Is Myanmar losing its sparkle for investors?

A dismal human rights record, banking frailty and new elections; how some dedicated private equity firms are battling against the negative news and see light at the end of the tunnel.

The global outcry over the imprisonment of two Reuters reporters isn't the only challenge facing Myanmar: foreign investment has started to sag, having ramped up from a low base barely a few years ago when the reclusive country finally opened its doors to the outside world.

Not that all foreign investors are being put off; for some, the opportunity to work in a less crowded field with more realistic valuations is a welcome development.

According to the World Bank, FDI approvals in 2017/18 are down 14% year-on-year in Myanmar as slowing government reform and the alleged ethnic genocide of the mostly Moslem Rohingya people in Rakhine state has sapped investor interest.

Prior to that, foreign investment into Myanmar had largely been on the up, spurred by the liberalisation of the economy in 2012 but comparatively still well short of its full potential. At just $3 billion, FDI into Myanmar in 2016 was less than four times what it was in Vietnam, according to the 2017 Asean Investment Report, and not much bigger than in Cambodia, whose population is two-thirds smaller.

Aside from the growing political and reputational concerns, a major issue holding back investment in Myanmar has been the massive overvaluation of local businesses, say private equity funds currently active in the country.

“In Myanmar two years ago, valuations were literally psychotic. Anyone with a business plan and a license to operate thought they were immediately worth $20 million,” said Joshua Morris, chief executive officer at Emerging Markets Investment Advisors (EMIA). “We’re starting to see that euphoria in Myanmar wear off.”

“We’re seeing a slow decline in valuation expectations [although they're] still high relative to more mature markets such as Cambodia, which might sound a bit ironic,” Morris added. 

EMIA manages two private equity firms that invest in Cambodia, Laos and Myanmar. It has so far made about 15 investments across those three markets.

For Morris, it pays to be patient in such frontier markets, which is just as well given the heavily pot-holed road he sees ahead.

“Myanmar is likely to go through a couple of difficult years; the political situation is at a point where the 2020 election is now back in play, the economy is hurting significantly because of the human rights condition ... tourism is down, FDI is down significantly, [and] the banking sector is likely to have a liquidity crisis.” 

It's a moot point whether Nobel Peace Prize laureate and Myanmar leader Aung San Suu Kyi, whose civil rights credentials have been mauled by the Rohingya crisis and her support for the jailing of the two reporters, is these days solely motivated by ethno-nationalist electoral factors.

But Myanmar does have a strong Buddhist-Bamar majority whose support she will need if she is to be re-elected in 2020. And as she once famously said when under house arrest for 15 years following the Burmese army's refusal to relinquish power after she had won elections in 1990: "It is not power that corrupts but fear. Fear of losing power corrupts those who wield it and fear of the scourge of power corrupts those who are subject to it."

With that in mind, it seems unlikely that the crisis that has driven an estimated 700,000 Rohingya into refugee camps and damaged newly democratic Myanmar's reputation will die down soon and could continue to drag on FDI in view of the poor optics. 

While the government’s stance on human rights violations is a concern for Pamela Fung, executive director at Morgan Stanley Alternative Investment Partners, there are other reasons to be cautious about backing private equity funds in the country.

“From a commercial perspective there are questions around the legal infrastructure, the depth of the capital markets there … I don’t know whether it’s ready for private equity at this point in time,” she said.

LOOMING BANKING CRISIS?

Another growing hurdle are concerns about the capacity of Myanmar's banking sector to survive a potential crisis brought on by rising non-performing-loans (NPL) and a weakening kyat currency.

“The investment climate has definitely tightened up in the last 12 months, not just because of the international scrutiny surrounding human rights issues, but also growing concerns regarding the local banking system,” Alex Odom, chief investment officer of Belt and Road Capital Management, said.

Belt and Road Capital Management is a Cambodia-based investment firm with equity interests across Cambodia, Laos, Myanmar, Vietnam and Thailand.

Myanmar has 28 banks operating in the country, with four state-owned banks, three banks owned by municipal governments, 10 semi-private banks that trade privately but are partially owned by -- or closely associated with, government agencies -- and 14 privately owned banks.   

Following the 2013 Central Bank of Myanmar Law and the 2016 Financial Institutions Law, these banks have undergone radical reform. According to a Milken Institute report on the sector published in August, though, fears of a repeat of the 2003 banking crisis persist and have hindered its development and led to overregulation.

 

The 2003 crisis was triggered by the collapse of informal finance companies that had sprung up as a result of a government-imposed 10% cap on interest on deposits, forcing consumers to look to risky financial companies offering more than the official rates, according to a 2003 report by Sean Turnell, an Australian economist from Macquarie University.  

When these went bust in February 2003 confidence in the banking sector was shattered, and even though it has now been mostly restored, the people of Myanmar are still wary of another meltdown in the sector.

Today, the issue is with liquidity as banking reforms in the last three years have taken hold of the sector. Traditionally, many “loans” were in actual fact overdrafts, and were rolled over on a yearly basis with no effort to recall the monies, or to assess the collateral.

In July 2017, banks were given until the end of the year to reduce overdrafts to 20% of loan portfolios. As they accounted for more than 75% of Myanmar’s $9 billion in bank loans it could have resulted in chaos again if the directive had been fully carried out

Instead, the central bank relented in November and introduced a phased-in reduction to 50% by mid-2018, 30% by mid-2019 and 20% by mid-2020.   

These changes, along with the drop in FDI and tourist numbers in 2018, have all placed greater strain on a “core banking system that is very bad”, according to Victor Chua, a managing partner at early-stage investment firm Vynn Capital.

 

FINDING VALUE

For veteran investors in frontier markets -- an investment label usually reserved for the most hazardous, least developed, lowest-tier emerging markets with the weakest legal jurisdictions -- such elevated economic and political risks are par for the course.

And Myanmar is a difficult country to operate in, ranked 171 out of 190 countries in the World Bank's annual Doing Business Index.

“Myanmar is as frontier as you can get unless you are talking about North Korea,” said Genevieve Heng, managing director and co-founder of Anthem Asia, a Myanmar-focused fund with a particular interest in female-run enterprises.

She has just reached first close on Anthem Asia's first fund at about $35 million after a particularly gruelling fund-raising marathon, given the tough macro-economic and political backdrop. Anthem Asia is targeting $100 million and already has commitments from the UK's development finance institution CDC and the Dutch impact investor Triple Jump. 

It's not for everyone but dig deep, keep your nose to the grindstone, and be patient and you can make big money in such frontier markets, or so the mantra goes.

By definition that ideally means getting in early, before a frontier market moves up the emerging market investment rankings and the investor field gets more crowded.

Ralph Keitel, regional lead East Asia for private equity investing at the IFC, part of the World Bank committed to backing Anthem Asia just three weeks ago as part of its mandate to develop financial markets, and make money.

“We are investing for the long term [in Myanmar],” said Keitel. “We are seeking to build a GP that will be still be around in the next 20 years.”

Certainly, investing in Myanmar before the latest sour chapter in its story proved a bonanza for some prominent names like TPG Capital, which made an internal rate of return of 88% on the sale of its stake in Myanmar Distillery Company (MDC), according to a person familiar with the deal. 
 
“We bought a Myanmar distillery and it worked out great,” David Bonderman, chairman and founding partner of TPG Capital, said at the Milken Summit Asia in Singapore on Friday.
 
Having acquired a 50% stake in Yangoon-based MDC in 2015 for $150 million and sold it for $494.4 million in October 2017, though, that size of deal and speed of exit is atypical of the kind that investors can hope for these days in Myanmar.  
 
As EMIA's Morris put it: “You have to be ready for a fairly long ride after you source these fairly high growth companies to get them to a point where bigger financial players or strategics can come in.” 
 
Sourcing such investments is very tough, but presumably could get easier as some investors pull out. 
 
“The truth is there aren’t that many good companies, so a lot of people are chasing the solid companies, ” said Heng of Anthem Asia, which has been active in Myanmar for six years and targets investments worth up to $3 million.
 
“We go by word of mouth,” she said, as well as through small company associations since about “about 99% of the private companies are SMEs.”
 
"Myanmar is still very much trust based; remember we’re talking about a country that went to sleep for 40 years,” Heng added. “The new generation wants to engage with the outside world,” said added, citing a mushrooming of e-commerce start-ups. 
 
But once you've sourced a potential deal, another challenge is closing that deal due to a lack of verifiable data -- this is a frontier market after all. 

“The number one problem I have with companies is their accounts; we’re not talking about two or three books – we’re just talking about the ability to give me the accounts,” Heng said.

One thing is for certain when investing in Myanmar, as Heng noted: “You cannot be passive because a lot of the skills that we take for granted are lacking.”

Editing by William Kemble-Diaz

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