With the new Yangon Stock Exchange (YSX) established as recently as October 2015, Myanmar’s capital markets remain at a very early stage in their development. As such, the bourse is subject to many of the pitfalls often found in a low-volume, frontier industry, but there is also a wealth of potential. With access to finance being one of the key pillars of economic growth, the development of a vibrant capital market is also vital. With this in mind, authorities are embarking upon a series of legislative and regulatory reforms as part of efforts to boost the country’s capital markets. Notably, this will involve removing some of the main barriers to entry for both domestic and international players.
Historical Precedent
In colonial times, the then-Rangoon Stock Exchange was effectively an outstation of the Bombay and Calcutta exchanges. With several European firms involved, the exchange formed a secondary trading hub for over-the-counter (OTC) equity from a limited number of British and US companies. The market closed on the outbreak of the Second World War in the Pacific, but was revived in the 1950s to trade the preferred shares of nine public-private joint venture (JV) corporations in an unofficial OTC market. As the country turned towards authoritarian socialism, however, the exchange was permanently closed in 1962, following the nationalisation of all economic entities.
Issuance of government securities, meanwhile, dates back to the 1920s, although under British rule they were essentially those of the British Imperial Indian government. Treasury bills were issued up until 1948, and after independence Treasury bonds were also traded. With the nationalisation of all banks in 1963, the central bank’s issuance of Treasury bonds was carried out through a state-owned commercial bank.
There was then a lengthy hiatus lasting until 1993, when a new military government signed a memorandum of understanding with Japan’s Daiwa Institute of Research (DIR) for the development of a securities market. That same year, the government also started issuing Treasury bonds and two years later a new Securities Exchange Law was drafted. In 1996 the government allowed the formation of a 50:50 JV between the state-owned Myanmar Economic Bank (MEB) and DIR. This led to the establishment of the Myanmar Securities Exchange Centre (MSEC) later that year. The new centre had a paid-up capital of $3.4m and an authorised capital of $17m, and was intended to mobilise underutilised public funds. Myanmar had a relatively high rate of savings and low rate of consumption at the time, with total savings up 32% in FY 1992/93 and a financial savings-to-GDP ratio of 11.1%. However, a large portion of this were kept outside the banking system, with the MSEC viewed by many as a way of financing economic development through OTC trading. In addition, the government was pushed to launch a capital market alongside its major privatisation plans.
The MSEC began trading both stocks and Treasury bonds, the latter as an agent of the Central Bank of Myanmar (CBM). It was unfortunate timing, however, as the Asian financial crisis hit in 1997-98, followed by a major banking crisis in Myanmar in 2003. The repercussions of this fallout are still felt across the financial sector today, as it led to a loss of confidence in the market. Myanmar’s crisis was triggered by informal lending and deposit taking in which investors were promised high interest rates if they became shareholders instead of depositors, a description that exploited a loophole in banking regulations. Many of these schemes collapsed in 2003, leaving participants with considerable losses.
Modern Market
The next step forward did not come until 2008, when the government put together its Capital Market Development Roadmap. This targeted the establishment of a full stock exchange by 2015. Again, the timing was not favourable, as it coincided with the global financial downturn of 2008-09. The pace of political and economic reform took a backseat until 2012, when the CBM, Japan Exchange (JPX), and the DIR established the YSX. Assistance in formulating the necessary legislation and regulations was provided by the Policy Research Institute of Japan’s Ministry of Finance, with July 2013 seeing the Securities and Exchange Law enacted. A further memorandum of understanding was signed in 2014 between Myanmar’s Ministry of Finance (MoF) and the Japanese Financial Services Agency, aimed at developing the necessary financial infrastructure. This agreement resulted in the creation of the Securities and Exchange Commission of Myanmar (SECM) in October 2014.
Regulator
The SECM is the main regulator of the capital markets and is headed by six members plus a chairman, all of whom are appointed by the government for two-year terms. The commission has the power to grant or withhold licences and permits for stock exchanges and OTC markets, and is charged with supervising securities businesses and giving permission for initial public offerings. Additionally, the SECM is responsible for issuing fines and conducting investigations into any suspicious activity in the market. The commission works with the MoF to set rules and stipulations for stock exchange regulation, with the MoF supervising the SECM until it and the capital markets are deemed to be developed. Indeed, the initial chair of the commission was also the deputy minister of the MoF.
Under the Securities Exchange Law, securities dealing, brokering and underwriting can only be conducted by licensed securities companies, which must meet authorised and minimum paid-up capital requirements. Likewise, securities investment advisory businesses must be officially licensed. Clear rules are now in place for listing in terms of disclosure, with a company prospectus that includes audited financial statements for at least two years. In addition, a company must have paid-up capital of at least MMK500m ($382,000) on listing day and issue at least 5000 floating shares on the day of listing, with these expected to reach an initial market capitalisation of at least MMK500m ($382,000).
The new YSX was constituted in 2014, with MEB holding 51% of the shares, DIR 30.25% and the JPX 18.75%. YSX, with a paid-up capital of MMK32bn ($24.4m), was then granted permission by the SECM to begin operations, with Kanbawza Bank as the fund settlement bank for cash settlement of stock trading. It was officially opened on December 9, 2015 and began trading in March 2016. The MSEC, meanwhile, has continued trading as a 50:50 partnership between MEB and the DIR.
Facts & Figures
As of January 2018 there were five companies listed on the YSX, with a total market capitalisation of MMK607.1bn ($463.7m). First Myanmar Investment was the first to list on the YSX in March 2016; followed by Myanmar Thilawa SEZ Holdings, which listed in May 2016; Myanmar Citizens Bank listed in August 2016; First Private Bank in January 2017; and the most recent to list was TMH Telecom Public Company on January 26, 2018. Following an invitation to apply for licences in January 2015, five securities companies were awarded trading licences by the SECM in March 2016.
However, the performance of the exchange still remains some way below initial expectations. The Myanmar Stock Price Index has fallen by around 50% since it debuted. First Private Bank saw its share price decrease by 20% in the six months to the end of the first half of 2017. Indeed, in September 2017 there was concern that the bank may even delist, a move that would be a severe blow to the fledgling exchange. Daily trading volumes have also declined, averaging around 9000 shares in January 2018, while five-figure totals were more common in the opening months.
Legislation
One reason often cited for the slow progress is that since its inception, only local individual and institution investors have been allowed to buy and sell on the YSX, closing it to foreign participation. This ruling was tied to the Myanmar Companies Act, which dated back to colonial times. The new version of the legislation, the Myanmar Companies Law, aims to encourage more foreign direct investment in the country, partly by opening up the YSX to international participation. The law was approved by the government in January 2017, submitted to Parliament in July 2017 and signed into law December that year. However, the law is unlikely to be implemented before August 2018, when the necessary bylaws and company register necessary for enforcement are expected to be completed.
The Myanmar Companies Law alters the definition of a “foreign company” to allow foreign ownership of up to 35% of shares in a Myanmar-registered company. Formerly, foreign possession of even one share classified the whole company as foreign, making it ineligible to list. The updated legislation also addresses issues in minority shareholder protection, as the previous act provided such persons or institutions limited coverage. The framework will enable companies to issue different classes of shares and in a variety of currencies if desired. Additional rules regarding capital maintenance and alteration are also included, while regulations overseeing the company prospectus and listing have been aligned with the 2013 Security and Exchange Law, the 2015 Security and Exchange Rules, and YSX regulations.
Another reason behind the subdued trading activity may be the generally low level of awareness of the YSX’s role and its potential to boost investment and deliver returns. The local banking crisis in 2003 has made many people suspicious of new financial sector developments. Other hurdles include investors having to physically go to the exchange or a broker’s office to make a trade, and the stipulation that any deal worth over $8000 must get the approval of the SECM.
The lack of high yields is also challenging. All of the listed companies have been doing well in terms of profits, even as their share prices have been falling. This contradiction suggests low demand for trades, which may be connected to dividend yields that are generally low compared to payouts from alternative investments. Bank deposits, for example, averaged around 8% in autumn 2017, while the highest yielding stock at that time was First Private Bank, at around 7.3%.
Absence of a free float may also be contributing to performance, which is quite typical of a new market. For example, 85% of Myanmar Citizens Bank’s shares are held by 10 shareholders. This kind of concentration is off-putting to smaller potential investors, particularly in a market like Myanmar’s where minority shareholder rights remain poorly defined. The enforcement of the new Companies Law is likely to be crucial here as well.
Many of the limitations of the YSX are not uncommon for new exchanges in the region. The stock exchange in neighbouring Laos, for example, was established in 2011, but still has just five listed companies. The Cambodian Stock Exchange also has five companies after launching in April 2012. Another more encouraging example is the Ho Chi Minh City Securities Trading Centre, which had just two stocks when it launched in July 2000, but went on to become the Ho Chi Minh Stock Exchange, one of Asia’s top performers. It is thus still too early to judge the YSX, but the new possibilities brought by the Companies Law looks likely to lead to a welcome reversal of its current downward trends.
Treasury Bond
Myanmar’s bond market has been an important part of capital markets development in recent times, with the government eager to deepen and widen the fixed-income segment as part of its plans for financial sector liberalisation and expansion. This centres on an attempt to open up a secondary market. The primary Treasury bill market has existed in the country since 1993. Back then, issuances were made available to local private banks and were later opened up to state-owned banks in 2009. Treasury bills could be used to soak up excess liquidity and up until September 2015 the banks were able to use the Treasury papers as collateral when borrowing from the CBM. Since that date, however, banks have been allowed to tap the interbank market for loans when they encounter liquidity shortages, which is a major development for the sector (see Banking chapter).
The MoF has also begun issuing shorter-maturity Treasury bills to a wider market in order to finance budget deficits. It had previously issued such papers, but only the CBM had been buying them as they had held a low annual interest rate of around 4%. This changed in January 2015 when Treasury bills were put up for public auction, though banks were the main customers. The bills have three-, six- and 12-month maturities, with auctions held every two weeks. Discount rates ranged from 7-9% over 2015 and 2016, a trend that continued into 2017. In September 2017 the three-month Treasury bills had a market discount rate of 7.6%, the six-month had a discount rate of 8.5% and the 12-month, 8.8%. The ministry sets the maximum limit for how much the rates can rise.
The first Treasury bonds issued were three- and fiveyear instruments, which are still offered periodically. In 2010 issuance of two-year Treasury bonds was introduced. These were initially sold at a rate predetermined by the government, but in September 2016 the first Treasury bond auction was held, raising MMK200bn ($152.8m) from three private sector banks under conditions of competitive bidding. The weighted average yield of 8.8% among all the different Treasury bonds on offer was also above the 8% bank deposit rate, making them a much more attractive investment than they once were. Regular auctions have been held ever since.
Access to Credit
Since 2010 the MSEC has acted as an agent for the CBM in the sale of Treasury bonds, but of late there have been discussions over potentially allowing government treasuries to be traded on the YSX. This would be an important development, not only for the exchange, but also for Myanmar’s businesses in general, as is would be a significant first step towards the creation of a deeper bond market.
Ultimately, it would also include corporate issuances, of which there are none at present. Without access to a capital market, businesses looking to gain extra financing currently have to rely on private sources – such as family, friends, loan sharks and other unofficial lenders and personal savings – or banks. The latter requires collateral, usually in the form of real estate, and also charges high interest rates. The maximum bank lending rate, fixed by the CBM, was 13% as of early 2018. Generally, most banks tend to charge at the maximum lending rate given the relatively high deposit rates.
One sector in particular that feels the absence of a strong capital market is insurance, which requires long-term investment options to help cover its risks. “For life insurance issuers, the younger the population, the longer the term of the liabilities,” Thiri Thant Mon, managing director of investment banking firm Sandanila, told OBG. “Myanmar is a young country, so the likely payouts are further in the future. In more mature markets there are 10-, 20- and even 50-year bonds to invest in. Here, the maturities are too short and issuance amounts too small for insurers to build an asset portfolio.” Once insurers find bonds they can rely on, they often become major customers. In Vietnam, for example, around 50% of all government bonds are bought by foreign insurance companies, providing vital support for the market and the wider economy.
Outlook
With the YSX now operational and Treasury bill and bond auctions a regular event, Myanmar’s capital markets have taken some significant steps forward. Even so, much remains to be done, with changes to the rules regarding foreign participation needed to kick-start trading and listing activities, while stakeholders have a major educational task ahead. Demonstrating to companies and the broader public that the capital markets have an important and valuable role to play in the development of the economy overall will be crucial to growth. While the market is certainly difficult, it is also full of potential given Myanmar’s depth of human and natural resources, along with its geostrategic location.
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