December Myanmar Business Survey #2 Significant drop in Myanmar investor confidence a bump in the road or a sign of more fundamental issues?

Transcription

1 December 20 Myanmar Business Survey #2 Significant drop in Myanmar investor confidence a bump in the road or a sign of more fundamental issues?

2 2 Roland Berger Focus Myanmar Business Survey #2 Investors remain confident about Myanmar's long-term opportunities. However, short-term business sentiment drops drastically from 73% a year ago to 49% now. NOTE The survey was conducted before the latest developments in Rakhine state, which are likely to have further reduced investor confidence in Myanmar

3 Myanmar Business Survey #2 Roland Berger Focus 3 In December 20, Roland Berger published the first Myanmar business survey. The results showed an enormous sense of optimism among both local and international investors: 73% of business people expected the business landscape to (rapidly) improve. This optimism, which was arguably unparalleled worldwide, resulted from the political and economic changes the country had recently undergone, including economic reforms particularly in the telecom sector, democratic elections and a peaceful transition to a new government led by Nobel Prize winner Aung San Suu Kyi, as well as the subsequent lifting of US sanctions. To assess how this business sentiment has evolved since then, Roland Berger launched the second Roland Berger Myanmar Business Confidence Survey, conducted in June-August 20, this time in cooperation with the Union of Myanmar Federation of Chambers of Commerce and Industry (UMFCCI), the leading chamber of commerce in the country. This second survey captures the latest business sentiment of almost 500 owners and senior executives from of all sizes (compared to 9 responses in the 20 survey). In the latest survey, 61% of the respondents are local (compared to 38% in 20) and 39% are international firms (compared to 62% in 20). A: Business confidence for the next 12 months. How will Myanmar's economy and business landscape fare in the next 12 months? Local International % 1% 23% 68% 8% 15% 35% 47% 3% 5 71% 7% 22% 62% 9% 1% 15% 35% 45% 4% Cover photo: istockphoto / SeanPavonePhoto All % 73% 5% 22% 65% 8% 1% 15% 35% 46% Deteriorate rapidly Deteriorate slowly Remain the same Improve Improve rapidly Source: Roland Berger Myanmar Business Confidence Survey 20 and 20 49% 3%

4 4 Roland Berger Focus Myanmar Business Survey #2 A DRASTIC DECLINE IN SHORT-TERM OPTIMISM The survey results show a drastic decline in short-term business sentiment, with only 49% of executives expecting the business landscape to (rapidly) improve within the next 12 months, compared to 73% in 20. The drop is consistent across local (from 76% to 5) and international firms (from 71% to 49%). It should be noted that the survey was conducted before the latest developments in Rakhine state in August and September 20, which is likely to have further reduced investor confidence in Myanmar. A The decline in business confidence cuts across all sectors, with every industry reporting a drop in confidence of between 14 percentage points (professional services) and 32 percentage points (tourism). Given the immense need for electric power, international firms are most optimistic in the utilities and energy sector (71%) and least optimistic in the retail & distribution sector (), a market that is still mostly dominated by local firms. Local firms on the other hand are least optimistic in the construction and real estate market, likely driven by Yangon's real estate market slowdown and a lack of approvals of large infrastructure construction projects. B The drop in investor confidence also goes hand in hand with the stagnation of foreign direct investment (FDI) in the country. FDI has only averaged USD 739 million per month in the period April-August 20, in line with 20 but below levels recorded in 2015 and early 20 and down on the investments that were expected to flow in after US sanctions were lifted. C DROP IN INVESTOR CONFIDENCE DRIVEN BY LACK OF COMPREHENSIVE AND CLEAR ECO- NOMIC POLICY AND FRAMEWORK All in Myanmar face a long list of issues and difficulties. The four most significant ones are lack of trained staff (found by 77% of to be a significant or very significant issue), no clear government economic policy (77%), unpredictable legislative environment (72%) and selective and unpredictable enforcement of regulations (72%). D The lack of trained staff is a well-known problem for and is nothing new in fact, the issue has decreased in importance compared to last year (-3 percentage points for international firms). In contrast, the lack of a clear government economic policy has become an increasing bottleneck for both local and especially international firms (+11 percentage points). It is now found to be a significant challenge by 86% of the international firms (of whom 53% find it a very significant challenge), and the number 1 challenge overall. Hence, this is likely to be a root cause of the failure of FDI to grow significantly. THE GOVERNMENT HAS TAKEN POSITIVE STEPS IN THE LAST 12 MONTHS, BUT COMPANIES EXPECT MUCH MORE It is not that do not appreciate the positive economic steps the government has taken in the last 12 months. For example, the new Investment Law and rules are found to have had a positive impact on the business landscape by 64% of local and 62% of international. Also, the further development of the special economic zones (in particular Thilawa SEZ) is seen as a positive development. Improving the rule of law is found to have positively impacted the business landscape by 41% of international firms. Naturally, the removal of US sanctions is also seen as a very positive development for economic growth. E In addition, believe that the government has started to address the long-term fundamentals of a sound economy. For example, 45% of consider that corruption has reduced in the last 12 months. F

5 Myanmar Business Survey #2 Roland Berger Focus 5 B: Business confidence for the next 12 months by sector. How will Myanmar's economy and business landscape fare in the next 12 months? Local International All 20- Utilities, oil & gas and chemicals 7% 64% 71% 4% 54% 58% -22 Financial services 9% 45% 54% % 58% -19 Professional services 9% 55% 64% 11% 44% 55% 1 48% 58% -14 Hotels & tourism 56% 56% % 54% -32 Telecom, media & technology 55% 55% 7% 36% 3% 47% 5-24 Retail & distribution 3% 39% 42% 3% 4-19 Construction & real estate 8% 3 38% 53% 6% 37% 53% -22 Improve rapidly Improve Source: Roland Berger Myanmar Business Confidence Survey 20 and 20

6 6 Roland Berger Focus Myanmar Business Survey #2 C: Foreign Direct Investment in Myanmar. Foreign direct investment by permitted enterprises [monthly, USD million]. TOTAL: 9,483 [790 monthly average] 3,822 TOTAL: 6,630 [737 monthly average] TOTAL: 3,695 [739 monthly average] 2,230 2,296 2, ,038 1, Source: DICA; Roland Berger

7 Myanmar Business Survey #2 Roland Berger Focus 7 D: Key challenges faced by in Myanmar. How significant are the following business challenges for your company? Local International All Lack of trained staff 37% 35% 72% % % 77% -7 No clear government economic policy 34% 38% 72% 0 53% 33% 86% % 35% 77% +3 Unpredictable legislative environment 24% 42% 66% -3 44% 36% % 39% 72% -2 Selective and unpredictable enforcement of regulations 24% 4 64% +5 37% % 72% +5 Rising labour costs 2 53% 73% +3 11% 49% 6-1 % 51% 67% +2 Too much administration 18% 42% % 73% +6 28% 38% 66% +2 Kyat volatility 36% 33% 69% % 35% 61% +6 31% 33% 64% +9 Restriction on access to financing 28% 34% 62% +4 22% 3 52% +9 25% 32% 57% +8 Market access barriers/investment restrictions 13% 41% 54% +5 23% 37% 6 +2 % 39% 56% +2 Lack of intellectual property rights protection 14% 36% % 3 45% -4 14% 33% 47% +3 Administrative issues 8% 27% 35% -8 % 39% 55% % 32% 44% +1 Discrimination against foreign 7% 19% 26% -2 18% 31% 49% % 25% 37% +8 Very significant Significant Difference compared to 20 Source: Roland Berger Myanmar Business Confidence Survey 20 and 20 Difference compared to 20 Difference compared to 20

8 8 Roland Berger Focus Myanmar Business Survey #2 E: Perception of government economic policies. How have the following measures impacted business landscape in Myanmar? Removal of US sanctions New investment law and rules SEZ development Transport policy/public investment in transport Education policy/public investment in education/training Healthcare policy/public investment in healthcare Improving the rule of law Focus on environmental sustainability Electric power policy/public investment in electric power Significant positive impact Local International 18% 54% 72% 24% 51% 75% 11% 53% 64% 8% 54% 62% % 62% 71% 6% 52% 58% 1% 38% 39% 9% 48% 57% 2% 25% 27% 5% 46% 51% 28% 28% 4% 45% 49% 2% 39% 41% 3% 35% 38% 2% 21% 23% 6% 3 36% 1% 25% 26% Some positive impact F: Perception of corruption. How do you think corruption has evolved in the last 12 months? Local International All 3% 7% 4% 1% 8% 49% 4 2% 2% 8% 45% 42% 3% Deteriorate rapidly Deteriorate slowly Remain the same Improve Improve rapidly Source: Roland Berger Myanmar Business Confidence Survey 20 and 20 47% 42% 45%

9 Myanmar Business Survey #2 Roland Berger Focus 9 Companies are aware of the positive steps taken by the government in terms of economic policy. The government's 12-point economic guideline launched in July 20 is a good example. Subsequently, several ministries have clarified certain positions in their sector developments on an ad hoc basis. However, what the private sector has been looking for and what is missing so far is the communication of an overall economic transformation roadmap, with clear targets, timeline and quick wins, followed by clear, comprehensive and consistent sector policies, at least for key sectors such as financial services, electric power & energy, agriculture, transport infrastructure, tourism and manufacturing. A myriad of reports by international organizations has been issued, covering many of the above topics. However, what the private sector seems to be looking for are much more specific plans, endorsed by the government. Indeed, many are highly confident that the government has the potential to boost economic growth. The most crucial government measure, as proposed by the business community, is the provision of stable electricity supply (96%), not unexpected in a country where only 35% of the population has access to electricity and face frequent black-outs. Other measures cited by are, as noted above, transparent policy making and implementation (95%), rule of law (94%), transportation infrastructure (94%), simplification of licensing and regulatory procedures (92%), regulatory capacity building (9), financial sector reform (9) and education reform and training (88%). G This is a long list of highly important measures to be taken, but it is not an unusual one for a country such as Myanmar that has come out of isolation and is looking at a major transformational change. Given the way political transformation has taken place, expectations for economic transformation are similarly high probably too high. That said, more is needed in terms of the com- What is missing is the communication of an overall economic transformation roadmap, with clear targets, timeline and quick wins, followed by clear, comprehensive and consistent sector policies, at least for key sectors. prehensiveness of economic policy and reforms (both in breadth and depth), and the speed with which the program is implemented. The good news is that the government can still count on Myanmar's longer-term attractiveness, and the willingness of both local and international to increase their investments when the right conditions are in place. BUSINESSES REMAIN BULLISH ABOUT MYANMAR'S LONG-TERM OUTLOOK Despite the short-term challenges that face in Myanmar, they remain bullish about the country's mid-to-long-term economic potential. 93% of local are either optimistic or very optimistic about Myanmar's longer-term potential. The long-term confidence among international is lower (82%) than among local firms, but still very high. H

10 10 Roland Berger Focus Myanmar Business Survey #2 G: Importance of potential government measures. How important are the following government measures to boost economic growth? Government measure Stable electricity supply 20 75% 21% 96% Transparent policy making and implementation 6 35% 95% -2 Rule of law 6 34% 94% -2 Transportation infrastructure construction 61% 33% 94% +2 Simplification of licensing and regulatory procedures 47% 45% 92% -2 Regulatory capacity building 47% 9-1 Financial sector reform 57% 33% 9-1 Education reform and training 47% 41% 88% +3 Broadband infrastructure development 47% 41% 88% -6 Promoting fair competition 36% 48% 84% -7 Land reform 4 83% +6 Reform of state-owned enterprises and further liberalization 32% 46% 78% -1 Peace agreement 37% 4 77% +4 Environmental policies and enforcement 27% 47% 74% +9 Healthcare reform 27% 44% 71% +6 Very important Important Source: Roland Berger Myanmar Business Confidence Survey 20 and 20

11 Myanmar Business Survey #2 Roland Berger Focus 11 H: Optimism about Myanmar's mid- to long-term economic potential. How confident are you regarding Myanmar's mid to long term economic potential? Local International All 1% 6% 82% 11% 93% 2% % 7 12% 82% 2% 1 77% 11% 88% Very pessimistic Pessimistic Optimistic Very optimistic New question in 20 survey no comparison possible with 20 I: Key reasons for international firms to have entered Myanmar. What is the most important reason for entering the Myanmar market? 1 Being one of the last "frontier" markets Large domestic market Myanmar governments commitment to liberalization Strategic location Possibility to "leapfrog" Legal and regulatory environment Competitive labour costs Availability of resources Very important Important 1 International firms only Source: Roland Berger Myanmar Business Confidence Survey 20 2% 12% 7% 8% 18% 2 37% 28% 42% 22% 33% 48% 34% % 4 49% 67% 6 54% 86% 85%

12 12 Roland Berger Focus Myanmar Business Survey #2 Indeed, the reasons for to enter the Myanmar market are more fundamental in nature, such as the country being one of the last frontier markets (86%), having a potentially large domestic market (85%) and boasting a strategic location (6). I COMPANIES IN MYANMAR STILL PLAN TO EXPAND AND INVEST, ALTHOUGH AT A SLOWER PACE THAN LAST YEAR A less dynamic economic development than expected has led to a noticeable drop in satisfaction with company performance. In 20, 58% of were either satisfied or very satisfied with their performance in Myanmar. By 20, this had dropped to 37%. J Lower performance and less short-term confidence are also impacting investment plans, unsurprisingly. Companies in Myanmar still plan to expand and invest, although at a slower pace than last year. 79% of local plan to expand operations (compared to 9 last year), and 74% of international firms plan to do so a significant deterioration compared to 94% last year. And if the root causes of the drop in confidence are not swiftly addressed, this may be just the beginning of a potential downward spiral in confidence, investment, and company performance. K The lower investment plans translate into less hiring of and investment in staff which is a problem in that more employment and training is something Myanmar urgently needs for its economic transformation. Companies plan to hire more staff and increase employee numbers (66%), although less so (-14 percentage points) than in % of plan to spend on training and employee development, given that lack of trained staff is one of the biggest issues facing, but this also represents an 11 percentage point drop from the previous year. L Low investor confidence has negatively impacted investment plans. And if the root causes of the drop in confidence are not swiftly addressed, this may be just the beginning of a potential downward spiral in confidence, investment, and company performance.

13 Myanmar Business Survey #2 Roland Berger Focus 13 J: Assessment of company performance. How do you view your company's performance in Myanmar? Local % 6% 33% 44% % 4% % 36% International % 2% 11% 31% 13% 5% 19% 38% 29% 9% 38% All % 1% 9% 32% 15% 4% 14% 45% 3 7% 37% Very discontent Discontent Average Satisfied Very satisfied Source: Roland Berger Myanmar Business Confidence Survey 20 and 20

14 14 Roland Berger Focus Myanmar Business Survey #2 K: Expansion plans of firms. Are you planning to expand operations in Myanmar in the next 12 months? 9 Local % 8% 7 2 1% 2 62% % 79% International % 1% 5% 82% 12% 4% 22% 61% 13% 74% All % 1% 6% 78% 15% 2% 21% 62% 15% 77% Will scale back operations Will not expand Some expansion Aggressive expansion Source: Roland Berger Myanmar Business Confidence Survey 20 and 20

15 Myanmar Business Survey #2 Roland Berger Focus 15 L: 12-month company expectation. How do you think the following will change for your company in the next 12 months? Spending on training and employee development Increase number of employees Local 2 54% 8% 64% 74% 72% International 13% 55% 68% 14% 57% All % 55% 11% 55% 20- [percentage points] 72% 66% Investments 13% 55% 68% 1 38% 48% 12% 48% 6-14 Export volumes 1 34% 44% 24% 24% 6% 31% 54% -8 Increase rapidly Increase slightly M: Threat of competition. How much of a threat is competition to your business? If you are a local company, how do you perceive the competition from foreign? 32% Competition from foreign is not threatening my business 49% Competition from foreign is somewhat threatening my business 19% Competition from foreign is highly threatening my business If you are a foreign company, how do you perceive the competition from local? 22% 19% 59% Local are Local successfully trans- are not forming themselves competitive and becoming increasingly competitive Local are competing, but not very successfully Source: Roland Berger Myanmar Business Confidence Survey 20 and 20

16 Roland Berger Focus Myanmar Business Survey #2 WHAT DOES THIS MEAN FOR INTERNATIONAL FIRMS? Overall, there has been a significant deterioration in business confidence in Myanmar, among both local and international investors. For international investors, this means that Myanmar may not yet be the investment opportunity it appeared to be in Myanmar is now one among many investment destinations for international investors, competing with other markets in Southeast Asia, such as Vietnam and Indonesia. International wishing to enter Myanmar need to be aware of the many challenges they will be facing. One of the key issues multinationals will encounter is the difficulty of finding experienced employees. Indeed, only 13% of Myanmar's working population has a high school education or university degree. The only short-term solution to address the lack of experienced employees is to invest in targeted training. Although many are reluctant to do so, citing the high turnover rate in Myanmar (~8 of employees in Myanmar stay with a company less than 3 years), there is simply no alternative to training. Moreover, training is a mechanism to retain good employees. International firms should not be frustrated by the lack of experienced people. Rather, they should invest in training and tap into the Myanmar people's motivation. The lack of a clear government economic policy is more difficult for multinationals to address and is more critical in sectors like infrastructure than in sectors such as light manufacturing. Multinationals should therefore engage with the government directly rather than waiting for policies or projects to be communicated to them. The lack of economic policy also presents an opportunity to influence policy and share investment proposals directly with the government. Maintaining an impeccable reputation is critical for this to be successful. There is one other aspect that may favor entering sooner rather than later, despite all the obstacles. This is the fact that local competition is not yet well prepared to face players operating on an international level. 59% of international firms believe that local firms are not competing successfully and a further 19% believe that local firms are not yet competitive enough. M This notion is reinforced by the current belief of about 7 of international firms that they can enter and operate by themselves rather than working with local partners/jvs. Overall, multinationals in Myanmar should be in it for the long run, with a well-defined strategy. However, given the rapidly changing environment, any multinational must be flexible along the way and look to tap into any opportunities that may arise. WHAT DOES IT MEAN FOR LOCAL CONGLOMERATES? Local large conglomerates are clearly in a tough spot. Traditional sources of revenue have dried up, new markets are developing only slowly, and they will be working under new and more competitive rules. In addition, the local conglomerates are faced with increasing international competitors and liberalization of key sectors. 68% of local firms believe that competition from foreign is threatening their business, of whom 19% even believe it is threatening their business "greatly". And about 6 of local would like to partner with foreign firms, though their interest is not yet reciprocated. Some local conglomerates may not survive this challenge. The ones that do will have successfully shifted from their traditional businesses of trading and public sector contracts. Such a strategic shift in business activities needs to be accompanied by a transformation in terms of culture, customer focus, skills, corporate governance, reporting, speed of decision making and execution, etc.

17 Myanmar Business Survey #2 Roland Berger Focus WHAT DOES IT MEAN FOR THE MYANMAR GOVERNMENT? A CALL FOR ACTION! The Investment Law and other new or revised regulations have been an important step forward. But more needs to be done, faster! An example illustrating the importance of this mantra is Myanmar's recent unexpected slip in the World Bank's 2018 "Ease of doing business" ranking: the country moved from 0th to 1st spot and is still ranked last among ASEAN nations. This despite targeted efforts by the government to move up the rankings. But it is a competitive game, and other nations have apparently done more, such as Thailand, which with a similar approach moved up 20 spots to a remarkable 26th place globally and third in ASEAN! Similarly, Indonesia moved up 19 spots, and Vietnam rose 14 spots. The Myanmar government will need to come up with a more comprehensive economic reform agenda that includes a roadmap and concrete projects. The business community is not expecting detailed studies or reports on economic policy, but rather a clear agenda with quick wins to restore lost confidence and a balanced longer-term roadmap so that executives can make investment decisions. With a clearer economic policy, Myanmar will be able to tap into the financing that can be attracted to the country and create jobs for the Myanmar people. Based on our interactions with multinationals, significant pockets of investment can be deployed in Myanmar but only if the government creates the right framework and opportunities to do so. It is our firm belief that stronger sustainable economic growth will also facilitate other government priorities, such as healthcare, education and the peace process. So "more and faster" will hopefully be the motto for the government's economic agenda in With a clearer economic policy, Myanmar will be able to tap into the financing that can be attracted to the country and create jobs for the Myanmar people.

18 18 Roland Berger Focus Myanmar Business Survey #2 Credits and copyright WE WELCOME YOUR QUESTIONS, COMMENTS AND SUGGESTIONS AUTHORS Thomas Klotz Managing Partner, Southeast Asia Damien Dujacquier Senior Partner Dieter Billen Principal dieter.billen@rolandberger.com This publication has been prepared for general guidance only. The reader should not act according to any information provided in this publication without receiving specific professional advice. Roland Berger GmbH shall not be liable for any damages resulting from any use of the information contained in the publication. 20 ROLAND BERGER GMBH. ALL RIGHTS RESERVED.

19 Myanmar Business Survey #2 Roland Berger Focus 19 About us Roland Berger, founded in 1967, is the only leading global consultancy of German heritage and European origin. With 2,400 employees working from 34 countries, we have successful operations in all major international markets. Our 50 offices are located in the key global business hubs. The consultancy is an independent partnership owned exclusively by 220 Partners. Navigating Complexity Roland Berger has been helping its clients to manage change for half a century. Looking forward to the next 50 years, we are committed to supporting our clients as they face the next frontier. To us, this means navigating the complexities that define our times. We help our clients devise and implement responsive strategies essential to lasting success. Think:Act Booklet Myanmar: A wave of optimism will it last? (20) Think:Act Booklet Mobile Money for the unbanked Avoiding common industry pitfalls (20) Exclusive: Results and analysis of our comprehensive business confidence survey of the country. Led by mobile operators in frontier markets, Mobile Money (MM) has become one of the most talked-about financial services in the world.

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