The Top-two Growth Obstacles for Myanmar Businesses
13 Nov 2016
Access to financing and the availability of human resources are key determinants of the long-term development path of newly emerging economies, and Myanmar is indeed facing formidable challenges in both of these areas.
The Land of Golden Pagodas, as it is popularly known, is firmly established as the next frontier market among international investors – many of whom rushed in to seize on opportunities as the country opened up after nearly 50 years of isolation.
As expected, what they discovered was an economy in dire need of everything from new laws and infrastructure to soft skills and access to long-term capital.
Although the initial euphoria has now subsided, Myanmar has undoubtedly delivered a lot over the last five years, and investors remain cautiously optimistic.
The country has made one of the most impressive digital leapfrogs in the realm of mobile communications, with the process of issuing new mobile licences both swift and determined compared to neighbouring Thailand.
The government was equally unwavering in its efforts to open up the domestic banking sector to foreign participants, while simultaneously ushering in a new era of ATMs, credit cards and modern banking technology to ease the cost of financial transactions.
There were also a number of early victories in attracting manufacturing firms to serve a large, untapped market of 54m people, and the real estate sector took off in earnest on the back of strong demand in urban centres like the capital Yangon.
However, the going is expected to get tougher from here on out, as the economy struggles to maintain its growth momentum over the next five years.
Alternative Source of Financing
The most often cited hurdles facing the private sector these days are access to affordable credit and skilled workers.
According to executives interviewed by Oxford Business Group (OBG) in its Myanmar Business Barometer survey, the credit terms offered by local banks are often too onerous. Indeed, the cost of even short-term lending in Myanmar is amongst the highest in South-east Asia and is highly restrictive.
Collateral and liquidity requirements essentially mean that only a handful of companies are eligible for such lending; the majority continue to rely on informal family networks and savings to bankroll business expansion.
In this light, the 2015 establishment of the Yangon Stock Exchange (YSX) was a much-anticipated event by many domestic and foreign companies looking for alternative sources of funding.
The survey of C-suite executives conducted by OBG revealed there is plenty of demand for listing on the new exchange. Some 43% of those polled said they were in principle considering the IPO route as a means to raise new capital if it was available to them.
Some 26% of those interviewed indicated firm plans to list on the YSX at some point in the future, and roughly half of this group are looking to float shares within the next five years. This will be welcome news for a capital market that is, from an operational point of view, ready to take off but remains in dire need of new instruments.
The biggest hurdle, according to executives, is the lack of audited accounts that fulfil listing requirements and the high cost of compliance with capital market regulations. Historically, the family-owned firms that dominate the private sector have been reluctant to invite scrutiny and submit themselves to more stringent reporting requirements.
Forms for listing, made available in September 2015, reveal a number of potential issues that local companies will need to address.
First of all, the rules say that prospective firms will need at least two years of profit history, paid-up capital of MMK500m ($406,000) and a system that prevents insider trading, among other things. Second, businesses pursuing an IPO must also be tax-compliant and have a minimum of 100 shareholders in order to list.
Apart from a willingness to comply with new regulations, there is the issue of experience and know-how. As one equity market participant told me, much of this stems from a simple lack of awareness and education. According to him, Myanmar still has a shortage of qualified brokers, analysts and financial experts to provide a sound valuation and financial model to ensure fair value for investors.
In Search of Qualified Labour
Beyond capital markets and the YSX, the quest to find the right talent at the right cost has become a dominant theme for Myanmar’s economy as a whole. Real estate firms that I spoke to at a recent conference said that using an apples-to-apples comparison, wages in Yangon are now at roughly the same level as those in Bangkok.
This is being driven by a scarcity of talent and rapidly increasing demand for new employees. According to OBG’s survey, close to 75% of companies have expanded their workforce in the last 12 months.
And nearly 50% of those firms reported a significant increase in their number of employees, putting additional pressure on a labour market that is already struggling to keep pace with demand.
In the region, only Indonesia – and to some extent Vietnam – is experiencing the same level of intensity in the search for skills and talent.
In the short term, companies are being forced to raise wages to attract the best staff. A predominant share – some 90% of executives surveyed by OBG – said they had to boost compensation in the last 12 months, with as many as 42.3% having to offer significant increases in order to recruit and retain personnel.
Lessons from Other Markets
Lessons from other fast-growing economies covered by OBG, such as Indonesia, Papua New Guinea, Mongolia, Nigeria and Vietnam, suggest that such strong competition for talent could undermine the country’s external competitiveness if not addressed early on.
Internationally, Myanmar continues to be perceived as a country with some of the most competitive costs of labour. However, our survey results suggest this is no longer the case as far as skilled labour is concerned.
The pressure is now on policymakers to recalibrate the higher education system to cater to accelerating private sector demand. In the near term, greater flexibility may be needed, for example by granting short-stay, talent-based visas to specialists from other ASEAN countries to fill key positions.
When it comes to boosting activity on YSX, the government should lead by example. Myanmar has a number of state-owned enterprises in the oil and gas, postal services and transportation sectors that ought to be corporatised and eventually listed on the stock exchange.
Apart from boosting liquidity and creating an alternative asset class to real estate and land, such moves could help fulfil the new government’s wider promise to distribute wealth among ordinary citizens, who are continuing to demand a higher standard of living.
The experience of other countries in transition shows such democratisation of capitalism would do a lot to legitimise the new economic policies and address the issue of rising inequality stemming from Myanmar’s rapid transition to a market economy.
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