A recent study by the European Chamber Of Commerce in Myanmar (Eurocham) reveals that business confidence in Myanmar is falling. A possible revoking of Myanmar’s GSP benefits by the European Union following human rights violations in northern Myanmar, political unrest, and absence of economic reforms and infrastructure are some of the reasons for businesses losing confidence in the country.
During the first half of this year, approved foreign direct investments (FDI) totalled US$ 1.7 billion, compared to US$ 4.1 billion during the same period in the previous fiscal year. GDP is forecast to slow from 6.8% last year to 6.2% this year, according to the World Bank.
While the government repeatedly pledged to elevate Myanmar into the top 100 in the Ease of Doing Business ranking by 2020, the country failed to improve at all, being buried at 171st. In comparison, China, India and Malaysia all made significant improvements in the index.
Policy failures, protectionism, red tape, economic nationalism, the regulatory environment, labour contracts and judicial independence are fundamental investor concerns. The four areas considered by the World Bank as the key impediments to doing business in Myanmar – access to land, utilities, finance and human capital – affect all investors.
Foreign investors want better business environment before expanding
EuroCham Myanmar’s third Business Confidence Survey covered 150 European companies in Myanmar. The Myanmar domestic market is growing and therefore continues to attract many foreign companies. Remarkably, 29% of the surveyed companies responded that they have revenue of less than Euro 1 million. This is a clear indication that Myanmar is attracting more European SMEs.
The share of companies employing less than 50 people has increased from 58.2% in 2016 and 50% in 2017 to 65.1% in 2018, whereas the share of companies employing between 50 and 250 employees decreased from 23.6% in 2016 and 30% in 2017 to 17.8% in 2018.
The share of profitable companies decreased from 50% in 2016 to 41.4% in 2017 to 37.7% in 2018. Of the surveyed companies, 32.6% expect to be profitable within two years and 29.7% expect to be profitable after two years. In general, this is not a positive development due to the smaller share of profitable companies.
Eight-one percent of the European companies highlighted a need for improvement of Myanmar’s business environment, while 46% of the respondents highlighted that the overall business climate, worsened in the last 12 months. Moreover, most companies have indicated that they have been negatively affected by protectionist policies, economic nationalism, inflation and MMK appreciations in Myanmar.
The respondents have also identified their top five challenges while doing business in Myanmar which are; regulatory issues, lack of qualified labour force, legal uncertainty, financial infrastructure and local competition.
The European business community respondents seem less committed to further reinvest in Myanmar, with an overall planned decrease of reinvestment in most regions. However, the Ayeyarwady region and Shan state have a growing share of companies planning to reinvest in these areas, whereas planned reinvestments in Mandalay region, Nay Pyi Taw Union Territory and Tanintharyi region decreased in comparison with last year.
While many foreign companies have a more negative perspective of the Myanmar market than previously, 61% of the surveyed companies responded that they are here to produce goods for the Myanmar market and seem determined to stay. Also, smaller European companies are entering the Myanmar market.
For most European companies, the opportunities in Myanmar’s domestic market are the most important reason to set up operations in Myanmar. The second and third most important reasons are expanding or establishing regional base and operations and the economic reforms. The surveyed companies also considered Myanmar’s geographical location to be an important indicator.
Textile and apparel industry is the growth engine
Myanmar’s apparel sector is one of the main export sectors of the country. Myanmar exports textiles and apparel worth US$ 2.5 billion (in 2017), and employs 450,000 workers, more than 90% being women, in over 600 factories, according to the Myanmar Garment Manufacturers Association (MGMA). Europe is the main export destination, accounting for over 70% of its clothing exports.
Woven and knit apparel are the main export products from Myanmar. The country produces high value, premium clothing, such as performance apparel, formal suits, etc, and is higher up the value chain than neighbouring Cambodia.
Abundant availability of labour, amongst the lowest labour costs in the world, GSP benefits in Europe, and free trade agreements with some ASEAN markets, sharing borders with two of the fastest growing markets in the region – these are some of the opportunities of investing in Myanmar. Moreover, Myanmar’s domestic market itself it opening up.
However, rising labour costs, low levels of skills, and hence productivity, absence of industrial infrastructure, weak banking system, are some of the challenges.
The MGMA has elaborated a 10-year roadmap for the development of the sector, planning to reach a value of US$ 8-10 billion and to employ 1-1.5 million workers, while also improving business practices. In addition, the opening of the retail sector to foreign investments, allowing among others sale of clothing, is likely to stimulate garment production in the country by international brands. Construction of new industrial zones hosting garments factories are being planned, while the completion of two dry ports in Yangon and Mandalay by 2019 will sustain exports in the sector.
Government policy initiatives
To guide the country’s growth and development in the coming years, Myanmar launched two major frameworks – the Myanmar Sustainable Development Plan (MSDP) and the Myanmar Investment Promotion Plan (MIPP) – in 2018.
The aim of the MSDP is to connect and align the country’s numerous policies and institutions for the purpose of generating sustainable economic growth. In October, the MIC launched the MIPP, under which public investments are expected to expand from US$ 5.6 billion between 2016 and 2022 to US$ 43.2 billion by 2031-2036. Meanwhile, private investments should swell from US$ 8.1 billion to around US$ 25 billion over the same period.
The other aim of the MIPP is to raise Myanmar to a middle income economy over the next 20 years. The goal is for citizens to increase their earnings to K45,000-K50,000 per day by 2036. The government has also made changes to its foreign investment laws to attract more investors. Company laws have been tweaked too to make it easier to do business in the country. Retail and wholesale sectors are being gradually opened up to foreign investors and brands. However, much more will need to be done to make any actual industrial progress in the country, and to reverse the deteriorating business conditions.
Opportunities for India
India’s exports of cotton and other textile raw materials to Myanmar are showing a steady increase, even as apparel exports are negligible. Indian local brands, especially in the Northeastern border states are well placed to expand into the Myanmar market, which is culturally closer to NER. Moreover, India and Myanmar opened the port of entry and exit at Moreh in August 2018, making it easier for NER to connect with Myanmar for trade purposes. Trade in the region till now has been more barter-like, which did not really help. While border trade via Moreh is quite small, informal trade of mainly Chinese goods, without payment of duty and in head loads is booming.
However, there is hardly any normal trade. Most of trade between India and Myanmar takes place through sea routes. Unless, trade through land route via Moreh-Tamu sector is competitive in terms of cost and time, it is difficult to visualise normal trade flow happening via the much-hyped Trilateral Highway.
- The most important reason for European companies to come and do business in Myanmar are the opportunities in Myanmar’s domestic market.
- Most European companies remain positive on their expectations of operational change during the upcoming three years.
- Compared to 2017, a larger share of European companies is planning to reinvest in Shan State and the Ayeyarwady region
- Regulatory issues, lack of qualified labour force and legal uncertainty still remain the biggest challenges in Myanmar for European companies.