MYANMAR - OPEN FOR BUSINESS? - Holman Fenwick Willan

International
Commerce
March
2012
MYANMAR - OPEN FOR BUSINESS?
Has resource rich Myanmar come in
from the cold?
The recent elections in Myanmar appear to
have provided a watershed in the country’s
challenging political landscape. The last 12
months have seen its government embark on
a wide-ranging programme of economic and
political reforms, prompting the first visit by a
US Secretary of State in more than 50 years.
Has the time come for Myanmar to open
its doors to new foreign investment? Will
foreign investors now set their sights on the
considerable resource opportunities on offer in
this new political environment?
The following briefing discusses the
opportunities, as well as the potential risks and
pitfalls, facing foreign investors.
Are the doors now open?
For over five decades, Myanmar suffered
from the effects of international isolation and
economic stagnation. Having been one of
Asia’s wealthiest nations at the time of its
independence in 1948, by 2011 Myanmar had
slumped to one of Asia’s poorest.
Following the recent general election (the first in
20 years), the country appears to have signalled
a change in attitude. In spite of allegations of
electoral fraud and a boycott by Aung San Suu
Kyi’s National League for Democracy, the result
was hailed by the government as a significant
step in the transition to civilian democracy.
The government’s promise of economic and
political reforms appears to be holding true.
2011 has witnessed significant political and
economic developments: the release of political
prisoners; the announcement by Aung San Suu
Kyi that she will stand for election to parliament;
new laws allowing peaceful protests and the
formation of unions; anti-corruption initiatives;
policies aimed at lifting restrictions on the
flow of foreign investment; and exchange rate
reforms.

Myanmar sanctions – the current regime
Since the early 1990’s, Myanmar has been the target of sanctions by the
United States, the EU and Canada.
United States
The US first imposed an arms embargo on Myanmar in 1993, widening it four
years later to include all new investment. In 2003, the Myanmar Freedom and
Democracy Act was passed, banning all imports, with the exception of teak
and gems that had been processed in a third country. The Act also restricted
the export of financial services, froze the assets of some financial institutions
and extended visa restrictions on officials.
The Tom Lantos Block Act of 2008 imposed a specific ban on jadeite and
rubies.
EU
In 1996, the EU imposed sanctions that included a ban on the sale or transfer
of weapons, visa restrictions on officials and a freeze on officials’ overseas
assets. It also suspended all bilateral aid, other than humanitarian assistance.
Further sanctions were imposed in 2007, following the violent suppression of
anti-government protests, including a ban on imports of gems, timbers and
metals. These were again tightened in 2009, following the extension of Aung
San Suu Kyi’s house arrest.
Canada
Canada imposed sanctions on Myanmar in 2007, which banned imports
and exports, apart from humanitarian goods. The assets of Myanmarese
citizens connected to the government were frozen. Canada also outlawed the
provision of financial services and technical data to Myanmar.
Asia
Asian countries have been against imposing sanctions on Myanmar.
However, of the major economies only China, India and South Korea have
actively invested in the country.
In addition, the Association of
South East Asian Nation’s (ASEAN)
decision in November 2011 to allow
Myanmar to take on the leadership
of the 10 member bloc in 2014, was
widely seen as an endorsement of
the country’s progress, a move that
was followed in December 2011 by
a visit by Hillary Clinton. Among the
encouraging messages of support
02 International Commerce
was the pledge that the US was
“prepared to walk the path of reform
[with Myanmar]” and would be
“prepared to go further if reforms
maintain their momentum”. Such
diplomatic language has led to
speculation by commentators of a
relaxation of the sanctions currently
in place, in turn ending decades of
western isolation.
First mover advantage?
Myanmar’s resource reserves provide
the country with significant economic
potential. For those companies willing
to take the risk, the potential rewards
may be substantial.
Myanmar possesses an abundant
supply of natural resources (see
side panel). According to Myanmar
government officials, the country
has the world’s 10th largest natural
gas reserves, estimated at over 90
trillion cubic feet, and whilst many
commentators dispute the accuracy
of these figures, the presence of
French and US energy companies,
despite the continuing sanctions
in place, clearly indicates the
seriousness with which Myanmar’s
oil and gas reserves are being taken.
Myanmar is also endowed with
other significant resources, including
timber, minerals, precious stones,
fisheries and agricultural products.
Additionally, Myanmar finds itself well
placed geographically, which should
allow it to take economic advantage
due to its proximity to strong Asian
economies. Lodged between South
East Asia, India and China, the
country is situated at the heart of
the world’s key growth economies.
With the targeted investment in
infrastructure, specifically in areas
such as rail, road and pipelines,
together with its deep sea ports,
situated as they are on the Indian
Ocean, Myanmar has the potential to
emerge as a vital link in the region’s
economic activity. Furthermore, with
a population of 53 million people,
Myanmar has a large workforce
with strong prospects for domestic
growth.

GDP
• Expected to rise by 5.5% in
2011.
• $82.72 billion (PPP) (2011).
Exports: $9.5 billion (2011)
• Commodities: natural gas,
wood products, pulses, beans,
fish, rice, clothing, jade and
gems.
• Partners: Thailand 38.3%, India
20.8%, China 12.9%.
Imports: $5.4 billion (2011)
• Commodities: fabric,
petroleum products,
fertilizer, plastics, machinery,
transport equipment, cement,
construction materials, crude
oil, food products, edible oil.
• Partners: China 38.9%,
Thailand 23.2%, Singapore
12.9%.
Source: CIA, The World Factbook.
However, years of western isolation
means that Myanmar lags far behind
its neighbours in many core economic
sectors, such as construction and
telecommunications. This lack of
development, together with the
absence of any significant local
competitors, presents foreign
companies with an opportunity to fill
the void.
Can risk be rewarded?
Despite the strides which have been
taken and the Government’s apparent
eagerness to continue with the pace
of change, investors still have a
number of reasons to be cautious,
especially in the short term:
• Regulatory uncertainty: among
the biggest concerns for any
foreign company looking to
invest in a developing economy
is its regulatory framework.
Myanmar lacks a responsive,
transparent and accountable
regulatory framework and
this creates a challenging
environment for setting up
How can new participants considering Myanmar protect themselves?
• Ensure a thorough due diligence process is undertaken.
• Consider a local partner with a strong JV Agreement – particularly when
dealing with pre-emption rights and political risk.
• Contemplate political risk insurance or other mitigating strategies.
• Regardless of the jurisdiction, adopt western governance positions.
• Seek legal/accountancy advice early on.
• When investigating resource assets, look to independent and widely
recognised experts to substantiate them accurately.
• Always consider the least attractive outcome from the outset and plan
appropriately.
businesses. Moreover, predicting
the ultimate shape regulation will
take following the transformation
from a command economy is
extremely difficult. Specifically,
in relation to foreign investors,
it remains unclear what rights,
protections and tax incentives
will be offered – however, similar
concerns have been raised in
other newly emerging economies.
• Government inefficiency and
corruption: Myanmar was
recently ranked as the world’s
2nd most corrupt country behind
Somalia. Not only does this
make the practicalities of doing
business extremely difficult,
but also potentially illegal for
companies covered by antibribery
legislation with extraterritorial
reach (see, UK Bribery
Act 2010).
• Infrastructure: Myanmar’s
infrastructure has suffered from
years of neglect, an example of
which is the rail network, which
remains relatively untouched
since independence in 1948.
To lay the foundations of
growth, significant investment
will have to be made in areas
such as transport, energy and
telecommunications.
• Workforce: despite possessing
a relatively large and cost
competitive workforce, a
significant proportion of it
possess little to no experience of
modern technology and business
practices.
• Exchange rate: Myanmar has
an official exchange rate and an
unofficial black market, exchange
rate. Recently, at the request of
International Commerce 03

its central bank, the International
Monetary Fund sent a team to
Myanmar to advise on unifying
the exchange rates, as well as
lifting restrictions on international
payments and transfers.
• Sanctions: sanctions by western
nations remain in force. Whilst
many commentators speculate
that these will soon be removed,
this will ultimately depend on the
pace of change that the country
is able to achieve.
• Risk of rollback: although
the signals from the new
Government support the view
that it is committed to political
and economic reform, the path
to a full democracy and a thriving
market economy is one with no
guarantee as to the end result,
and it remains to be seen how
far the present Government
intends to go with its reforms.
For example, in 2008 a new
constitution was introduced,
effectively entrenching the
primacy of the military.
Accordingly, a quarter of seats in
both parliamentary chambers are
now reserved for the military and
three key ministerial posts for
serving generals (interior, defence
and board affairs).
The potential opportunities and
rewards for foreign companies
willing to invest in Myanmar are
considerable. Already, the effects
of political and economic reforms
are being felt, as investors seek
a foothold in the country: foreign
investment jumped from $300 million
in 2009-10, to $20 billion in 2010-
11. However, whilst the outlook
is positive and exciting, given the
new ground that is being trodden,
investors would be wise to take a
cautious approach before diving in.
For more information, please contact
Brian Gordon, Partner, on +65 6305
9533 or brian.gordon@hfw.com, or
James Donoghue, Partner, on
+61 (0)8 9422 4705 or
james.donoghue@hfw.com, or your
usual contact at HFW.
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