Investors eye resourceful Burma

Viewpoint by Douglas Clayton Investor | January 2012

Frontier investors are eyeing Burma as its newly elected government moves to bury the country's pariah status and rejoin the global economy.

President Thein Sein has blunted human rights criticism by releasing political prisoners, relaxing press censorship, and drawing dissident Aung San Suu Kyi into the political process.

Mr Thein seems determined to lead Burma through a comprehensive program of political and economic reform and improved relations with the West.

The sudden charm offensive has caught the world by surprise, and drew the first visit to Burma by a US Secretary of State in more than 50 years.

Foreign investors toting briefcases are starting to replace backpackers on flights to Yangon.

Economic catch up

What is attracting them is easy to grasp.

When Burma gained independence in 1948, it was one of Asia's wealthiest nations and a significant commodities supplier.

Today it stands among Asia's poorest, thin and threadbare after six decades of economic mismanagement, political repression and international isolation.

But Burma's new leaders seem weary of penury and of becoming an economic vassal state of neighbouring China.

An epic economic catch up marathon seems set to start, and could morph into a sprint if Burma creates the right investment framework.

Asian investors will lead the race into Burma, trailed by global multi-nationals once the West's economic sanctions come off.

Key attributes

In the universe of frontier markets, Burma stands out in four key aspects:

• Location: Burma happens to be wedged between three of the most important economic engines of the 21st Century - China, South Asia, and Southeast Asia. Burma is a land bridge connecting vast populations, and the region's economic dynamism will quickly wash over Burma's borders once its reforms take root.

• People: Burma's population of more than 50 million represents a substantial pool of literate, inexpensive and un-militant labour, who will later become consumers of all sorts of products and services they do not yet have. One million workers have been trained in Thailand's factories and farms, and are ready to return home once decent jobs are available. Look for thousands of garment, furniture and seafood processing factories to sprout up after sanctions are lifted.

• Land: Burma holds the largest landmass in mainland Southeast Asia, larger in size than France. The land is still half forested and features mountains, rivers, fertile deltas, and a coastline of 2,000 kilometres with deep sea ports. The country' deserted beaches and cultural treasures arguably outclass those in Thailand, which draws 18 million tourists a year versus Burma's few hundred thousand. Tourism will skyrocket once Burma becomes marketable.

• Resources: Burma is hugely endowed with natural resources, including oil & gas, minerals, gems, timber, agricultural, fisheries, wind, and renewable energy resources. This bountiful inheritance underwrites Burma's future economic prosperity under better governance and accountability.

Due to its long isolation, Burma faces an acute shortage of hotel rooms, service apartments, office space, and modern shopping malls.

A construction boom will commence once restrictions are eased on foreign ownership of property.

Investors will also converge on the compelling opportunities in core economic sectors such as banking, mobile telecoms, internet, electricity, building materials, and food processing.

If Burma is to modernise, it will need significant foreign investment in virtually every sector.

Big risks

The biggest risk for investors in Burma today is regulatory uncertainty.

Burma awaits an updated foreign investment code with stronger rights, protections and tax incentives.

Furthermore, Burma's grossly overvalued official exchange rate distorts economic activity and heightens the risks and challenges for foreign investors.

And of course the country still remains the target of economic sanctions from several Western nations, led by the US.

Perhaps the most feared risk is a rollback of the entire liberalisation agenda, should impatient democracy advocates or separatist insurgents provoke globally-unacceptable military crackdowns.

It is easy to imagine that hardliners lurk within Burma's military who would like to derail the ambitious democratisation and economic liberalisation process.

And even now, hundreds of political prisoners remain locked up in harsh conditions with long sentences.

Blue sky of opportunity

But optimism prevails that Burma has in fact embarked on an historic journey that will create a better governed and economically successful nation.

If true, the transformation should create exceptional investment opportunities for both domestic and foreign investors.

Southeast Asia is a region of once mismanaged, undemocratic and impoverished countries, which sequentially found a pathway toward prosperity by initiating and sustaining bold liberalisation policies.

Each country enriched early risers who peered through the haze of risks and recognised a dawning blue sky of opportunity.

That is the Burma I see today.

Douglas Clayton is chief executive of Leopard Capital, a private equity investor in frontier markets.