Why Investors Should Tread Warily in Myanmar

Workers paint the central library at the University of Yangon in Yangon, Myanmar Photograph by Kuni Takahashi/The New York Times via Redux

When President Barack Obama arrives in Myanmar (Burma) Monday for the first-ever visit to the country by a sitting American president, he’ll be joining a large group of investors who have been eagerly scouting the country.

As most leading democracies have dropped sanctions on Myanmar over the past year, the country’s largest city, Yangon, has been inundated with foreign investment. General Electric and other consumer-goods companies are scouting out opportunities in Myanmar, while the leading credit-card companies are partnering with Myanmar banks to get into the market. Banks such as Standard Chartered are figuring out how to return. Even the World Bank, which has not had a presence in the country in decades, authorized a landmark aid package this month worth $245 million.

On the surface, the excitement seem to make sense. A country with a population of 50 million, sandwiched between some of the fastest-growing economies on earth, Myanmar was isolated for decades by its own leaders and Western sanctions. Led by reformist president Thein Sein, a former general, the country in the past two years has streamlined its investment laws, reformed its currency, and cracked down on graft. And Myanmar contains enormous natural resources. As one energy company executive told me, “Every oil company in the world is looking there now.” Earlier this year, officials from the Burmese Ministry of Energy announced that the country possessed “proven” oil reserves of almost 140 million barrels and 11.4 trillion cubic feet of gas, potentially putting it on par with some of the largest petroleum producers in the world.

As Joshua Hammer noted in a dispatch from Myanmar for Bloomberg Businessweek, rents for even modest office space in Yangon, a low-rise city that would hardly make anyone forget Hong Kong or London, are approaching those cities’ prices. The few Burmese with strong management and IT skills—less than 5 percent of the country is connected to the Internet—can command enormous salaries. Hotel rooms in the few five-star properties in the city are booked ahead for months, a far cry from the years of sanctions, when the only investors one saw in hotels in Yangon were from China, Thailand, and Singapore.

Yet this gold rush is wildly premature. Many businesspeople arriving in Myanmar are comparing the country to neighbors such as Thailand and Malaysia, which utilized cheap labor, big pools of foreign investment, and liberal investment laws to build large manufacturing industries. Yet Myanmar’s levels of development are far below those of its neighbors.

Worse, while Thailand and Malaysia had strong central leadership even as the countries democratized, in Myanmar the abrupt switch from one of the most repressive authoritarian states in the world to an increasingly open political environment seems to be igniting interethnic and interreligious conflict across the country. Vigilante violence, banditry, and competition over scarce resources such as rice are all on the rise. In a recent report on Myanmar, the International Crisis Group raised the prospect that intercommunal violence in western Arakan State, which has raged for six months now and killed at least 200 people, could spread to other parts of the country, leading to a full-on civil war. In particular, investors from the Persian Gulf, who might provide capital for many new tourism projects, will be wary of committing to a country where Muslim villages in Arakan State are being attacked and burned to the ground, and prominent groups of Buddhist monks are unleashing public vitriol against Burmese Muslims.

The Myanmar government has tried to convince investors that it’s signing cease-fire deals with many insurgent groups and will use the army’s overwhelming force to maintain order in other restive regions such as Arakan State and Kachin State. Opposition leader Aung San Suu Kyi, who enjoys the respect of many ethnic minorities despite being from the majority ethnic Burman group, has offered few concrete solutions to the ongoing wars, or any plan for a future federal state that would satisfy many minorities. Despite six months of increasing deployments of troops to Arakan State, the interethnic violence there seems to be getting worse, and nearly 100,000 people have fled their homes for squalid refugee camps where malnutrition is rife. Similarly, despite the government’s promises to end civil strife in northern Kachin State, the war has become more intense in recent months, with more engagements and casualties on both sides.

Already, some resources investors who salivated over Myanmar’s potential for oil, gas, timber, gems, and hydropower just six months ago are starting to reassess their willingness to dive in. They worry that, as in conflict zones such as Papua or Aceh in Indonesia, foreign businesses could wind up getting caught in the crossfire of brutal civil wars, accused by rights activists of repressing local people while also being accused by the Myanmar government of not doing enough to help end these insurgencies. “We went to the [oil and gas] trade show earlier this year, but I want to see real cease-fires, lasting cease-fires everywhere before we get more serious,” says one energy company executive about Myanmar.

Finally, Myanmar faces two other severe obstacles. Although the cost of labor is relatively low, it’s not necessarily lower than in neighboring Bangladesh, which has become a textiles powerhouse. Myanmar’s workforce is almost totally unschooled, since the former military regime basically shut all secondary education for decades for fear that student protests might topple the government. Second, although Thein Sein is trying to stabilize the Burmese currency, the kyat, and rebuild the banking sector, the country is essentially an illiquid market—it’s very difficult to repatriate profits or to make venture capital investments there. Myanmar is setting up a stock market, but once the exchange is established, with Japanese help, its turnover will probably be miniscule compared to other regional bourses.

As several venture capitalist specialists with experience in many emerging markets in Asia told me recently, it will still be a long time before VCs with significant heft enter the country, since they’d be afraid they could not get their money out if necessary. Much of the hype about Myanmar, in short, looks like just that: hype.

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