Burma’s SMEs Uneasy Ahead of Asean Trade Zone

By Soe Sandar Oo 3 December 2013

RANGOON — Lamenting high domestic interest rates and Burma’s relative inexperience in the competitive global marketplace, small and medium enterprises (SMEs) in Burma are wary as 2015 approaches, when implementation of the regional Asean Economic Community (AEC) is expected to drop barriers to trade in Southeast Asia.

The government and private sector have collaborated on a recently released draft law that would stipulate what constitutes SMEs, part of hurried efforts to ready Burma’s stunted economy ahead of the country’s Asean chairmanship next year—a role in which it will be expected to lead preparations for the 2015 AEC launch.

Khine Khine Nwe, joint secretary general of the Union of Myanmar Federation of Chambers of Commerce and Industry (UMFCCI), said foreign direct investment would rise with direct market access to the 10-nation regional grouping. Burma’s SMEs, she added, were largely inexperienced in working outside the country because transactions with foreign companies and customers have traditionally been subcontracted to go-between firms.

“Every small and medium enterprise is afraid of FTA [free trade agreement]. They are concerned that they are not in a position to compete. For me, I believe in remedying the situation. Benefits always rise alongside performance. If we cannot perform well, we will fade away,” she said during a three-day seminar held by the Economic Research Institute for Asean and East Asia last week in Naypyidaw.

“The country needs investment and technology,” Khine Khine Nwe said, adding that foreign investors should not be viewed as only a threat, but also as potential sources from which local entrepreneurs could learn best-practice business methods.

Htun Naing Aung, chairman of Kaung Kyaw Say Engineering Co Ltd and a central executive committee member of the Myanmar Industrial Association, said the underdeveloped state of Burma’s SMEs, which are just now considering their global prospects after years of Western economic sanctions, could have far-reaching negative impacts.

High domestic interest rates are central to the challenges.

The interest rate set by Burma’s Central Bank is 8.5 percent, while the average short-term loan rate internationally is just 1 percent, according to the Myanmar Industrial Association.

“Our SMEs are almost dying ahead of AEC in 2015. With high interest rates, how can we compete with FDI [foreign direct investors] who have low interest rates?” Htun Naing Aung said.

A spokesperson for the Central Bank defended the benchmark rate, saying the bank had already reduced business loan interest rates from 12 percent in 2011. She said the high rate was in part set to encourage people to deposit money in interest-earning savings accounts that could then be used to issue more loans.

“We also need stability in the immature financial sector,” the spokesperson added.

Compounding SMEs’ challenges, a professor from the Yangon Institute of Economics pointed out that smaller, less capitalized enterprises were squeezed by a handful of large companies that dominate business in Burma.

“We were under military government rule for many years and we have no connections with the outside world. So our SMEs are not yet ready to face foreign competition,” the professor said. “In Myanmar, the cost of electricity is very high and land prices are also high compared with other Asean countries.”

“The FDI law has been passed, and foreign direct investors will be able to enjoy whatever raw material and machinery imports tax-free [under the AEC],” said Nu Nu Lwin,another professoratMonya Institute of Economics’ Department of Management Studies. “It is a very good opportunity for foreign companies but for local small and medium enterprises that are already suffering from high logistics costs and lack a proper industrial policy, I think it will be quite difficult for Myanmar SMEs.”

However, Khine Khine Nwe urged entrepreneurs to put negative expectations in check.

“At least we can have a chance to perform well. If we strictly think of the disadvantages [of the AEC], how can we count on benefits? … That kind of mind-set has to change.”