yangon, all business activity is concentrated exactly here.

Two thirds of the population are occupied in agriculture, the average level of education — four classes. In the country there are no roads, there are continuous interruptions in electricity. By the beginning of 2013, according to Asian Development Bank, level of penetration of mobile communication made 9%, stationary phones — 1,3%, the Internet — 0,03%. Networks of the international telecom operators in Myanmar hasn’t worked until recently.

Investments into so-called frontier markets — the markets having considerable obstacles for investors — a risky venture. In Myanmar investment fever began, but it will hardly bring success. Now private investors have some opportunities: direct investments, acquisition of real estate and an investment in the funds focused on the local markets.

Local currency — kyat, the rate is floating, at the beginning of July dollar cost about 1000 kyats, thus the population willingly accepts dollars. Inflation is low — 3,2%, a refinancing rate — 10% per annum. Still a year ago in the country it was impossible to pay off with the cash card. And only quite recently in the largest cities there were one and a half hundred ATMs. This year Visa and MasterCard will only begin release of debit cards for calculations in local currency especially for visitors to Myanmar. For conducting commercial activity it is necessary to have the account in one of four state or 19 private banks. According to PwC, 11 from them have work permits with currency, but in reality such services are rendered only by four banks.

Pioneers

The Russian investors who are looking narrowly at Myanmar have an opportunity to go on the blazed road, after all our companies have an experience in this country. However, this experience is not always successful, and, strangely enough, so far affairs go better at private companies, except for business traffic in arms. After all Russia has never supported economic sanctions against Myanmar and sells it Mi-35 helicopters and fighters MiG-29, and also artillery complexes and air defense systems. Except for military deliveries, economic presence of Russian business in Myanmar is close to zero, the plenipotentiary envoy of the Russian Ministry of Foreign Affairs Georgy Toloraya notes.

"Itera" and "Zarubezhneft" in 2006 paid for investigation of the shelf, but, having estimated complexity of projects, decided not to risk. Other state enterprise, "Tyazhpromeksport", lost in Myanmar one hundred millions euros. In 2004 "Tyazhpromeksport" undertook to construct steel plant worth more than €143 million in six years, but to the appointed term instead of cast iron the loss in €93,5 million poured out. In 2010 the Rostec state corporation took the enterprise under the control, and his head Nikolai Ulyanov retired.

The representative of "Rostec" explained losses with an inefficiency of former management. The price of the contract was underestimated at least by €22 million, subsequently its cost grew even more as the seismic indicators of the area provided by the local partner were doubtful. "Rostec" prolonged the contract with Myanmar until the end of 2013, assumed losses and obligations, and also provided additional financing.

One more Russian investor mastering Myanmar — the owner of JSC Oil Company "Nobel Oil" Grigory Gurevich. In 2007 he registered the local company and in the 2008 on the tender received two remote oil overland sites — the block A and the B-1 block in the North of the country.   Photo

To reach them you should go down the river Irrawaddy which flows from the Himalayas and crosses all country. Freight with the drilling rig is delivered in a year: during a season of rains, from May to November, it goes on the barge, then it is necessary to wait when the river shoals, and to carry it by land. Pioneers reached objects on elephants, now paved a dirt road. By the end of the year the company expects to declare opening of a field on the B-1 block. If industrial reserves of oil are confirmed, Gurevich's expenses will be considered in the production sharing agreement.

On both blocks "Nobel Oil" has already spent $33 million, cumulative expenses, according to Gurevich, will make $100 million. Last year the company took still the third block E in the central part of the country (expense to $60 million). In August — the next tender, "Nobel Oil" has already placed the order. The plan of works of "Nobel Oil" coordinates with authorized state company Myanmar Oil and Gas Enterprise (MOGE) which depending on results can enter into the capital of subsidiary of the Russian oil industry workers from shares of 15-25%. After the beginning of production the state will levy a tax in the form of 40–60% of the extracted oil, the rest will be divided by shareholders.

All preliminary works are conducted with the local partner who can also apply for 5–10% of the company. "Nobel Oil" partner in Myanmar — Htoo Group belonging to the local oligarch Tya Sze, close to the former military dictator Than Shwe. Sanctions of the USA work for both. Htoo Group include air carrier, civil engineering firm, hotels, and also the Myanmar Avia Export company delivering Russian army equipment to aviation.

There’s also an example of unsuccessful Russian investments into oil branch of Myanmar. In 2007 the Singapore company Silver Wave Sputnik Petroleum started working at the North of the country. Formally Sputnik was the project of the Republic of Kalmykia, but her former president Kirsan Ilyumzhinov specified in conversation with Forbes that he personally invested some million dollars.

Myanmar was captured by investment fever. How to earn in the country where still there isn't enough communication and ATMs?

The company began drilling, but didn't find oil, and then Ilyumzhinov lost interest. The authorities of Myanmar stopped cooperation ahead of schedule. Ilyumzhinov regrets for the hasty decision and doesn't exclude that in the future he will submit the application for the tender.

And Gurevich meanwhile dreams of creation together of the organization for involvement of investors to Myanmar with the Russian Embassy and wants to bring the Bolshoi Theater on a tour.

Big prospects

Myanmar — the last chance for the Russian investors to earn fully on growth in Southeast Asia, the partner of the Eurasia Capital Partners company Sergey Meng considers. "We missed discovery of Vietnam, Thailand, Malaysia — he lists. — The Russian business is still presented in Myanmar very poorly that is strange, after all the local embassy very much willingly helps businessmen, there is a good opportunity to make relationship better.

Some Russian investors are already ready to use this chance. Ilyumzhinov plans to submit the application for obtaining frequencies of LTE and construction of a communication network of the fourth generation. The founder of the Antares Company Evgeny Roytman with whom he already keeps similar projects in Vietnam and Cambodia can become his partner, according to him. The financial consultant of the project — the British Ashmore Group, at the first stage of investment will make $150 million. Ilyumzhinov plans to hold negotiations with the authorities of Myanmar in August. And, apparently, he will have more than serious competitors.

While mobile communication works with interruptions in the country, the international roaming is practically not present. The national network of the standard 3G has to appear only by 2016 by efforts of the Telenor company which won the tender.

At the end of June the power of Myanmar played the first two private licenses for construction of a national network and its operation within 15 years. In a short list from 91 applicants only nine remained, except Telenor the license was obtained by Qatar Ooredoo. They managed to bypass such giant as France Telecom, and alliance of the global investor George Soros with the Asian developer of Yoma Strategic Holdings (YSH).  

What else sectors of economy look prospectively? According to McKinsey, two-digit rates of average annual growth in 2010-2030 will be shown by branch of telecommunications, financial services (on 23%), tourism (17%), and manufacturing industry (10%). Eurasia Capital Partners plans to spend this year for investments into service companies up to $30 million. In particular, it is call center and the educational center for training of IT specialists.

What’s with real estate? The prices on square meters instantly flew up in response to the growing investment demand, rental rates were made even to the level of Singapore. Last year according to the Silkroad Yangon Property Index residential real estate grew from $657 to $966 for sq.m. Analysts of the Silkroad Company expect that in the closest five years the price can treble.

The manager of the international consulting company Ekaterina Alexandrova bought in 2012 the apartment of 200 sq.m in one of condominiums of Yangon for $380 000. The property is issued on the local company as nonresidents can't own directly real estate in Myanmar. The house is located in the territory of golf club, and Alexandrova expects to earn it if not on growth of cost, then on rent. The daughter of the Russian diplomat who was born in Pakistan left Russia 20 years ago to begin career in Europe, but the love to Asia prevailed, and now she works in Hong Kong.  

Alexander Shumkin, the former customs officer, lives in Yangon for 12 years, got several businesses, for example, sold rubies — the country has the largest fields of these stones demanded by buyers in Turkey, the Emirates, Iran. When demand for real estate grew, he began to put money in construction of housing of economy class. The four-storeyed house on eight apartments on 30 sq.m worth $30 000-40 000 costs to Shumkin approximately $200 000.

How to start business

To the investor not familiar with local realities, it will be difficult without investment consultant. There are some investment companies working with clients in Myanmar — Bagan Capital, Leopard Capital, TLG Capital, Charlemagne Capital, Cube Capital and Eurasia Capital Partners. In consulting — West Indochina, Intercorp Asia and Thura Swiss.         Photo

What to begin with? Myanmar concluded agreements on avoidance of the double taxation by about ten countries where investors can register the holding company. In some cases taxes in these jurisdictions will be lower, for example in Singapore income tax makes 17% against 25% in Myanmar, a tax on a capital gain according to the bilateral agreement — 10% against 40%. KPMG recommends registering holding in Singapore, Malaysia or Thailand, which will found firm in Myanmar. For opening of the account of the legal person the nonresident should bring the recommendation of the Investment commission of Myanmar (MIC), constituent documents of the company, the passport of the founder in local bank. The minimum sum of the account — $1000. Not long ago in the country the cash currency was replaced officially by the currency certificates attached to the dollar rate (FEC), but since July 1 they are cancelled. In the spring operations with cash currency in the territory of Myanmar for legal persons are increased to $10 000 a day, earlier banks gave out such sum twice a week.  

Each cross-border operation requires permission of Currency board of the Central Bank of Myanmar (FEMB). Such permission will be required on a withdrawal of capital: the investor in five years after payment of taxes can take out money from the country in the currency they were invested. Also "currency" permission is necessary for payment of a foreign debt and percent on it.

It is possible to invest in the growing economy of Myanmar, simply taking shares of the companies which business is connected with the local markets. Shares of the company of YSH having a big developer portfolio in Myanmar, at the exchange of Singapore within a year since July 2012 grew by 2,4 times. Own exchange in Myanmar isn't present, it can appear only by 2015.

For financial investors there is an opportunity to participate in growth of economy through funds. The Silk Road Finance investment company in the fall of 2012 started Myanmar Human Capital Fund ($25 million) focused on projects in the sphere of information technologies, educations and medicine. Dragon Capital has a joint regional fund including in a portfolio assets in Myanmar and Frontier Investment & Development Partners ($250 million).

Cube Capital has one more regional fund, it is focused on the markets of real estate, but the company can buy and other assets in Myanmar, Mongolia and Vietnam ($200 million). The investment horizon of Cube Asia Frontier Fund— three-five years, the minimum sum of investments — $1 million, a reference point of internal standard of profitability — from 25%.

What about risks? “I believe, the Russian investors are well familiar with these risks — the partner of Cube Capital Thomas Holland says. — They include possibility of fraud, non-execution of the made decisions, problems with obtaining permissions, the legislation and regulation, capital control, there’re also system political and other problems.”

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