On the right track: Plans to open a modern stock exchange in Yangon are under way

Myanmar is well on its way to opening a local, modern Yangon Stock Exchange (YSE) by 2015 with the help of the Tokyo Stock Exchange and Daiwa Securities, Japan’s second-largest brokerage house. Demand from over 60 companies is high and investors are anxious to obtain liquid access to the market. Even so, many building blocks must be put in place before the exchange can become a reality.

Myanmar’s first stock exchange was closed in 1960 after the military assumed control of the country. It was replaced by the Myanmar Securities Exchange Centre (MSEC) that is still in existence today, although it is barely used. Companies that wish to issue shares to the public and trade opt for brokering the shares themselves, and citizens must visit the company itself to buy or sell shares. However, the former deputy governor of the Central Bank of Myanmar, U Maung Muang Win, speaking at the end of May 2013 to a group of investors, highlighted the bourse’s development as “vital to the economic development of [the] country”, assuring onlookers that everything was on schedule for the launch of the Yangon Stock Exchange (YSE). The Securities Exchange Law was passed on July 31, 2013, following the approval of parliament earlier that year, ahead of the more detailed rules to be laid out in 2014 as well as the final opening in 2015.

Capital Access

Access to capital in Myanmar has traditionally been limited to an elite stratum of companies intimately linked to the government that in turn would closely control the banks and lending. For many smaller businesses, family and friends were often the only feasible avenue to raising extra debt or equity finance to expand their businesses. Attitudes to the banks and other moneylenders from most people are still very cautious, and widespread distrust in the system is a roadblock for market development. Domestic banks lend at 13%, and inflation has remained high at 6.5% over the past four years even after a period of 20% average inflation in 2000-10. This has led the banks to keep small portfolios and restrict lending to close associates or internally within their groups and close contacts. Traditionally, the central bank would print money on the instructions of the Ministry of Finance to fund the state’s fiscal deficit. This process led to high inflation and added mistrust of the currency, preventing Myanmar kyat (MMK) from being lent.

Furthermore, of the 19 domestic banks in Myanmar and four state-owned banks, a total of seven are on the Specially Designated Nationals (SDN) list that prevents US businesses and businesspeople from having dealings with them, even after four of these were removed from the list earlier in 2013.

As such the domestic debt market through banks is small, strictly limited, politically problematic and expensive. Most companies are forced to borrow from family and friends if their network allows it, or to use loan sharks even at high interest rates. Many other companies are looking for alternative options, and a functioning stock in Myanmar is one key institution that will be able to provide this financing.

Local Companies

Yet despite the lack of a functioning local exchange, there are a few companies in Yangon that have issued shares to the public and trade the stock on an over-the-counter (OTC) basis.

This small group has continued to operate privately, requiring each shareholder to visit the company offices in order to trade shares or receive updates on the company’s performance. Currently only citizens of Myanmar are permitted to buy and trade these shares, and some companies perform in-depth background checks before allowing an individual to become a shareholder. These little-known companies are the most developed in terms of facilitating public access to capital, and will most likely be in the spotlight once the new exchange is created.

Hurdles

However, not everyone believes the 2015 deadline for the YSE will be feasible. U Sein Maung, chairman of First Private Bank, is pessimistic about the ambitious plans by Tokyo and the Myanmar government to open a functioning exchange in the space of two years. “The establishment of a stock exchange by 2015 is an unrealistic goal,” he said. “It will take time to train brokers and dealers, which the country doesn’t have at the moment.” However, despite awareness of such challenges, there is optimism about the future potential of any new stock exchange. “2015 seems very ambitious. I hope it will drive forward development and installation of business standards for all companies, large and small,” U Thura Soe Paing, managing director at All Myanmar Investment Partners, told OBG.

There are still many hurdles to be passed in the development of the YSE, but international partners in the process insist they are being recognised and systematically addressed. Daiwa Securities, Japan’s second-largest brokerage house valued at $14.1bn, is among these optimists, and the Japanese Exchange Group (JEG) working alongside them in Myanmar has also been pushing forward.

“We need securities companies, accounting firms and law firms to support a capital market,” said Koichiro Miyahara, senior executive officer at JEG. “There are several good accounting and law firms in Yangon, and foreign firms are coming, so I think there will be enough in a few years to support.”

Daiwa Securities Group and the JEG are becoming heavily involved with the MSEC to put in place all the necessary measures to see the Yangon exchange become a reality. To this end Daiwa expects “between five and 10” companies to list during the YSE's first year of operations, and a further five to 15 to use the exchange by the end of 2017. Daiwa Securities has helped to establish the current character of the Myanmar Securities Exchange in 1996 under the military regime, when only two companies listed, and is leveraging this relationship now that the country is shifting to a more democratic system.

Other helpers include South Korea’s exchange regulator Korea Exchange (KRX), which has offered to educate Myanmar’s Ministry of Finance officials on securities exchange operations and regulations. KRX has been making an effort to expand its global footprint over the past few years within Southeast Asia, and is now in a joint venture with both the Laos and Cambodian governments on developments of their local exchanges. The KRX began talks with Myanmar as early as January 2011, and is also keen to be a part of the capital markets development.

Exchange Law

The new Securities Exchange Law passed in 2013 addresses the ownership rights and legal requirements to encourage investors and companies to use the platform. The law is seen as one of the essential building blocks of a functioning capital markets system, and its passage is expected to provide the boost needed to advance plans.

Rules from the law cite a minimum capital requirement of MMK500m ($550,000) for companies wishing to issue shares, with evidence of two years’ profitability and a minimum of 100 shareholders. The law will come as part of a recent flurry of legislation aimed at boosting economic growth, attracting investment, and bringing Myanmar into the international playing field.

IT: Integral to all global business operations in the digital age is an up-to-date as well as a reliable IT and communications infrastructure network. This is even more important for an electronic trading platform. This is a key concern for the success of a local stock exchange in Myanmar, and without radically upgraded internet speeds, security and accessibility, plans will have no foundation.

In 2013, however, two new international telecoms players entered Myanmar, providing the modern and affordable services necessary to bring the country into the 21st century. After decades of neglect by international investors, the country has granted licences to Norway’s Telenor and Qatar’s Ooredoo to compete alongside the two local telecoms companies. These firms have the opportunity to tackle one of the final frontiers for mobile penetration. Yet there is a long haul ahead, and a huge amount of work is necessary before citizens can begin reaping the benefits. The risks are high for these players and margins may be tight, but the potential benefit for Myanmar citizens is immense. Myanmar’s ICT penetration is still the lowest in the region, and only 1% of the population had access to internet in 2011.

As a result, Myanmar has the potential to leapfrog decades of ICT development and install the latest technology within the coming years, meeting the deadline for the planned unveiling of the YSE in 2015. Coupled with the lack of communications and other technologies, the domestic energy supply deficit is a serious bottleneck for businesses and a stock exchange to run effectively.

A lack of supply results in regular power cuts even in the country’s commercial capital, Yangon. Measures are being taken to address this issue. While a number of options have been laid out before the country, both the size and the scale of the changes required to improve the situation are enormous.

Foreign Companies

Due to the challenges still associated with a local exchange, many companies have looked to international partners and methods of raising capital across the border.

For foreign investors whose access to the local OTC shares remains restricted, the options for liquid investments are limited to companies listed abroad with Myanmar assets. This group of companies, listed mainly in Singapore and Thailand, offer a ready-made vehicle to deploy capital at work in Myanmar. As a result the majority of these stocks have performed exceptionally well over the past year.

One of the largest active conglomerates in Myanmar is Yoma Strategic Holdings. This is a Singapore-listed $779m subsidiary of Serge Pun Associates (SPA), one of the largest and most active conglomerates in Myanmar. However, unlike other internationally listed companies with interests in Myanmar, all of Yoma’s revenues originate from within the country. To date, the company has primarily been engaged in real estate projects, such as the Meeyahta development in downtown Yangon that includes two office buildings, two serviced apartment towers, two hotels and a retail mall. SPA’s other subsidiary, First Myanmar Investment (FMI), is also one of the few “public” firms trading in Myanmar, and is engaged in real estate, agriculture and banking. Having been the focus of many international investors’ interest in Myanmar, Yoma’s shares saw a rapid rise from 2012 through mid-2013, peaking in June and then falling sharply before levelling out later in the year.

Other listed entities with Myanmar interests include the Korea-listed, $3.6bn-valued Daewoo International, which has been operating in Myanmar’s oil and gas sector since the 1980s. It now owns a 51% stake in the $3.73bn Shwe Gas Pipeline, which is expected to extract 500m cu ft of natural gas per day to China in 2013. However, it is worth noting that not all local groups have been as successful as Yoma in tapping into international capital markets. Max Myanmar, a local conglomerate run by infamous businessman U Zaw Zaw, attempted in May 2013 to back some of its assets into a Singapore-listed entity as Yoma had done in 2006. The reverse takeover failed, however, as the Singaporean Stock Exchange had concerns over the company’s alleged human rights violations under the previous regime, and U Zaw Zaw’s name on the US sanctions list.

Max Myanmar has annual revenues of $500m, and runs 21 petrol stations in the country which were to be the assets injected into Aussino, a $40m textiles producer listed on the SGX. Aussino’s share price rocketed in preparation for the deal, and dropped suddenly when it turned sour. This event is a reminder that although the country is continuing to undergo unprecedented reforms in the financial domain, there are still severe limitations on selected companies and individuals looking to reach out to international investors, and despite motives some changes cannot happen overnight.

Outlook

The launch of the YSE is currently in the works for Myanmar, and there is extensive and wide-ranging support for the creation of a local bourse. However, investors cannot underestimate the time and work it will take to properly ensure that stock is able to trade freely and securely in a functioning capital market within the country. 2015 will thus constitute the beginning of a gradual process of transition, rather than representing its culmination.