GO
Loading...

Is the Rush Into Myanmar Creating a Bubble Economy?

Kaori Enjoji|Tokyo Bureau Chief
Wednesday, 11 Jul 2012 | 1:52 AM ET

In a country where reportedly a quarter of the population lives in poverty and 70 percent live without electricity, a bubble sounds like an odd way to describe what is happening in a part of Myanmar. If the ultimate trophies for international investors are the nation’s rich resources, such as natural gas, tungsten and gems, let’s just call it a gold rush.

Golden Sule Pagoda, Rangoon, Myanmar
Juergen Ritterbach | The Image Bank | Getty Images
Golden Sule Pagoda, Rangoon, Myanmar

On the surface, the only signs of glitter in the country’s largest city, Yangon, are the roofs of the famed pagodas. After decades of isolation and neglect, grand facades of the city’s colonial past are fading. Despite the decay, property developers talk of restoring old buildings into designer boutiques. One of a limited, dated selection of hotel rooms for businessmen charges $240 a night in June, not including the 4 percent handling fee if you want to pay via plastic. A rising middle class is willing to pay six times more for a used Toyota Alphard today than they would have a year ago, when the waiting list was shorter. Some million-dollar homes are selling.

“I think undoubtedly there is what you might describe as a bubble, right in the middle of Yangon. You’re sitting in the heart of downtown, and we’re surrounded by properties which have gone up dramatically in value,” said Andrew Rickards, CEO of YOMA Strategic Holdings, a property developer.

The release of some political prisoners, the election of pro-democracy leader Aung San Suu Kyi to parliament earlier this year and a number of other reforms have prompted countries around the world to ease sanctions. The response from many global investors, who have been waiting for years for Myanmar’s economic awakening, has been to find a local partner as quickly as possible to tap into what the International Monetary Fund (IMF) calls a “historic opportunity.” On any given week, a who’s who of international investors in sectors ranging from banking to real estate to retail is in Yangon signing agreements with local partners.

“We have no capital, no technology, so we need investment,” said Soe Thane, Chairman of the Myanmar Investment Commission.

Many hope that this wave of investment will help raise the living standards of Myanmar’s 62 million people. According to the IMF, GDP per capita is about $702, roughly 40 percent lower than Laos and Cambodia. Others, like Human Rights Watch, warn that rules are needed to ensure the investment does not fan corruption and increase the military’s power.

Kanae Doi, Japan representative of Human Rights Watch, says due diligence in extractive industries is critical.

“Large scale construction can cause the eviction of indigenous people, for example,” Doi says, adding that in Myanmar, such projects often include some kind of military involvement. “The army can cause abuses such as forced labor or even rapes or killing. So all the private sector companies need to be super careful they will not be an accomplice to grave human rights abuses.”

According to the Corruption Perceptions Index, there are only two other countries publisher Transparency International perceives as more corrupt that Myanmar - North Korea and Somalia.

“Forming government will take a lot of time, it’s not going to be like a football team. You put in a new coach and you have the champions league,” said Maitrii Aung-Thwin, Assistant Professor at the National University of Singapore.

Political analysts say Myanmar’s current political process, which began after the election of a nominally civilian government in 2010, is at best in its infancy. When parliament reconvenes for the fourth time in July, a mountain of bills ranging from a foreign direct investment law to taxation issues await approval. As one parliamentarian said, “We were all army people. This is very new to us.”

Manufacturers, meanwhile, say Myanmar is an attractive production hub. Its population is relatively young compared to other ageing workforce in places like Japan, South Korea and Singapore. Labor costs in Yangon are a fifth of those in Bangkok and a third of Shanghai, according to Japan External Trade Organization (JETRO). With a 640-kilometer coastline looking onto the Indian Ocean and a border spanning five countries, Myanmar’s geography offers distinct advantages.

Like any investment in a frontier market, the risks are inherent, says Paul Wilson, a consultant for clients like Forbes & Manhattan, a Canadian merchant bank focused on the resources sector.

“I think businesses should come in with eyes wide open. This is a country that has been closed for some time. Find partners you can really trust, who you want to be in business with for 10 to 15 years. Take your time doing that,” Wilson said.

Yangon already has a handful of local tycoons, who have cornered key segments of the market. Many received their coveted licenses to operate through military connections and now run sprawling, lucrative conglomerates that span transportation, banking and real estate sectors.

At the same time, there is a budding group of a younger generation of local entrepreneurs like Kyaw Kyaw Moe. He is one of the people behind watch retailer Cherry Oo Manufacturing, which has original equipment manufacturer (OEM) agreements with factories in Hong Kong and South Korea. At one of his many stores in downtown Yangon, a steady flow of customers buy watches that cost between $50 and $100. When the time is right, Cherry Oo plans to build its own factory in Myanmar and export to the world.

“No, no, it’s more,” says Moe, when asked whether his profit margins are about 90 percent. “We don’t write ‘made in China’ because people don’t want to pay a lot of money for that in our country. ‘Made in Hong Kong’ sounds much better.”

Featured

Contact Asia News

  • CNBC NEWSLETTERS

    Get the best of CNBC in your inbox

    › Learn More

Asia Video