Myanmar is one of the fastest growing economies in Asia and is becoming a hot investment target for international companies. But the country’s undeveloped transport and banking infrastructure means corporate treasurers may be in for a bumpy ride, in more ways than one.

In late 2015, Myanmar held its first election since a nominally civilian government came to power in 2011, ending over 50 years of military rule. The result was a historic victory for the main opposition party, the National League for Democracy (NLD), led by the social democratic stateswoman and country’s most eminent political figure, Aung San Suu Kyi.

Long considered a pariah state while under the oppressive rule of the former military junta, Myanmar’s emerging political freedoms are mirrored by parallel reforms in the economic sphere. Both in political and economic terms, Myanmar is gradually ending half a century of isolation and central planning and becoming a more liberal country open to international investment. It is a trend which is set to open up a myriad of new opportunities for corporates in Asia, as well as a few challenges for their treasurers too.

A new era

Myanmar is one of the poorest and one of the most populous of the ten ASEAN member states. Yet the country, with its abundance of natural resources, including arable land, gold, timber, oil and natural gas, has much to offer growing international businesses.

The competitive advantages bestowed by these natural assets are strengthened by the fact that the country is now busy building industries almost entirely from scratch and, in addition, is seen as a gateway between Southeast Asia, China and India. No wonder foreign direct investment (FDI) rose to new heights during 2014-2015, as multinationals including Coca-Cola, Telenor, Colgate-Palmolive, and Mitsubishi laid bets on an emerging consumer boom. Overall, growth in Myanmar’s foreign investment has exceeded that of any other ASEAN country in recent years, albeit starting from a very small base.

Although the somewhat languid pace of political reform in the country has disappointed some commentators – last year’s historic election notwithstanding – progress is clearly being made on the economic front. The floatation of the kyat in April 2012 kicked off the country’s transformation in April 2012, followed shortly after by autonomy being granted to the Central Bank of Myanmar (CBM). Certain regulations around banking procedures were relaxed in the wake of this development. Just recently, in March 2016, Myanmar’s first stock exchange, the Yangon Stock Exchange (YSX) officially opened its doors for trading, an event which Maung Maung Thein, head of Myanmar’s Securities and Exchange Commission, said, marked a “great day” for the country. “We can now proudly and mightily proclaim to the world that we are no longer a backward country,” he added in a speech to a crowd of business leaders.

The opening of YSX was but the latest development in a wave of economic changes that began under the presidency of the moderate reformist Thein Sein. These include new policies around anti-corruption, currency exchange, foreign investment laws and taxation. Meanwhile, the Asian Development Bank (ADB) formally began re-engaging with the country to finance the construction of new infrastructure and other development projects within the country.

Banking on reform

As of April 2015, Myanmar’s banking system comprised of four state banks, 22 private banks (nine of which are classified as semi government institutions), 42 representative offices of foreign banks and foreign finance companies.

Myanmar’s banking sector remains extremely underdeveloped and this naturally presents considerable challenges for the corporate treasurer. To begin with, the almost complete absence of modern banking infrastructure means the economy remains largely cash based. Transfers between businesses or individuals often require the physical movement of cash between branches of the same bank or branches of different lenders. Even something as simple as clearing a cheque requires a visit to the central bank, and verbal communication from the cheque writer’s bank that the person in question has sufficient funds in his or her account to honour the cheque. For treasurers used to banking in more developed parts of the world, this way of doing business can come as quite a culture shock.

“Right now there’s almost no interbank market in Myanmar,” says Wan Chun Shong, Treasurer at Malaysian automobile makers the Tan Chong Group, a firm which has been aggressively expanding into Myanmar since 2012. “It means moving money around is often very difficult. Even last week when I was visiting the country I saw people carrying sacks of cash between banks. Most financial transactions are still conducted on a cash basis – it is really quite amazing.”

But progress is being made on this issue, albeit gradually. The introduction of the CBM’s new clearing and settlement system, dubbed CBM-Net, in January 2016 has been described by pundits as a significant milestone in the country’s financial development, one which will make an “immense difference” to the day-to-day operations of banks. Under the new system, the central bank and Myanmar’s local and international banks are connected electronically, meaning instructions to debit or credit different accounts in different banks can be carried out instantly and automatically. Cheques can be cleared through a mechanised clearing house, which is connected to the CBM-Net system.

CBM’s long-awaited introduction is but the latest step taken towards establishing a more modern banking system. In 2014, the country began to allow a wider range of companies to operate in the country, awarding nine banking licences to foreign banks, including: ANZ, ICBC, Maybank and the Japanese mega banks. In March 2016, four more banks were granted licenses (Bank for Investment and Development of Vietnam, State Bank of India, Taiwan’s Sun Commercial Bank and South Korea’s Shinhan Bank) bringing to 13 the total number of foreign banks allowed to conduct business in the country.

“Allowing corporates like us to access the services of foreign banks is a very important development,” says Chun Shong. “We are now having conversations with our banking partners around access to various types of instruments such as letters of credit.”

The licences were somewhat limited in scope, allowing a bank to have just one foreign branch and only permitting activity with foreign corporates. Nevertheless, Asia’s corporate bankers feel the move could be instrumental in attracting greater investment from foreign corporates in the years to come.

“It removes one of the key barriers to entry,” Grant Knucey, former CEO Cambodia, Laos & Myanmar at ANZ Banking Group told Treasury Today Asia shortly after the nine foreign bank licenses were awarded in 2014. “There is a real feeling among the corporate universe that without foreign banks in the market they will be unable to grow and execute their long-term strategies. I have no doubt that the extension of these licenses will encourage more companies to investment in Myanmar.”

Other industry experts agree with this assessment. There has been a significant wave of interest from foreign investors since 2010,” Abdul Malek Mohd Khair, Country Head at Maybank’s Yangong branch told Treasury Today Asia. “With the local banking sector remaining limited in its ability to fully serve the requirements of international companies, foreign banks are expected to play a more significant role, especially in the large scale project financing and foreign-related ventures. The dollar-based financing solutions from the foreign banks are one of the catalysts to the higher inflow of foreign investment into the country.” But the benefits do not stop at what foreign banks can offer corporates: there is also the impact on the local banking sector to consider. “The entry of foreign banks also brought about the sharing and transfer of best practices to the country,” he adds “especially to the local banks and Central Bank which will eventually level up the banking sector and bring about growth.”

Inviting investment

Foreign investment already seems to be on an upward trajectory. The lifting of economic sanctions in 2013 began a flood of investment from foreign companies. In 2014, Myanmar received just over $4bn in FDI. By the end of the following fiscal year, that number had doubled to $8bn as foreign firms won oil and gas concessions and, reflecting the improving geopolitical environment, international hotel chains started moving in.

According to PwC’s Myanmar Business Guide, the sectors currently seeing most FDI include infrastructure (roads, power plants, telecommunications and logistics, in particular). After decades of underinvestment, infrastructure is a sector the current administration is very keen to encourage foreign companies to finance. As highlighted by a recent report by the Asian Development Bank, Myanmar’s underdeveloped transport infrastructure “provides poor access to markets and services” and “hampers business development”. “This means increasing transport investments to the equivalent of 3% to 4% of gross domestic product from little more than 1% in recent years,” says Peter Brimble, ADB Deputy Country Director in Myanmar. “Private sector resources will need to be mobilised given the immense funding requirements.”

Recent political developments should ensure the upsurge in FDI continues to pick up steam in the years ahead. “FDI is expected to get a lift from the successful political transition following national elections in November 2015, with investment flowing into newly established special economic zones and rapidly expanding transport, telecommunications and energy sectors,” ADB wrote in the report.

Talking to corporate treasurers working in Myanmar, however, one does get the sense that they feel the country is moving in the right direction. Much remains to be done, however, to reform an economy isolated for the best part of five decades. “We believe that outlook is promising,” says Chun Shong. “The business environment is still in a sort of preliminary stage of development, and so it remains very challenging. But Myanmar has only just begun to open up and liberalise, so there are a lot of things that we are expecting to change and to improve.”

Treasury’s wish list

What areas are treasurers most keen to see improvement in? What do they regard as being the biggest impediment to them executing their responsibilities at the present time?

“I think that one of the biggest constraints facing treasurers right now are the rules around US dollar transactions,” says Chun Shong. Although foreign companies operating in Myanmar have been permitted to transfer funds back out of Myanmar since the passing of the 2012 Foreign Exchange Management Law, bureaucratic obstacles remain in place for money being transferred in and out of the country. That means intercompany financing, relied upon by the Tan Chong Group in the absence of developed capital markets, can be especially onerous. “It is a challenge because when we are sorting USD funds for offshore out of Myanmar, approval is required from both the CBM and the Ministry of Commerce. Similarly, for my company here in Malaysia to lend into the company operating in Yangon in Myanmar, we have to get approval from the central bank because it involves capital restrictions.”

Keeping idle liquidity in Myanmar to a minimum is very important though, given the dearth of practicable short-term investment options in Myanmar at the present time. Besides short-term bank deposits there are no instruments, like money market funds, for instance, that treasurers are known to use in more developed markets. “If your trapped cash here is too big, you are going to have a problem,” Chun Shong observes.

With Myanmar opening its doors to international businesses, the regulatory environment around foreign exchange is developing quickly and sometimes changes – not always of a positive nature – are enacted at very short notice. Events late last year offer one such example of this. Fearing the destabilising economic effects of unchecked dollarisation, Myanmar’s CBM has recently attempted to curb the use of US dollars. In October 2015, just a few weeks before the country’s historic elections, the CBM announced the cancellation of foreign exchange licences to thousands of businesses, including hotels, restaurants, and airlines.

Naturally, such developments continue to make Myanmar a challenging place for corporates, and especially for those involved in managing the treasury operations. “At the end of the day, I need to do my job,” says Chun Shong. “Faced with all these constraints it can be very difficult for treasurers in Myanmar at the moment – you end up doing pretty much everything on a cash basis. So I would like to see trade liberalisation – to allow us to buy US dollars easily.”

But top of Chun Shong’s wish list of reforms is further improvements to financial infrastructure and the regulation of institutions that operate within it. “The authorities need to build a functioning interbank market, and they need to improve the regulation of the banks operating in the country,” he says.

Chun Shong knows that the prospects for seeing such changes largely rest on what happens in the political sphere. The economic reforms we have seen since 2011 are unlikely to have occurred without the political reform that ended both the country’s international isolation and five decades of military rule.

Today, further reform seems only likely to take place if the country continues its transition to democracy. If that happens “everything else should fall into place,” says Chun Shong. “There’s a new government in place now, and we are expecting things to get better.”