INSIGHTS from Myanmar Capital Partners - June 2013

Overview:
May was another busy month for the leadership of the new Myanmar. 

Key points
President Thein Sein visited President Obama in Washington, the Japanese made huge pledges of aid during a visit by Prime Minister Abe and Opposition Leader Aung San Suu Kyi spoke about reform of the constitution as well as the challenges in managing the aspirations of minority tribes. The local currency, the kyat, weakened like some other leading currencies in the context of the on-going global realignment. Foreign investors intensified their engagement.

Politics

• Thein Sein in Washington - Thein Sein became the first Myanmar president to have been welcomed by the White House in 47 years. United States President Barack Obama committed to assist Myanmar's political and economic reforms. The promise was seen as a stamp of approval for the Myanmar government's reform process. Obama praised Thein Sein for his reform efforts but asked him to take steps to stop communal violence directed at Muslim communities. After meeting with Obama, Thein Sein told reporters that whilst Myanmar still had many challenges Obama's policy towards Myanmar helped greatly with the ongoing reform process.  
• On the Constitution - Myanmar’s opposition leader Aung San Suu Kyi has said that the severe restrictions that make the 2008 Constitution unchangeable must be removed before any constitutional amendment could take place. Suu Kyi acknowledged the public interest in the issue, saying that it was a positive sign of the reform process towards democracy. “What we want and what is feasible must be considered clearly. I believe we have to start with what is possible to achieve what we want totally.”
• On Taxation - A new, stronger tax collection system is to be studied by the Myanmar Parliament in June, led by the Bank and Finance Development Committee. An overhaul of the country’s tax system is needed to overcome legacy weaknesses. There needs to be an improvement in tax collection in all areas, from commercial businesses to the state lottery. Taxes will also target growing consumer demand for alcohol and tobacco. The government is aiming to collect about 4.5% of Myanmar’s gross domestic product for the 2013-2014 financial year, which could be about US $2.5 billion. This percentage is still low compared with other emerging economies in the region. Increased revenue is to be spent on healthcare, education and infrastructure.

• Open for business - President Thein Sein has invited private sector investment from the United States to participate in the new Myanmar. The visiting Myanmar leader addressed businessmen at the US Chamber of Commerce, encouraging US companies to recognise a wealth of business opportunities. He asked for an end to the remaining economic sanctions which have isolated Myanmar for decades from the global community. The US Chamber of Commerce agreed that Myanmar’s substantial reforms under President Thein Sein’s leadership had created a path forward giving room for the United States government to ease trade and investment restrictions and in so doing giving American businesses an enormous opportunity to engage with Myanmar’s growing consumer market. Since this visit Coca Cola has committed to a $200m bottling plant and many other initiatives are in hand.

Business

• Inward investment increases – Recent data show that foreign direct investment in Myanmar was almost five times higher than the previous year, much of it going into garment production and manufacturing. Over $1.419 billion in foreign direct investments was made in almost 100 businesses. As a comparison there was some $300 million in foreign direct investment (FDI) for 11 businesses in the previous fiscal year starting in April 2011. Most of the investment in 2012/13 came from China, Hong Kong, Japan, South Korea and Singapore. The outlook is brighter still after the recent easing of trade sanctions by the EU.
• Better roads? - the United States has said it will help Myanmar repair some of the main infrastructure in the country’s transportation sector. This pledge is part of a broader development aid package the United States will provide to Myanmar. Included in the plans are repairs of the Yangon-Mandalay highway, a strategic road for much of Southeast and South Asia. Apart from the infrastructure development plans, Thein Sein’s trip also saw Myanmar sign a Trade and Investment Framework Agreement (TIFA) with the United States.
• More cement - PT Semen Indonesia plans to build a $200 million cement factory in Myanmar in 2014 as it expands its business in Southeast Asia in a bid to compete with Thailand’s Siam Cement. The plan is the latest expansion strategy by the company, which became the first Indonesian state-owned firm to make an overseas corporate acquisition after buying a majority stake in Vietnam’s Thang Long Cement in 2011.  Southeast Asian companies are battling to be more competitive regionally as they prepare for the advent of the ASEAN Common Market in 2015, which will ease restrictions on the transfer of goods and services across the region. The company is talking to the Myanmar government about opening a factory with an annual production of 600,000 to 1 million tonnes. Myanmar currently imports around half of the 6 million tonnes of cement it uses annually.
• Mainly Asians - Most visitors to Myanmar are from Asia with the biggest nationality groups being Thai and Chinese. Some 16 percent of tourists visiting Myanmar came from Thailand whilst 12 percent are from China. However, despite the growing numbers, tourism contributed only 0.2 percent of Myanmar’s gross domestic product in 2011 compared to an average 4.6 percent for the 10 ASEAN member countries. This is likely to change if the government succeeds in attracting 3 million tourists per year by 2015, compared with about 1 million in 2012. Efforts are being made to expand the infrastructure although this present challenges for planning and construction.
• New Japan loans – Japan will offer low-interest loans totalling US $205 million providing finance for the first phase of the new harbour to form part of the Thilawa Special Economic Zone in Yangon. The funds will be provided as Official Development Assistance by the Japanese government, but work will not start before next year. No reason has yet been given for the delay, although Japanese officials have previously complained of land access and infrastructure problems associated with Thilawa. Three major Japanese companies, Marubeni Corporation, Mitsubishi Corporation and Sumitomo Corporation have agreed to construct Thilawa.
• Second Yangon airport - An international consortium led by a Singapore firm, Yongnam Holdings, has formed a partnership with the JGC Corporation of Japan and another Singapore company, Changi Airport Planners and Engineers, to bid to build and operate the Hanthawaddy International Airport in Pegu Division, some 50 miles outside Yangon. Yongnam has previously worked on Singapore’s Changi Airport, Bangkok’s Suvarnabhumi Airport, as well as airports in Kuala Lumpur, New Delhi and Mumbai. The contract is expected to be for 30 years. Yangon’s existing airport has seen a huge increase in traffic over the last two years, registering 1 million international arrivals in 2012 for the first time.
• Oil & Gas - China state-owned oil company Sinopec has sold a 30 percent share in its wholly owned oil block in central Myanmar to Taiwanese firm, CPC Corp. Sinopec has held the block, near Mandalay, since 2004, and although some exploratory wells have discovered oil and natural gas there has so far been no production . The block covers a 12,000-square-km zone. Industry insiders said that the sale is part of a broader exchange of oil and gas interests between the two companies as China and Taiwan soften their old political animosities and engage in closer commercial links.
• Powering the nation – The shortage of electricity in Myanmar is becoming more acute as the country’s economy grows and more energy is needed to run more factories, power more hotels and light up more urban homes. Currently only 26 per cent of Myanmar’s estimated 60 million people have access to mains electricity, according to a recent study by the Asian Development Bank, estimating the country’s present electricity generating capacity at 3,360 megawatts. However Myanmar’s generating capability in reality is much less because of dilapidated infrastructure and aging and inefficient plants, a problem that is compounded by hydroelectric systems which cannot deliver full capacity in the dry season due to low water levels.
• New power generation - In the past year several announcements have been made for plans for new power stations, fuelled either by coal, by natural gas or using renewable energy, altogether totalling some 2,010 megawatts, 60 percent more than the current total electricity generating capacity. However, none of these plans has so far moved beyond feasibility. Companies from Japan, Malaysia, Indonesia and Thailand have all proposed building new power stations, but so far no contracts have been awarded. Malaysia’s Mudajaya Group proposed a 500-megawatt coal-fired plant in Mandalay; Indonesian firm Bukit Asam proposed a 200-megawatt plant; a Japanese group proposed a 500-megawatt project in Yangon; and Thai companies said they would construct over 600 megawatts of capacity in Dawei and Naypyidaw. None of these have moved beyond the feasibility study stage and what they appear to lack is finance and more importantly investment assurance from the government.
• GE to the rescue - US General Electric Company has offered to upgrade gas turbines to generate more electricity. The current gas turbines have been operating for over 30 years and as such don’t generate sufficient capacity. The gas turbines need to be upgraded, according to the electricity workshop. Supposedly some 700 MW electricity generated from the gas turbines has been supplying nine areas, but it is generating only 350 MW. Upgrading the gas turbines should generate full capacity, technicians will come and check the necessary requirements for upgrading the gas turbines if the government gives the green light.
• More Beer – Soon after the European Union lifted sanctions on Myanmar, Netherlands-based Heineken, the world’s third-largest brewer, announced it would invest in a US$60 million brewery with an annual capacity of 100 million litres. The brewery, which has been approved by the Myanmar Investment Council and whose construction is expected to be completed by the end of next year, is through a joint venture with Myanmar’s Alliance Brewery Company, owned by local entrepreneur Aung Moe Kyaw. Heineken, through its wholly-owned subsidiary, Asia Pacific Breweries, will own 57 per cent of the joint venture, APB Alliance Brewery Company, which in turn will provide over 400 new jobs. Heineken Chairman and Chief Executive Jean-Francois van Boxmeer said, “There is a growing recognition of the positive progress that Myanmar is making in terms of its political and social reforms. Through our investment, job creation and implementation of our global policies, I believe that we will support this process.”
• Japanese funds for Thilawa SEZ - Visiting Japanese Prime Minister Shinzo Abe attended a signing ceremony for a bilateral agreement to develop the first phase of Thilawa Special Economic Zone. Three Japanese companies, Mitsubishi, Marubeni and Sumitomo, and Myanmar Thilawa SEZ Development Public Company (MTSDPC) will take part in the first-phase implementation. MTSDPC is a joint-venture which is formed with nine public companies. Thilawa SEZ will be jointly developed by Myanmar’s companies with 51 percent of stake and Japan’s companies with 49 percent. The Thilawa project covers an area of over 2,000 hectares between Thanlyin and Kyauktan townships in Yangon Region. Japan has offered to provide US$205 million as an ODA loan to Myanma Port Authority to build a port in Thilawa and an agreement will come soon for the loan to be signed.
• Private sector insurers - Myanma Insurance, the state-owned insurance company in Myanmar, has given permission for five private firms to offer insurance services in the country for the first time in 50 years. IKBZ Insurance Co Ltd, Grand Guardian Co Ltd, Aung Thitsar Oo Co Ltd, National Economy Public Co, and Aung Myint Mo Min Insurance Co Ltd were given company licenses in May. One of the five, IKBZ Insurance said that they would be offering both life insurance and non-life insurance services.
• Currency adjustments – Since adopting a unified exchange rate in 2012 Myanmar’s currency seeks an equilibrium with regional and international currencies. During May, after a long period of stability, the kyat depreciated by more than 7 per cent to around the 940 against the US$ as several leading global currencies seek a new equilibrium. Whilst the lower kyat is welcomed by exporters such as rice farmers, fish farmers and others, the weaker currency coincides with a construction boom in Myanmar’s commercial capital, Yangon, which is fuelling demand for dollars as builders import equipment and materials. The Ministry of Commerce reported that Myanmar’s average April-May import bill of $30 million a day was about 17 percent higher than last year.

                                                    Kyat Exchange Rate    MMK/USD    MMK/EUR
                                                    30/4/13                        884.20        1164.30
                                                    31/5/13                         939.50        1224.50

Myanmar Capital Partners - Update
Myanmar Capital Partners, the trading name of an advisory and investment service backed by Lloyd George Management and Oxford Capital Partners, continues to broaden both in and outside of Myanmar. The services (see website) are focused on assisting international corporations with local projects and building the pipeline of local investable companies into which our private equity funds can invest.  Our first commitment is under due diligence.

We are grateful for the experience of the members of our Myanmar Advisory Council. Five national advisers, specialising respectively in software and international payments, in micro finance and mining, in offshore oil and gas services, in agro-industries and in healthcare are working with us. This month we have welcomed a senior Burmese international healthcare adviser to help with our analysis of investment opportunities.

Our local team is expanding and recruitment is in hand. Our firm is becoming a beacon for educated and experienced Myanmar people overseas who wish to return to Myanmar and participate in the New Economy.
Our central Yangon offices are linked to a fibre optical cable network. Communications are improving continually across Myanmar and with international partners.

The Irrawaddy Fund LP has commitments from sophisticated and professional international investors and will make a final close at $150 million. Other interested investors should contact our CEO.

Enquiries should be addressed to the Country Head, Gregory Miller, at ceo@myanmar-capital-partners.com


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