Investment reforms expand Myanmar capital markets

Now occupying the impressive downtown premises of the former central bank, the Yangon Stock Exchange (YSX) celebrated its third year of business in March 2019. However, as one of the region’s youngest stock exchanges, the YSX is still in the process of catching up to its regional peers. The YSX is seeking to establish a wider international profile, as foreign investment and international traders will be essential to the stock exchange’s expansion. In July 2019 regulators announced further liberalisation to this end, allowing foreign individuals and locally based entities to directly purchase up to 35% of listed company stocks.

Additionally, an alternative board, the Myanmar Public Companies Board – which will serve as a transitional point to full listing on the YSX – is in the process of being established and is set to commence operations in 2020.

Facts & Figures

The YSE is the successor to the Rangoon Stock Exchange, set up in the 1930s as a secondary, over-the-counter market for the Bombay and Calcutta exchanges. The Rangoon Stock Exchange was closed in the Second World War, reopened in the 1950s and finally closed permanently in 1962 under General Ne Win’s company nationalisation following the military coup that same year. In 1996 a wave of market liberalisation saw the formation of the Myanmar Securities Exchange Centre, which was tasked with setting up a new bourse. This was not actioned until 2012, when the Central Bank of Myanmar worked with the Ministry of Finance and Revenue, Japan’s Daiwa Institute of Research (DIR) and the Japan Exchange Group (JPX) to establish Myanmar’s new capital market.

The following year Parliament passed the Securities and Exchange Law, which created the Securities and Exchange Commission of Myanmar (SECM), the sector regulator, in 2014. The SECM operated under the Ministry of Finance, which has since been replaced by the Ministry of Planning, Finance and Industry (MPFI). The year 2014 also saw the establishment of the YSX Joint Venture Company, in which state-owned Myanma Economic Bank, DIR and JPX are partners. In 2016 Kanbawza Bank became the YSX’s settlement bank, and March that same year saw First Myanmar Investment become the first listed stock. In the months that followed three more companies listed – Myanmar Citizens Bank, First Private Bank and Myanmar Thilawa Special Economic Zone Holdings. Following this, however, new listings stalled. The next listing did not occur until January 2018, when TMH Telecom held the exchange’s first initial public offering (IPO); the previous listings were made via the introduction of existing shares. The success of TMH Telecom’s IPO demonstrated one of the principal functions of capital markets: to provide a source of funding and investment so that companies are able to undertake further development and expansion. Nevertheless, Myanmar’s markets remain small, with those five companies still the only ones listed as of end-2019. Addressing the reasons for this slow growth remains a priority for the authorities of the YSX, the SECM, the MPFI and other financial sector stakeholders.

Challenges

Low levels of financial literacy have limited the YSX’s expansion. As Myanmar has only recently opened up to international financial norms and procedures, much of the general population is not aware of the potential benefits of capital markets. “Initially, there was a lack of awareness of the YSX among both the general public and stakeholders,” U Thet Htun Oo, executive senior manager at the Administration Department of the YSX, told OBG. “People were not fully aware of the benefits of the exchange.”

Another challenge has been the reluctance of stateowned enterprises and other types of companies to list, partly because of the barriers to entry. In order to list companies must meet 17 requirements and disclose a certain amount of information, which many firms are unaccustomed to. For example, a company must have been profitable for the two years prior, have minimum paid-up capital of MMK500m ($326,000), disclose corporate information and prove stability of income.

On the demand side, Myanmar has a general lack of large institutional investors, with individuals making up the majority of players on the exchange. Foreign funds, meanwhile, have thus far been reluctant to get involved until the market shows greater range and depth, and the authorities address a number of factors in corporate governance and transparency.

Making Improvements

In the World Bank’s “Doing Business 2020” report, there was some notable improvement: the country ranked 165th overall, up from 170th in 2019. One of the country’s measured gains was in protecting minority investors: regulations were enacted that require greater disclosure of transactions with interested parties, increased liability of directors and greater corporate transparency.

Elsewhere, the latest move by the SECM to bring in more foreign participation is also starting to address the lack of investors. In July 2019 the commission announced that foreigners would be permitted to trade shares on the YSX, with a framework for this published in September. While no residency requirements were listed for foreigners, the fact that trading would require a local bank account and trading account in kyat, as well as identity verification, shows that foreign investors would need to have some local presence.

Trading from overseas, however, may be opened up later in 2020 as part of a phased introduction of foreign activity. The framework allows companies to set limits for foreign participation, with this not bounded by the 35% limit outlined in the current Companies Law, but by wider foreign investment regulations and whether the company owns immovable property. The YSX will automatically suspend the purchases of a company’s shares when they get within a 5% range of the company’s own prescribed upper limit for foreign shareholding. Whether this approach will be taken when the market is opened remains to be seen, with a 35% limit on foreign holdings a likely first step. Although no timeline had been confirmed for the implementation of the new regulations as of November 2019, the proposed changes have still increased international interest in Myanmar’s capital markets. Indeed, in the month following the July 2019 announcement the Myanmar Stock Price Index (MYANPIX) rose by 10% month-on-month. Although the index has since declined moderately, as of mid-November 2019 the MYANPIX was at 469.06, some 15.7% higher than the 405.37 seen in November 2018. Market capitalisation was around MMK644.2bn ($420m), up 15.6% year-on-year.

In November 2019 the Philippines-based conglomerate Ayala Corporation announced that it would invest $237.5m to secure a 20% stake in each of two Yoma Group entities – Yoma Strategic Holdings and the YSXlisted First Myanmar Investment. The deal for the latter is in the form of a $82.5m convertible loan, which, subject to SCEM approval, could be converted into a 20% share in First Myanmar Investment.

Attracting Listings

To assist firms that are reluctant to list due to the YSX’s standard requirements on corporate governance, the authorities announced in September 2019 that the secondary Myanmar Public Companies Board would be launched in 2020. The board hopes to attract some of the 251 registered public companies in the country that are not listed yet have public status under the Companies Law. Although the secondary board will still enforce high standards, it will offer a route for firms that are not yet ready for the main YSX board. The YSX has also established a special taskforce in cooperation with the Japan International Cooperation Agency that is tasked with boosting awareness of the exchange and the benefits of listing. It provides a onestop-shop for companies that are interested in listing, which offers assistance with business development, analysis, accountancy and other services.

At the same time, the YSX has been reaching out to schools, colleges and the media to boost awareness and financial literacy among the public. “We are doing student training, listing promotion and investor promotion programmes, and also promoting the stock market via a money talk programme on TV and other media,” U Thet Htun Oo said. These efforts may already be bearing fruit. One domestic company widely tipped to list is Myanmar Agro Exchange Public (MAEX), which submitted its documentation for SECM approval in September 2019. The company’s CEO, U Aung Gyi, told local press that he hoped MAEX’s listing would coincide with the start of foreign purchases of shares, illustrating the virtuous circle that could gain momentum if timed right. Indeed, Thailand’s exchange also started small and was slow to take off; now there are over 600 listings on the Stock Exchange of Thailand, which has become one of the region’s most successful bourses.