Mar 26, 2012

Myanmar Eases Investment Laws

A raft of new investment laws are expected to make Myanmar draw more foreign interest if sanctions are lifted in the coming year. But the overhaul leaves some problems unresolved—and might stoke new ones.

A plan to give tax holidays and other incentives to foreigners is expected to be approved as early as this week, ahead of a closely watched April 1 parliamentary by-election. That vote could put democracy icon Aung San Suu Kyi into elected office for the first time. Ms. Suu Kyi suspended campaigning Sunday after she fell ill from heat exhaustion in southern Myanmar, her doctor said.

Other major changes in the works include plans to simplify the unwieldy foreign-exchange system, give more independence to the central bank and open the economy to foreign phone companies and banks.

The new laws follow other reforms that over the past year have generated rising enthusiasm among Western leaders and business executives. Some are pressing to end decades of sanctions against Myanmar, which transferred power to a parliamentary government from a military regime last year. U.S. and European leaders have indicated they are likely to begin easing key sanctions soon if the April 1 vote, being held to fill a small number of parliamentary seats vacated over the past year, is free and fair.

GE Healthcare, a unit of General Electric Co., GE -0.35%said in late February it was entering the Myanmar market with a local partner, while Standard Chartered STAN.LN +0.34%PLC has said it is interested in re-entering the country, as have numerous other global companies.

As more investors consider Myanmar, the difficulties of day-to-day business there are becoming clearer. The new laws, while likely to improve Myanmar's business climate significantly after decades of minimal contact with the outside world, won't fix massive infrastructure shortcomings or the nation's unpredictable legal system, immature banking sector and still-opaque policymaking.

Paul Wagner, an import-export entrepreneur from Colorado, says he saw the challenges when he looked into buying and reselling Myanmar whiskey abroad.

Reaching potential partners was difficult, given the country's patchy phone service, he said. Moving money in and out is another problem, he said, even if U.S. sanctions restricting American financial transactions are lifted. There are still no provisions under Myanmar law for foreigners to set up local borrowing facilities. Credit cards are rarely used, and the country's financial institutions are only just now working on technologies to initiate correspondent relationships with foreign banks.

"How am I going to pay $100,000 to someone—bring it in in a suitcase?" he said. The lack of banking services "will stop me" from expanding in Myanmar, he said.

There are also growing fears that Myanmar doesn't yet have the technical expertise to handle the investment unleashed by the latest rule changes, or to handle the likely pushback from domestic businesses whose operations could be swamped by more efficient foreign players.

Other countries in the region, including Cambodia and Vietnam, suffered significant economic problems after opening to more foreign investment in recent years. Cambodia's inflation surged to nearly 100% a month at one point in the 1990s as foreign aid flowed in.

Although analysts aren't expecting things to be as bad in Myanmar, some believe the country could face its own problems with inflation or macroeconomic or social instability if it moves too quickly to throw open the doors to foreigners.

"Reform is moving like we are in a sack race, hopping around," without enough well-trained bureaucrats for proper implementation, said Maung Maung Lay, a Yangon-based vice president of the Union of Myanmar Federation of Chambers of Commerce and Industry, which represents Myanmar's business sector.

Businesses are particularly concerned about the foreign-investment law, he said. "We may be overwhelmed," he said. "We don't have the capital, the technology and the sources to compete" with foreign companies.

Analysts are also paying close attention to plans to partially float the Myanmar currency, known as the kyat, as early as next month. Although details remain unclear, the idea is to end a complex system that has an official rate of about six kyat to the dollar, while street rates hover at about 800 kyat to the dollar. Unifying those rates would make it far easier for foreign companies to operate in Myanmar.

Myanmar officials are moving ahead nonetheless. According to an official at Myanmar's Ministry of National Planning & Economic Development, the new foreign-investment law would provide a tax holiday for foreign investors for up to five years and expand foreigners' rights to distribute their products locally.

It would also give foreigners the right to lease land from private owners, and permit them to repatriate 100% of their profits and import large numbers of skilled workers, which currently isn't allowed, said Aung Naing Oo, deputy director general of the Directorate of Investment and Company Administration at the economic development ministry. The law has been approved by the cabinet and could be finalized by parliament as early as this week, he said.

With the new law "we will definitely see an increase in investment," said Nay Zin Latt, an adviser to Myanmar's President Thein Sein. He said it also could attract more management expertise, which could help address concerns over the country's capacity to handle so much money. Myanmar is receiving technical advice from the International Monetary Fund.

He said the government could implement a system similar to one in place in Malaysia that provides preferences for some local businesses, ensuring they maintain a leg up in some sectors.

Some other changes flagged in recent weeks could take longer to implement. The telecom law, expected to create four new phone licenses open to foreigners, hasn't yet gone to parliament. The banking law is expected to provide more independence for the central bank in setting interest rates, which could further boost macroeconomic stability.

Rules to let foreign banks operate locally may not happen until as late as 2015, said U Than Lwin, deputy chairman of KBZ Bank, Myanmar's largest commercial bank, and a former deputy governor of Myanmar's central bank.

International companies continue to circle the country. "Everybody's talking about it," says David Peck, chief executive of Arrow Technologies Pte., which supplies manufacturing equipment across Asia. If Western companies don't move fast, "we'll be sitting behind the Japanese and Koreans picking up the crumbs" as they rush in, too, he said.

Source:  WSJ