Myanmar to draft two new investment laws

Japan remains committed to Myanmar

Japanese companies invested US$22.8 billion in Singapore, Thailand, Indonesia, Malaysia, the Philippines and Vietnam in 2013, according to the Japan External Trade Organisation (JETRO).

The trend is strong, following the first wave of Japanese investment in the 1980s and 1990s, which helped build up automotive and electronics sectors in Thailand, Malaysia and Singapore. The combined investment in these countries is believed to be hundreds of billion.

The figures may have raised eyebrows in Myanmar, given the official statistics that showed that aggregate investment from Japan in the country stood at only $387.4 million at the end of January 2014. According to data compiled by the Directorate of Investment and Company Administration (DICA), that is merely 0.73 per cent of the total FDI permitted by the Myanmar Investment Commission. Japan is ranked as the 12th largest investor in Myanmar.

According to DICA, combined investment from Japan during the 2011-12 and 2013-14 fiscal years was as little as $111 million. That is a tiny fraction of the combined FDI of nearly $6 billion that flowed into Myanmar during those years.

Does this indicate that Myanmar is not attractive to Japanese investors?

“We are very surprised to know that FDI from Japan is not so big in terms of statistics,” admitted Yoichi Kobayashi, chairman of the Japan-Myanmar CCI Business Cooperation Committee and executive vice president of Itochu Corp.

However, he added, the full story is different offers a different impression.

“Japanese companies have invested in Myanmar through other countries, especially neighbouring countries, like Thailand and Singapore. We have many Japanese companies there. So if we calculate and combine FDI from Japan and investment by Japanese companies located in other countries, around 20 per cent of foreign investments in Myanmar are from Japan, directly and indirectly. This shows that we are either the No 1or No 2 investor here, following Singapore or even exceeding Singapore,” he said.

Moe Myint Kyaw, secretary general of the Union of Myanmar Federation of Chambers of Commerce and Industry (UMFCCI), admitted that the figures may be a bit outdated.

“In my own opinion, these are accumulative figures that need to be rechecked by the MIC (Myanmar Investment Commission). We should look at what kind of business Japan is doing in Myanmar rather than its standing in the top investor list. We need to investigate whether the businesses really support national interests or not. If a business can bring benefits to our citizens, we are more than happy to welcome it, regardless of the amount of capital brought in,” he said.

Stronger ties

To give substance to their words, last week, the chambers of commerce in both countries showed their commitment to strengthen bilateral economic ties through frequent discussions. At the 11th joint meeting of the Myanmar-Japan CCI Business Cooperation Committees, 97 delegates participated, 47 of which were from Japan, representing a wide range of sectors, including agriculture, manufacturing and ICT.

At the meeting, messages of President Thein Sein and Prime Minister Shinzo Abe were read out by Deputy Minister of Commerce Pwint San and Japanese Ambassador to Myanmar Tateshi Higuchi, respectively.

During the joint meeting, the discussions mainly focused on potential future bilateral economic cooperation, especially in agro-based food, business cooperation and human resource development for small and medium enterprises. Both parties agreed to engage in capacity building programmes for SMEs.

To Moe Myint Kyaw of UMFCCI, Japanese investments could bring technology transfers, new market opportunities and employment opportunities that would benefit many local people.

“The chambers of both sides already signed a memorandum of understanding to hold a bilateral discussion on improving economic ties at least twice a year, one in Myanmar and one in Japan. Last year, a similar meeting was held in Japan. And the next meeting will be held in Japan by the end of this year,” he said.

Kobayashi also foresees more positive developments. After the meeting, the delegation went to Mandalay to explore business opportunities.

“In Myanmar, the agricultural sector has huge potential. So it is very important for Myanmar to increase the quality of products and, at the same time, to increase production for exports, as you need to compete with other Asean countries such as Thailand and Vietnam. Increasing production and increasing the quality of rice and other agriculture products are simultaneously very important,” he said.

This would require machinery, he admitted, and it is up to the Myanmar government to find ways to support farmers.

Zaw Min Win, vice president of UMFCCI, stressed the importance of joint efforts to maintain a productive business environment.

“What we expect from Japanese investments is more than the money they will put into their investments here. Currently, skill shortage is one of our main challenges. That is why we have asked Japanese investors to help improve the skills of local workers and share their technology and expertise,” he said.

“Although the Ministry of Commerce has eased a lot of restrictions, there are still some difficulties and differences between the systems of the two countries. To sort them out, representatives from the Chamber usually discuss with the ministry officials led by the deputy minister at the ministry headquarters every week, or at least twice a month. So I believe the difficulties will disappear gradually,” he added.

Huge potential

According to Zaw Min Win, Myanmar still has the biggest potential for investment among the Asean countries in Japan’s eyes.

Kobayashi echoed his view.

“Myanmar has just started. We have already invested in Myanmar. And you have a huge potential in various fields. So this is a good time for us to come to Myanmar,” he said.

“I believe Myanmar has made the best decision in selecting three Japanese banks out of nine banks [to operate in Myanmar]. We hope that this year, these banks will establish their branch offices in Myanmar. These banks will bring positive impacts on the influx of further FDI from Japan and will attract more Japanese firms to come here.”

To Kobayashi, trust and confidence between the heads of State — President Thein Sein and Prime Minister Abe — will drive more fruitful bilateral cooperation in the future.

Resource sector wins most FDI

Myanmar has been aggressive in boosting investment in its agricultural and manufacturing sector, as this creates a large number of jobs and income to the greatest number of people. It is estimated that 70 per cent of the Myanmar population is involved in agriculture. Meanwhile, expansion in the manufacturing sector is expected to replenish record trade deficits.

While the country earns huge foreign exchange income from tourism and primary natural products, it still needs to import basic consumer goods from neighbouring countries.

According to the International Monetary Fund (IMF), Myanmar’s trade deficit increased to 5.5 per cent of its GDP in December 2014 as imports grew by 25 per cent year on year for the period from April to December 2014, while export growth remained flat. Against this backdrop, the country’s net international reserves fell to $4.5 billion at end-December.

Still, much of the FDI Myanmar receives goes into the natural resource sector.

In an address in Parliament last week, MIC chairperson Zay Yar Aung said foreign companies have invested at least $39 billion in 522 businesses to date, most of which has gone into the natural resource sector.

Between the introduction of the Foreign Investment Law on November 30, 1988, and September 30, 2014, the Myanmar government allowed foreign companies to invest $49.9 billion in a total of 783 businesses. But for various reasons, a total of 261 business were disqualified, resulting in a loss of $10 billion. Now, 522 businesses receiving $39 billion in foreign direct investment remain.

In that period, 74.88 per cent of foreign companies invested in the natural resources sector. The rest invested in other sectors, such as agriculture and livestock breeding. Some fear not enough is being invested into Myanmar’s infrastructure.

Meanwhile, the MIC has allowed a total of 22 Myanmar national companies to run 22 businesses with initial investments of Ks 583.4 billion plus $115.5 million.

Obstacles to FDI

Though Myanmar has attracted as much as $5 billion in FDI in the current fiscal year, some critics have said Myanmar could have been more attractive if some fundamental problems were solved.

The World Bank’s Doing Business 2015 report ranks Myanmar 177th out of 189 countries in terms of ease of doing business, based on the regulatory framework governing business. The business start-up process in Myanmar was ranked as the most onerous in the world, and the time required for the process is significantly longer than in other countries.

The process consists of 11 different administrative procedures, which is much more than the average in the member countries of the Organisation for Economic Co-operation and Development (OECD) or in Asia-Pacific countries, where this process consists of five and seven separate procedures, respectively. As a consequence, procedures in Myanmar become costly and dissuade people from starting or formalising their businesses.

Simplifying some administrative procedures and eliminating unnecessary ones thus removes major barriers and could lead to a significant increase in the establishment of new businesses in Myanmar. Compared with its neighbours in the region, Myanmar still imposes a longer process to start up a business.

In a publication titled “Business and Development in Myanmar: a policy handbook for private sector development” released on Thursday by UN Escap, the authors also noted that private ownership rights in Myanmar remain highly restricted; land tenure and titling laws are not up to international standards; and land transfers continue to be complicated. According to the Doing Business 2015 report, the quality of property registry (i.e., the ease with which businesses can secure their rights to property) in Myanmar was ranked at only 151st out of 189 countries.

“This is extremely problematic for businesses as their operations frequently require the establishment of a new office or factory and acquisition of land or another enterprise. Therefore, private sector expansion heavily depends on the possibility to promptly register the property and receive a decent level of protection of property rights. However, nationalisation and expropriation, without the possibility of legal redress or other compensation, remains common. To improve the situation, the government should endeavour to provide title deeds and secure property rights more effectively,” the report said.

Starting a business in Myanmar

– The process remains more complicated and costly than in other countries

Indicators /Myanmar/Southeast Asia/East and Northeast Asia

Number of procedures/11 /8.3/6

Days /72/46/11.9

Cost (% of income per-capita)/155.9/21.3/5.1

Source: World Bank Group

Business performance also depends on institutions’ abilities to enforce existing laws. A fundamental component of successful judicial and regulatory enforcement is to provide fair, quick, and cost-effective legal redress, equally accessible to all affected parties. However, only 52 per cent of Myanmar’s population trusts the country’s judicial system and courts, and the contract enforcement capacity in Myanmar is one of the lowest in the world, ranked 188th out of 189 countries in 2014.

“Overall, the current business-related regulations that are in place in Myanmar are still not fully beneficial to the private sector. They are often seen as obstacles preventing businesses from flourishing and contributing to the country’s growth. To change that, the government of Myanmar needs to provide a regulatory framework in which businesses can thrive. Similarly, addressing corruption and facilitating business access to finance are also of extreme importance. To understand the exact needs of the private sector, better private-public cooperation and communication are also highly recommended. In this way, the government could be well informed about what policies are helpful for businesses and what needs to be changed in order to further facilitate their activity,” the report noted.

Macro-economic outlook

In the broad picture, Myanmar’s economic prospects remain strong, with a higher growth rate than neighbouring countries.

However, the growth rate tends to decelerate, according to Yongzheng Yang, the leader of the International Monetary Fund (IMF) team that visited Myanmar from January 28 to February 5 this year.

Myanmar’s GDP growth is expected to decelerate slightly to 7.8 per cent in the 2014-15 fiscal year from 8.3 per cent in the previous year due to slower growth in the agricultural sector.

“The growth outlook of the Myanmar economy remains favourable over the medium term, but downside risks for the near term have increased. Fiscal risks stem from spending pressures, including a potential large increase in public sector wages, which will raise inflation expectations. The external current account deficit could widen further, and shortfalls in foreign direct investments and other capital inflows could result in slower reserve accumulation,” Yang said.

The IMF urged the Myanmar government to increase tax revenue and prioritise spending to ensure that the budget deficit would not exceed 5 per cent of GDP.

It also warned that the bill proposing a large increase in public sector wages could crowd out much needed increases in health, education and infrastructure spending that are essential for increasing Myanmar’s growth potential. To mitigate this risk, the government will need to increase its efforts to broaden the tax base, improve tax compliance and minimise exemptions. Wage increases in the public sector should be in line with revenue and productivity growth. The IMF team also urged sub-national governments be held responsible for future fiscal allocation.

Source: The Nation

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