Myanmar Outlook Report

Transcription

1 Myanmar Outlook Report November 2014 Some fast facts: General information 2013 Capital Population Nay Pyi Taw 51 mn GDP growth rate 7.5% CPI (Jun 2014) 5.69% Import Export GDP Growth (%) Key exports Gas Garment Teak log Matpe USD13.76 bn USD11.20 bn East Asia & Pacific (Developing only) Myanmar Vietnam f 2015f 2016f Key imports Vehicles Refined mineral oil Base metals Electrical machinery Highlights The golden land is blessed with abundant natural resources, such as gas, oil, copper, jades, and wood. Dramatic changes in Myanmar s political system since early 2010, including shifting from military government to civil rule, brought about the lifting of embargos by several of the world s major economies including the United States, European Union, Australia, and Canada; and created a huge inflow of FDI. Myanmar s GDP growth rate is estimated increase to 7.8 percent during the period of 2014 to 2016, from 5.9 percent in 2012, driven mainly by rising investment. Myanmar kyats and inflation have been fairly stable over the past 12 months. Total trade has doubled in the past five years, reaching USD24.96 billion last year, from USD11.76 billion in 2009, with ASEAN countries being the biggest trading partners. Bilateral trade between Vietnam and Myanmar rose from USD9.31 million in 2000 to USD million in the first nine months of Vietnam was the second largest investor in Myanmar (after China) from 2012 to 2013, and ranked the fifth in the previous financial year. There are numerous investment opportunities for foreign investors. The most attractive sectors include energy, hydropower, oil and gas, mining, agriculture-fishery, real estate and telecom. Resources Natural gas Oil Forest Rubies 7.8 trillion cubic feet 3.2 billion barrels 50% of land 90% of world s reserves Myanmar authorities have put intensive effort into the establishment of the Yangon Stock Exchange (YSE), which is scheduled to open in October However, foreign investors will not be allowed to invest in the YSE at least for the time being. * Please see the important disclosure at the end of this report 1

2 Contents INTRODUCTION... 3 MYANMAR OVERVIEW... 3 The golden land s overview... 3 Turning over a new leaf... 3 Vietnam Myanmar bilateral relations... 3 Vietnam Myanmar bilateral trade... 4 Investments from Vietnam... 5 ECONOMIC GROWTH... 6 GDP... 6 Trade... 7 Myanmar citizens investment... 8 Foreign Direct Investment... 9 Government expenditure MACRO ECONOMIC INDICATORS Stable currency Inflation Interest rates SOME POTENTIAL SECTORS Hydro-power Oil and gas Mining Agriculture - Fishery Real estate Telecom INVESTMENT PROCEDURES General investment incentives Capital requirement and investment procedure RISKS AND CHALLENGES STOCK MARKET TARGET FOR OCTOBER CONTACT INFORMATION

3 INTRODUCTION Given its abundant and untapped natural resources, Myanmar is considered to be the last golden land of Asia. After many years of isolation, it has now opened to the world. The country has been the object of unprecedented interest in various sectors from foreign investors. And we expect it will shine again soon as it did in 1950s 1960s. MYANMAR OVERVIEW The golden land s overview Myanmar covers an area of square kilometers the second largest country in ASEAN. The country shares long borders with China, Thailand, India, Bangladesh and Laos. It has a population of 51.4 million people, just ahead of South Korea s 50.4 million. The golden land is blessed with abundant natural resources, such as gas, oil, coppers, jade, several wood species and many other resources. According to the newest report released by BP, there is 10 trillion cubic feet (283 million cubic meters) of proven natural gas reserves as of the end of ADB s report also shows that the country s oil reserve is estimated at 3.2 billion barrels. Forests cover almost 50 percent of Myanmar s total land. Additionally, the country is very rich in precious stones such as, jade, rubies, sapphires, and limestone and other minerals. Turning over a new leaf In 2010 and 2011, the world witnessed many astonishing political changes in the country. Following Myanmar s broad array of political reforms, the United States started to ease trade sanctions on Myanmar in July 2012; Japan wrote-off of USD3.7 billion of debt for Myanmar the same year; and the European Union, Australia, and Canada lifted most sanctions on Myanmar, except for the arms embargo. Vietnam Myanmar bilateral relations Vietnam developed strong bilateral relations with Myanmar very early. After its independence, Myanmar was an avid supporter of Vietnam during the wars against the French and the American invasions. In 1975, the two countries established bilateral relations at the ambassadorial level. As an ASEAN member, Vietnam played an active role in encouraging and assisting Myanmar to join ASEAN. In 1997, Myanmar officially became the eighth member of ASEAN. In 2010, Vietnam, while in the rotating presidency position in ASEAN, agreed with the results of the Myanmar election, as well as helping Myanmar gain support of the international community. 3

4 Vietnam Myanmar bilateral trade Bilateral trade between Vietnam and Myanmar started to increase in 2000, with total trade recorded at USD9.31 million. Ten years later, the trade value between the two countries soared 10 fold to USD98.91 million and rocketed to USD million in This year it is even better and the two countries bilateral trade posted at USD million in the first nine months, in which Vietnam s import value from Myanmar was USD114 million and Vietnam s export value to Myanmar surpassed FY2013, reaching USD250 million. Vietnam Myanmar bilateral Trade (USD mn) Vietnam exports to Myanmar Vietnam imports from Myanmar Source: General Custom Office, VPBS collected Vietnam s major export products to Myanmar have been steel and steel products (recorded at USD56.2 million in 2013, up 134 percent from 2012), machinery and spare parts (+ 86 percent), plastic products ( percent), textiles (+133 percent) and vehicles and spare parts (+63.1 percent). Meanwhile, Vietnam s major imported products from Myanmar were wood and wood products (posted at USD65.9 million, up 30.7 percent), agricultural products ( percent) such as mung beans, black beans, and soybeans. Vietnam s exported products to Myanmar 2013 (USD Mn) Vietnam s imported products from Myanmar 2013 (USD Mn) Steel and steel products 49.80% USD227.8 million 24.66% 8.20% 5.99% 5.78% Machinery and spare parts Plastic and plastic products Textile Vehicle and spare parts 28.79% 3.96% 13.84% USD123.5 million 53.41% Wood and Wood products Vegetable Seafood Others 5.57% Others Source: General Custom Office of Vietnam Source: General Custom Office of Vietnam 4

5 Since 2001, Vietnam s Ministry of Trade has cooperated with the Embassy of Vietnam in Myanmar and the Myanmar Ministry of Commerce to hold several international trade fairs at Yangon and Hanoi. The trade fairs aim to create opportunities for enterprises from the two countries to learn, communicate and strengthen business relationships. Vietnam and Myanmar have successfully organized annual trade fairs since In addition, Ho Chi Minh City has annually launched a fair for trade and tourism at Yangon in every May after the two cities established sister-city ties in March Investments from Vietnam Total investment capital from Vietnam to Myanmar has increased significantly since Vietnam was the second biggest investor in Myanmar (after China) in , and ranked fifth in the previous financial year. Seven Vietnamese investment projects were approved in Myanmar with total register capital of nearly USD600 million. Notably, HAGL s multi-purpose complex, which is located in a superior location in Yangon, is the biggest Vietnamese project in Myanmar with capital of USD440 million. The two office buildings (twenty-two floors) and a shopping mall (five floors), which belong to phase one of this project, are expected to be completed in the first quarter SIMCO Song Da Corporation s marble mining project at Nay Pu Taung in Mandalay has achieved good results. PetroVietnam Exploration Production Corporation (PVEP) s oil and gas exploration joint venture project also had a successful reservoir test with gas discovery. Besides approval investment projects, there are about 60 Vietnamese businesses that have been licensed to operate in Myanmar, including many of Vietnam s giants such as Vietnam Airlines, Viettel and Viglacera. HAGL Myanmar centre HAGL Myanmar centre Source: VPBS collected Source: VPBS 5

6 Vietnam s notable investment projects in Myanmar Name of project Total capital (USD mn) HAG Myanmar Centre Project 440 SIMCO Marble Mining Project 18 PVEP Gas Exploration 136 Project description Trade centre, hotel and service office complex in Yangon Marble mining plant at Nay Pu Taung in Mandalay A gas exploration project at offshore block M2 Moattham Source: VPBS collected ECONOMIC GROWTH GDP After World War II, Myanmar was one of the wealthiest countries in Asia and the world s largest rice exporter before sinking to among the region s poorest countries with GDP per capital of around USD869 as of Myanmar s rice export volume currently accounts for a marginal share of the world market. However, the lackluster economy has seen positive changes following a series of reforms in the country since According to the World Bank, Myanmar s economy grew 7.5 percent in 2013, a great improvement from the growth rate level of 5.9 percent in 2011, surpassing the average growth rate of East Asia and Pacific (limited to developing countries). The country s economy is estimated to growth at 7.8 percent during the period of 2014 to 2016, driven mainly by rising investment. GDP Growth (% y-o-y) East Asia & Pacific (Developing only) Myanmar Vietnam 10.5 Trade (USD mn) Import Export f 2015f 2016f Source: World Bank Source: VPBS collected 6

7 Trade Total trade turnover has doubled in the past five years, reaching USD24.96 billion last year, from USD11.76 billion in Myanmar had recorded a trade surplus during the period of 2002 to The rising demand for input materials and equipment for production caused a sharp increase in import value since 2010, resulting in a trade deficit in the past two years and it is expected to continue to widen in the coming years. Because of the sanctions imposed by the United States, the European Union, Australia and Canada, Myanmar has not enjoyed good trade relations with western nations. Myanmar s major trading partners are ASEAN members and its neighboring countries such as, China, India, Thailand and Singapore. Import turnover soared sharply to USD13.76 billion last year, up 51.7 percent from USD9.07 billion in The country s major imported products include machinery, non-electric and transport equipment, refined mineral oil and base metals and manufactures. The imported value of these products surged considerably from 45 percent to 57 percent last year from a year earlier and accounted for almost 60 percent of total import turnover in Many other products did not comprise a large proportion of the pie, but the imported value of these products spiked last year, including electrical machinery and apparatus, chemical elements and compounds, garment and fabrics, edible vegetable oil, plastic and cement. China is Myanmar s largest import market in 2012 and 2013, with total value of USD2.7 billion and USD 4.1 billion, respectively. China was followed by Singapore, Japan, Thailand and South Korea. Key import items (%) Major markets (USD mn) 16.72% Refined Mineral Oil (Apr - Jun) 41.94% USD13.8 billion 30.13% 11.21% Base metals and manufactures Machinery non-electric and transport equipment Others China Singapore Japan Thailand Korea others Source: DICA Source: DICA Myanmar s total export turnover reached USD11.2 billion in 2013, up almost 25 percent from Gas has been the top export product of Myanmar, accounting for 40.8 percent and 29.4 percent of total export turnover in 2012 and 2013, respectively. Jade and garment exports contributed nine and eight percent of total export value last year. Other Myanmar top export products are teak logs and agricultural products such as rice and matpe beans. 7

8 Key exported items (%) 40.5% 4.1% USD11.2 billion 29.4% 3.4% 5.7% 7.9% 9.0% Rice Matpe Teak log Garment Jade Gas Others Major markets (USD mn) (Apr - Jun) Thailand China India Singapore Japan Others Source: DICA Source: DICA Thailand and China are the largest export markets of Myanmar with total export value reaching USD4.3 billion and USD2.9 billion last year, accounting for 38.4 percent and 26 percent of Myanmar s total export value in India, Singapore and Japan are also major consumers of Myanmar s products. Myanmar citizens investment According to Myanmar s Ministry of National Planning and Economic Development, 984 citizen enterprises were sanctioned with total investment of MMK4,566 billion (USD4.7 billion) since the release of the Myanmar Citizens Investment Law 1994 through June Manufacturing, construction, hotel and tourism are the leading sectors among 11 sectors of the economy, accounting for percent, percent and percent of the total permitted amount of Myanmar citizens investment. Last year, domestic investment in manufacturing and hotel and tourism continued to soar sharply, reaching USD333.7 million and USD296.7 million, respectively. Notably, Myanmar citizens poured USD million into the power sector, much higher compared to the negligible amount of USD6.38 million invested in Myanmar citizens investments since % Manufacturing 41.27% Construction USD4.7 bn Hotel & Tourism 16.57% Others 14.61% Major investment sectors (USD mn) Source: DICA Source: DICA 8

9 Foreign Direct Investment Since the foreign investment law which was released in 1988, through the end of June 2014, 36 countries have invested in Myanmar with a total cumulative capital inflow of USD billion, mainly in power (41.28 percent) and oil and gas (30.76 percent). Manufacturing, mining, hotel and tourism, transport and communication and real estate attracted about three percent to almost nine percent of the FDI. Foreign direct investment rocketed to USD20 billion in 2010, from more than USD300 million in The total pledges, which were received in 2010, are even higher than the cumulative FDI inflow into Myanmar before The inflows mainly came from China (USD8.27 billion), Hong Kong (USD5.8 billion) Thailand (USD2.95 billion) and South Korea (USD2.68 billion). Cumulative Foreign Direct Investment by Sector (As at the end of June 2014) Sector Permitted Enterprises/projects Total investment (USD mn) % Power 7 19, Oil and Gas , Manufacturing 362 4, Mining 69 2, Hotel and Tourism 55 1, Transport & Communication 24 1, Real Estate 23 1, Livestock & Fisheries Agriculture Industrial Estate Construction Other Services Total , Source: DICA, VPBS collected Even though the FDI pledges declined considerably after 2010, Myanmar still remained an attractive investment destination thanks to the economic reforms and the removal of western sanctions. Last year, FDI was recorded at USD4.1 billion in 2013, with the capital flowing strongly into manufacturing, transportation, communication, real estate and hotel and tourism. The inflows were led by Singapore, which contributed 57 percent of the total capital inflows last year. It was followed by South Korea, Thailand, the UK and Vietnam. The Myanmar Investment Commission had previously estimated that FDI would reach USD4 billion to USD5 billion in the fiscal year. However, the country s capital inflows have surpassed USD4 billion in the first half of the financial year thanks to the telecom sector, which contributed around 20 percent of the total inflow. The surge in the telecom sector was mainly thanks to the two telecom companies: Qatar s Ooredoo and Norway s Telenor, which were awarded licenses to operate in Myanmar last year. 9

10 FDI by sector (USD mn) FDI by country (%) % 15.61% 15.51% USD 4.1 billion 56.98% Singapore South Korea Thailand Others Source: DICA Source: DICA FDI inflows are expected to speed up further as foreign investors are now permitted in some other major sectors such as, telecom and banking and full foreign ownership is allowed in mining, construction, jewelry, and utilities. However, the country s ability to absorb these capital inflows is still dubious as challenges such as unskilled workforce and infrastructure require a certain period of time to improve. Government expenditure Myanmar s government has increased its spending for growth and development recently. The government s total expenditure soared up significantly to 29.2 percent of the GDP in 2013, which is even higher than that of other countries in the region, from the level of 18.8 percent in In 2011, Myanmar s government allocated 31 percent of the nation s budget to infrastructure, while it spent only 1.1 percent and 3.7 percent of its budget on healthcare and education, respectively. Even so, these figures were lifted considerably to 6.5 percent and 11.8 percent last year and these are still the lowest ratios in the education sector and the third lowest ratio in the healthcare sector among ASEAN nations. Government expenditure to GDP (%) Country FY2010 FY2011 FY2012 FY2013 Myanmar Cambodia Thailand Malaysia Vietnam Myanmar s Government expenditure by sector 2011 (%) Health Education Agriculture Defense Infrastructure Others Source: ADB, VPBS collected Source: ADB 10

11 04/12 06/12 08/12 10/12 12/12 02/13 04/13 06/13 08/13 10/13 12/13 02/14 04/14 06/14 08/14 MACRO ECONOMIC INDICATORS Stable currency Before April 2012, Myanmar s currency the kyat (MMK) fluctuated at around 6.4 kyats per USD. However, the exchange rate in the black market varied from 800 kyats to above 1,300 kyats per USD. On April 2, 2012, the Central Bank of Myanmar announced it would implement a managed float for the kyat, setting an initial rate at 818 MMK/USD. The kyat then continued to depreciate to 970 MMK/USD at the end of July 2013 due to extensive import expansion and slower export growth. The MMK has remained fairly stable around MMK/USD since then. As the demand for imported machinery and input materials for manufacturing and infrastructure projects have been increasing, the depreciation of the kyat ushered in strong negative effects. However, the float of the currency made the country more attractive for international investors and was supportive of exporters. MMK/USD exchange rate Foreign exchange reserve (USD mn) Source: Bloomberg Source: ADB Inflation Inflation was one of the serious problems in Myanmar in the past. The country had experienced running and hyper-inflation in the 1990s and 2000s. This was mainly caused by the printing of money by the Central Bank of Myanmar to finance budget shortfalls and sharp rises in public sector wages and fuel prices. Since 2009, inflation has been controlled below nine percent and it has been fairly stable at around six percent in the last twelve months. Even though the fast acceleration of the economy had caused inflation under high pressure, international organizations such as IMF and ADB still projected this year s inflation to continue remaining under control at around 6 percent. 11

12 Inflation (%) Lending interest rate (%) Interest rates Source: ADB Source: ADB Interest rates declined sharply to 13 percent in 2013 from 17 percent posted in The Central Bank of Myanmar put a limit on commercial bank loans in the range of 10 percent and 13 percent for floor and ceiling rates, respectively. SOME POTENTIAL SECTORS As Myanmar opens up to the world and sanctions are lifted, there are massive investment opportunities for foreign investors in almost all sectors (except for those on the prohibited list). We believe the following sectors in particular are likely to be more attractive to investors compared with the others: Energy Myanmar s energy sector has been the most attractive sector for international investors, accounting for percent of the total cumulative FDI inflows through the end of June 2014, in which hydropower attracted USD19.3 billion and oil and gas received USD14.4 billion. Hydro-power Currently, around 70 percent of Myanmar s population has no access to electricity, the highest rate among ASEAN countries. In rural areas the rate soars to more than 90 percent. Yangon and other major cities also experience rolling power cuts. Many enterprises have to use expensive onsite electric power generators and manufacturers cannot attain their maximum capacity. Power shortage is one of the main concerns in Myanmar as it can limit the expansion of the economy. Therefore, the power sector will remain the top priority investment for the government (the government plans to increase power generation capacity to 20,000 MW by 2030). We believe the power sector, especially hydropower, will continue attracting investors thanks to the following reasons: - Myanmar has huge hydropower potential of more than 100,000 MW, which mostly come from the country s four main rivers - Ayeyarwaddy, Chindwin, 12

13 Thanlwin and Sittaung, according to the Asia Development Bank. - The current installed power capacity of the country is only around 3,800 MW (versus 26,500 MW in Vietnam), the available capacity is much lower than the installed capacity due to inadequate transmission and distribution infrastructure, and part of that is exported. The current capacity is struggling to meet the rising demand. - Demand is expected to grow significantly as the economic structure is moving from agriculture to industry and services percent of Myanmar s electricity mainly come from hydropower (versus 10 percent in South East Asia) and the remaining comes from gas-fired power and coal-fired power. Along with expanding fossil-fuel power, the government will continue to focus on hydropower (small size facilities that have less impact on the environment). - Hydropower has no fuel cost, resulting in low operating costs. Entry conditions: Foreign investment in hydropower and coal power plants is possible only as a joint venture with the Government or on a BOT basis. Challenges: Besides some regular challenges for investing in hydropower plants such as high capital requirement and subject to seasonal change factors, Myanmar s low electricity price is one of the obstacles preventing investors from investing in the country s power sector. Night-time satellite image Power capacity 2013 (MW) 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, Demand Available in Dry Availabe in wet Installed capacity Source: McKinsey Global Institute Source: MEPE Despite many foreign companies already investing in this sector and many other are on the waiting list, the increasing domestic demand and strong demand for power from neighboring countries such as Thailand and China will continue to attract foreign investors investing in Myanmar s power sector. 13

14 Oil and gas Beside hydropower, Myanmar s rich natural gas and oil reserves also attract the attention of international investors. This sector is also Myanmar s leading exporter, accounting for around 30 to 40 percent of total export revenue in the previous two years. According to the ADB, Myanmar s oil reserve is estimated at 3.2 billion barrels, which is of a relevant size among ASEAN countries. BP Statistical Review 2014 estimates that Myanmar s proven natural gas reserves as of the end of 2013 are at 10 trillion cubic feet (approximately 0.3 trillion cubic meters), accounting for around 2 percent and 0.15 percent of total proven natural gas reserve in Asia Pacific and the World, respectively. Currently, the country ranks 46 in the world in terms of proven gas reserves. The country s proven oil and gas reserves are not significant on a global scale. However, the country s natural gas oil reserve could be much higher as there are many areas have not been explored. Thus investors are interested in not only the proven reserves but also its huge unknown potential, which could be unearthed by advanced exploration. Oil and Gas reserves by selected countries Country Trillion cubic meters Gas reserve Oil reserve R/P ratio Billion barrels R/P ratio Brunei Myanmar Thailand Vietnam Malaysia Indonesia Total World Source: ADB, BP, VPBS collected Since October, 2013 there have been 16 onshore and 20 offshore (10 deep water and 10 shallow water) oil and gas blocks awarded to 46 international and local investors. The country plans to award another 15 blocks by the end of next year for foreign investors. Vietnamese company - PetroVietnam Exploration & Production (PVEP) entered Myanmar quite early, with a Production Sharing Contract for offshore block M2 Montana awarded on October After more than four and a half years, in June 2013, the company declared gas discovery from the first exploration well on this block. Entry conditions: In order to carry out exploration and production activities in Myanmar, companies need to sign a production sharing contract with Myanmar Oil and Gas Enterprise 14

15 (MOGE). Previously, foreign investors, who were interested in investing in the oil and gas sector could apply and negotiate directly with MOGE and MOE. However, onshore blocks and offshore blocks have been awarded through bidding systems since 2011 and 2013, respectively, for more transparency. Foreign investors are required to cooporate with local companies for all onshore and offshore shallow water blocks, but not for the deep water block. A royalty rate of 12.5 percent of available petroleum is applied for both onshore and offshore. After contractor s allowable cost recovery (50 to 60 percent), the MOGE s share of production will range from 60 to 90 percent depending on production rates and the well s depth. Mining Mining plays an important role in Myanmar s economy. Myanmar is the world s top producer of ruby, accounting for 90 percent of global production. Last year, jade export also ranked second in terms of value, accounting for nine percent of total export turnover. Besides a large endowment of precious and semi-precious stones (jade and gemstone), which are on the list of prohibited economic activities for foreign investors, Myanmar also has plentiful amounts of other mineral resources (copper, lead, ore, zinc and gold), presenting great opportunities for international investors. Entry conditions: Investors should take note, however, that mid-scale and small-scale production of minerals is still prohibited for foreign investors, while large scale production needs the approval from the Ministry of Mines. Size of Mineral reserves (million tons) Mineral Occurrences Proven Probable Potential Total Gemstones Limestone 3, , , ,818 Copper 1, , Lead Zinc Tin (ore) Gold Coal Source: ADB Agriculture - Fishery Myanmar s economy depends heavily on its agricultural sector, which accounted for 30 percent of GDP. Despite its poor equipment and low farming technology, the agricultural sector still achieved notable results. Rice exports were recorded at around 1.2 to 1.4 billion tons in the past two years. Other major crops such as beans, pulses, and maize contribute a large amount in total export value. Marine and inland fishery 15

16 production reached 4.72 million metric tons in 2012, which is equivalent to 82 percent of Vietnam s total fishery production during the same year. Agriculture has great potential for growth thanks to a favorable climate, abundant land and water resources. Cultivated land accounts for 12.8 million hectares, which has potential to grow by around 50 percent because another six million hectares of cultivable land is currently unused. Meanwhile, Myanmar s water supply per capital is nine times and five times higher than those of China and Vietnam, respectively. There are enormous opportunities in rubber, palm oil, baby corn, sugarcane and many others. Fishery is also seen as a potential segment given its coastline of almost 3,000 km, continental shelf of 230,000 square-meters and impressive inland waterways with a variety of nutrient and marine species, with many areas still not having been exploited. Given the favorable conditions and abundant resources, agriculture and fishery are increasingly attractive sectors for foreign investors. Entry conditions: Foreign investors can invest in international agricultural companies or Myanmar s domestic companies which are looking to expand or set up a new business. However, production and distribution of hybrid seeds are allowed only in the form of joint ventures with Myanmar s citizens. Risks and Challenges: - Land use is one of the issues that investors should take in to account when investing in the agricultural sector. There were numerous protests carried out by farmers who claimed their land was confiscated without compensation. - Another issue is its poor road system, resulting in expensive shipping costs (from rural areas to Yangon). Real estate Another promising sector that we would like to mention is real estate one of the top sectors drawing investor s attention. Myanmar s real estate prices have increased significantly since 2007 due to the reduction in property taxes, which were reduced to 15 percent, from 50 percent. Real estate prices have then skyrocketed since the reform in 2011 as it brought in massive FDI, which resulted in a strong demand for property. Land prices in Kyauktade township, the central downtown area of Yangon, were recorded to increase up to 1.5 million kyats per square foot (USD16,800/sqm). Meanwhile, those in Bahan township and Pyay Road were posted at around USD5,500/sqm to USD9,000/sqm before the Government put caps on property prices last month. Commercial leases in Yangon are now even comparable with other well-known expensive cities such as Singapore and are much more expensive compared to Ho Chi Minh city, even though Yangon s grade A offices quality are probably not commensurate with grade A international standards. According to Colliers International, office prices in Yangon are expected to increase by 25 percent in the 16

17 next two years. Hotel rates also soared in recent years. Sedona hotel increased its room rates to USD200/night in 2014, from USD50/night two years ago, thanks to rising demand from overseas visitors. According to the Ministry of Hotels and Tourism statistics, the total number of visitors reached two million in 2013, from one million in 2012 and is estimated to reach three million this year. The total number of hotel rooms is estimated to increase to 47,000 rooms this year, double from 24,000 rooms in 2012, but the current number of rooms does not seem sufficient to accommodate the rapidly growing number of visitors. Office lease (USD/month/sqm) Yangon 88 Singapore 73 Ho Chi Minh City 37 Hanoi Jakarta Bangkok 26 Kuala Lumpur Manila Entry conditions: Source: Collier International - Foreign investors are prohibited from owning land. However, they can get approval to lease land for up to 50 years and can extend the lease for 2 additional terms of 10 years each. - Investors can incorporate joint ventures with local shareholders, who contribute land rights and receives shares as a remuneration (at least 20 percent), to invest in condos and apartments, housing near industrial areas; commercial, low-cost housing and new townships. - The investment can be 100 percent foreign owned only if it is a three star rated (or above) hospitality project. - Foreign investors can invest in a construction project on a BOT basis and transfer it to the land owner (the Government) after 30 to 50 years. Demand for residential properties, offices, retail outlets and hotels is expected to spike upwards as FDIs will continue flooding in. Thus, the real estate sector will remain an attractive sector for investment. However, investors should be cautious as a real estate bubble may soon form and ultimately burst as we saw in Vietnam. 17

18 Telecom The telecom sector has changed rapidly since 2012, with SIM card prices dropping to around USD250, from around USD1,500 to USD3,000 in After the two telecommunication providers - Norway s Telenor and Qatar s Ooredoo - trumped nine other finalists (including Viettel) and scored exclusive licenses to operate in Myanmar last year, 1,500 kyat (USD1.5) SIM cards are now available in the country. According to data from ITU, as of the end of December 2013, Myanmar s internet penetration rate and mobile phone/telephone subscription rate are among the lowest in the world, posting at one percent penetration rate and around 13 percent for mobile phone subscription rate. These figures reveal substantial room for growth in the long term. Even though Telenor and Ooredoo were the winners in the bidding last year, there is a huge amount of other works that require the support from other telecom-related companies. These, in conjunction with the Government s will of increasing the mobile subscription rate, and internet perpetration rates to the level of neighboring countries, demonstrate there are numerous opportunities in Myanmar s telecom sector. Internet penetration rate (Dec 2013) Japan 86% South Korea 85% Brunei 75% Singapore 73% Malaysia 67% China 46% Vietnam 44% Philippines 41% Thailand 30% Indonesia 22% Laos 13% Cambodia 6% Myanmar 1% 0% 20% 40% 60% 80% Mobile phone and fixed telephone subscription (per 100 inhabitants - Dec 2013) Fixed telephone Mobile phone Singapore Malaysia Thailand Cambodia Vietnam Indonesia Japan Brunei South Korea Philippines China Laos Myanmar Entry conditions: Source: ITU Source: ITU There are no restrictions on foreign investment in the Foreign Investment Law for the telecommunications sector. However, the Government can impose additional restrictions and requirements. Challenges: Power shortages are one of the main barriers for telecom operators in Myanmar. In order to expand the network, there are a large amount of mobile towers that need to be built. Many of these might be built off electricity, requiring power generators. Other potential sectors The above sectors have received the most interest from international investors. But we evaluate the current landscape and note there are uncountable opportunities in many other sectors as well. The construction sector should be on the rise due to the 18

19 eager need for improving the country s poor infrastructure system. The manufacturing sector also has great prospects, given the country s substantial population with strong demand for a variety of products. The banking sector should soon spark as it is essential for the development of the country. Other sectors such as tourism and services are also absolutely on the potential investment list. Opportunities are countless; open for different types of investors. Investor s choice of investment will depend on their background and investment strategy. INVESTMENT PROCEDURES General investment incentives In order to attract foreign investors, Myanmar s Foreign Investment Law (MFIL) 2012 includes many incentives for foreign investors. The following are some general incentives for companies, which are registered under the MFIL and receive a MIC permit: - Tax holiday for the first five years. - Exemption or relief from custom duty or other internal taxes on machinery equipment, instruments, machinery components, spare parts and material used in the business, and items which are imported and required to be used during the construction period of the business. - Exemption or relief from custom duty or other internal taxes on imported materials for the first three years of commercial production after the construction is completed. - Exemption from commercial tax on goods which are manufactured for export. Other specific intensives will be granted for various sectors Capital requirement and investment procedure Foreign investors can register their companies under: - The Myanmar Companies Act, which does not require applying for a MIC permit. However, companies registered under the Myanmar Companies Act are not eligible for tax incentives. The minimum capital requirement is USD50,000 for service companies and USD150,000 for manufacturing companies. - The Myanmar Foreign Investment Law, in which registered companies can benefit from tax incentives. The minimum capital requirement is determined by the MIC. Foreign investors are recommended to consult with a local legal advisor to assist them with investment procedures. That said, we briefly outline the procedures that a typical Vietnamese company need to go through in order to open a service company in Myanmar: - Step 1: Apply for Certificate of Incorporation (temporary) in Myanmar, with the assistance of a local legal advisor (recommended). - Step 2: Obtain permission to invest oversea from the Vietnam Ministry of Planning and Development, register for an oversea investment account at the State Bank of Vietnam, and open an oversea investment account at a 19

20 Vietnamese commercial bank. - Step 3: Remit 50 percent of the capital requirement in foreign currency acceptable to Myanmar s banks, which have obtained Authorized Dealer License (Authorized Dealer License has been awarded to three State Owned Banks and 15 Private Banks see appendix). - Certificate of Incorporation will be granted after the investor has fulfilled step three. List of Prohibited Economic Activities Economic Activities under Prohibition Almost all sectors are now opened to foreign investors in the form of a joint venture or 100 percent foreign owned. However, foreign investors should be aware of the prohibited economic activities (to foreign investors) before investing in Myanmar: Sr. No Type of Economic Activities 1 Manufacturing and related services of arms and ammunition for the national defense 2 Managing and conserving natural forests 3 Prospecting, exploration and production of jade/gem stones 4 Production of minerals on a small or medium scale 5 Administration of electric power system 6 Inspection of electrical works 7 Air navigation services 8 Exploitation of minerals including gold in the rivers and water way 9 Pilotage services 10 Operating printing and broadcasting services jointly without approval of the Union Government 11 Periodicals in national ethnic languages including Burmese Source: MIC RISKS AND CHALLENGES Beside numerous opportunities for investment in Myanmar, foreign investors should also take into account the risks and challenges that they might face when investing in this country, such as: Policy instability Unsettled legal framework is one of the main issues for foreign investors. As part of the reform, the government is in a hurry to revise laws and regulations. Thus, foreign companies need to adapt quickly to the policy changes and be cautious of the ambiguous rules and regulations. Political Risk: 20

21 Myanmar s political and religious risks are notable issues as they could affect the business operating environment. According to the latest quarterly updates to dynamic political risk indices (Maplecroft), Myanmar has moved out of the extreme risk category thanks to the reforms since However, the country is still categorized as high risk. The clash between the majority Buddhists and minority Muslims over political reforms has led to the death of at least 250 people since The ongoing religious conflicts have required further effort from the Government. Unless the Government can ensure a secure environment, many international investors will be hesitant to join the market. Investors should also keep an active watch on the next general election, which will be held in October/November We would not make any predictions about a possibility for a twist. However, some political instability is expected to occur before/during and potentially after the general election. Inconsistent data International investors and researchers have probably been confused over the inconsistent database about this country. Myanmar s population data, for example, had been reported at around 60 million people for a long period of time, but it has recently been reported at only 51.4 million people. Oil reserve estimation also posted at a wide range between 50 million barrels to 3.2 billion barrels. Lack of skilled workforce More than 50 percent of the country s workforce are currently working in the agricultural sector. Due to the poor education system, international companies face a shortage of skilled workers. The weak education system needs a long time for improvement. Thus, the unskilled workforce will remain a problem for investors. Poor infrastructure There are many other obstacles that foreign investors need to overcome such as, poor rail connections, degraded road system and ports facilities, power shortages and unstable telecom services, which can result in lengthy delays, expensive shipping costs and inefficient production. Companies under sanction Since 2012, the United States, The European Union, Australia and Canada have lifted and eased most trade sanctions which they imposed on Myanmar. However, there are some companies and individuals that are still on the blacklist. Therefore, foreign investors should make sure they know their local partners well enough to avoid further troubles caused by doing business with firms out of favor with global economic giants. 21

22 STOCK MARKET TARGET FOR OCTOBER 2015 To be launched before the next election? Myanmar authorities and Japanese Daiwa Securities Group are putting intensive efforts into the establishment process of Yangon Stock Exchange (YSE). They plan to launch the YSE with three to five listed companies before the next election, which is scheduled on October/November The authorities and the Japanese are both confident that they will meet the deadline. Not for international investors Foreign investors will not be allowed to invest in the YSE at least for the time being. Requirements for being listed on the YSE In order to be listed on the YSE, companies need to satisfy the following requirements: - Minimum capital amount of MMK500 million (USD510,000) - Having minimum of 100 shareholders, in which the minority contributes at least 10 percent of the total capital. - The companies need to demonstrate profit in the previous two years or market capitalization of MMK10 billion (USD10.2 million) Companies to be listed According to Myanmar s Deputy Minister of Union Finance and Revenue, three public companies will be listed including, Asian Green Development Bank (AGD) Bank, First Myanmar Investment Co Ltd (FMI), and Myanmar Agro-business Public Co (MAPCO). Not ready yet? The development of the YSE s infrastructure still has a long way to go. Additionally, despite more than one year passing since the Securities Law release, the regulations and rules have not yet been finalized. The strict requirements and expensive fees are also the main hurdles for any companies that desire to be listed. Asian Green Development Bank the most potential to-be-listed company is facing a problem regarding charges to its major ownership structure. Thus it is uncertain whether AGD bank will be able to get on board. With the above mentioned, we doubt the prospect that the YSE will meet its target. Even if the Burmese authorities and the Japanese get infrastructure and rules & regulations completed on time, market participants and market liquidity would remain a high concern. 22

23 CONCLUSION Given the geostrategic location, untapped and abundant natural resources, significant population and a market-based economy, Myanmar is currently one of the most attractive investment destinations in Asia. Massive FDI inflows have been recorded over the previous few years and are estimated to continue to surge considerably in the future. We expect to see a magnificent picture of the country emerge over the next decade, but it is uncertain if Myanmar will become the next tiger of Asia. The growth rate of the country depends mainly on the ongoing reforms, many of which are determined by a stable political system in addition to the foresight and good governance of its policy-makers. 23

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