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IPE special report May 2018

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The ultimate frontier

Untapped riches tempt first movers to the newly-opening markets of Burma, reports Bee-Lin Ang, but the risks remain considerable

Burma, a country of 70m, slightly bigger than France and richly endowed with natural resources, has recently become a prospect for investors, following political reforms that might reverse decades of isolation and stagnation under a military regime. The country lacks basic infrastructure and electricity shortages are common, but it is blessed with oil, gas, gems and minerals, extensive arable land and forestry. For the foreign investor, rewards from first-mover advantage may be immense – but, clearly, this is also fraught with risk.

“It is somewhat analogous to South Africa in 1994 – a country blessed with tremendous resources and a geopolitical situation where the world wants to support a peaceful transition and development,” says Peter O’Malley, former head of natural resources at Deutsche Bank Asia Pacific and founder of Kenosis Capital, a newly-established boutique investment bank and advisory group focusing on Burma.

Southeast Asia’s second most populous country is on the cusp of change and its growth might even surpass that of neighbouring Vietnam. “Vietnam has 80m people and Burma, 70m. However, Burma has many more interesting natural resources opportunities,” says O’Malley.

The Asian Development Bank reports that Burma’s economy grew by 5.3% in the fiscal year 2010-11 (FY 2010). Growth of 5.5% and 6% is projected for 2011-12 and 2012-13 respectively. The government hopes to triple the size of the economy by 2016.

Competition for Burma’s oil and gas reserves is expected to intensify as foreign companies move in on a sector that was closed to Western companies due to sanctions. Foreign companies are expected to be invited to bid for 25 offshore oil and gas exploration blocks to be auctioned by the end of 2012. US-based Chevron and France’s Total have stakes that pre-date sanctions in the Yadana gas project sending gas to Thailand. Alongside oil and gas exploration opportunities are prospects for companies that could provide modern drilling equipment and technology.

“This is the time to get in on the ground floor,” says O’Malley, whose firm recently set up an office in the former capital, Yangon. “There’s a lot of risk capital needed. We believe those who structure proper investments now are likely to be highly rewarded. What we are doing is setting up joint ventures with local partners and we are starting various projects and investments including an oil company and a mining and aggregate company. We have committed $100m to a Burma resources fund and we will be launching that in the first quarter of 2013.”

Mark Mobius, the executive chairman of Templeton Emerging Markets Group, expects the largest investments to be in oil, gas and mining, followed by consumer products manufacturing and sales.

“With a population of 70m the potential consumer market is significant,” he says. “In addition, the country is rich in oil, gas and all kind of minerals. Tourism would also be significant and the country already hosts about 300,000 tourists each year.”

Doing business in Burma isn’t easy – O’Malley likens it to going back in time to the pre-online, pre-mobile 1970s, when weeks had to be spent planning logistics. “But it is well worth the effort.”

Indeed, every challenge is an opportunity in disguise. With less than 4% of the population owning mobile phones and fixed-line penetration at a little over 1%, the initial round of reforms proposed in 2012 will see new operating licences issued and international companies allowed to participate in joint ventures with the government to build infrastructure and offer telecom services.

While short-term risks to the growth momentum might come from the rapid appreciation of the kyat or slowing neighbouring economies, the long-term risk is more pronounced. As Burma emerges from decades of military rule, nationalism is on the rise amid new-found freedom to organise and demonstrate. While the country’s president Thein Sein has declared the reforms irreversible, surging sectarian violence in the country’s west, which has led to a state of emergency, is endangering the country’s democratic process. The biggest test of the government’s reforms will be its ability to maintain peace among the country’s ethnic and religious groups.

“While a great milestone was crossed in recent months, it does not, in any big way, remove the fact that Burma is really divided into more than 10 ethnic militant factions, whom the current local government nee ds to assuage,” says William Chan, CEO of Stamford Management Group, a multi-family office based in Singapore. “Anything that hints of strong militant factions with gun-toting mobsters is never a good sign for investors.”

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