Myanmar's SMEs could be backbone of new Yangon Stock Exchange

Myanmar's stock exchange, the newest frontier market on the block, has been greeted with caution but it could very well succeed where its neighbors have failed.

Myanmar launched the Yangon Stock Exchange (YSX) on Wednesday—the country's first official bourse—in the government's latest move to convince the world that the once-sanctioned nation is open for business.

As the local Myanmar Times noted, the launch was largely symbolic as the country lacks underwriters and only a handful of local firms are expected to join initially. First Myanmar Investment, chaired by local tycoon Serge Pun is reportedly one of the top names bandied about as a float candidate. For now, the exchange remains closed off to foreign investors.

But despite a lack of necessary regulations and legislation, factors widely cited as key obstacles to greater participation, the fundamentals for a healthy bourse seem intact.

"There's one thing Myanmar has, which is a lot of very good small and medium-sized companies," said Kenneth Stevens, managing partner at Leopard Capital, a private equity fund manager that specializes in frontier markets.

Because the nation has been in isolation for so long, it's had to forge its own path, he explained. "While its neighbors have a dearth of decent companies to list, Myanmar has several that have survived for decades."

Indeed, a combined total of seven companies are listed on the Cambodian Stock Exchange and Laos Securities Exchange.

While some strategists say Myanmar's strict accounting standards could scare off companies from listing on the YSX, local businesses may be more resilient than expected.

"When you look at companies considering listing at this stage, many are quite sophisticated in terms of governance and accounting standards…You also have a lot of local banks getting up to speed to meet the criteria," explained Romain Caillaud, senior director at global advisory firm FTI Consulting.

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He believes the YSX is better positioned than Cambodia or Laos and could easily resemble Vietnam's Ho Chi Minh Stock Exchange, which has more than 300 listings, in five to ten years.

Moreover, the fact that the YSX boasts Japan's Daiwa Securities and Japan Exchange Group as co-owners lends it credibility and should help squash fears of endemic corruption, he noted. Myanmar ranks 156th out of 175 on Transparency International's corruption index amid rampant reports of money laundering.

"What [Myanmar firms] need now are good partners, capital and for markets to open up and for development to follow," Stevens said.

One technical difficulty facing the YSX is the fact that its majority shareholder, the Myanmar Economic Bank (MEB), remains on a list of companies "blocked" by the U.S. government. Such a block would usually mean Americans are prevented from conducting transactions, but Washington has granted the MEB a special license that lets it handle U.S. accounts.

"As a result of authorizations included in the amended Regulations (as issued on June 30, 2014), the special measures against Burma do not apply to the operation of correspondent accounts for Asia Green Development Bank, Ayeyarwady Bank, Myanmar Economic Bank, and Myanmar Investment and Commercial Bank, or to transactions that are conducted through such accounts," said a filing on the U.S. Treasury Department's website.

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