End To US Sanctions a Boon to Burma’s Economy, But Woes Remain

By Elaine Kurtenbach 18 October 2016

RANGOON — KFC’s grinning Colonel Sanders and his goatee are among the few prominent signs of US brands or business in Burma’s biggest city, Rangoon.

That will likely change after President Barack Obama ended most remaining US sanctions against this fledgling democracy on Oct. 7. But much hinges on how the government led by former political prisoner Aung San Suu Kyi revamps the country’s outdated laws and other policies.

The US had earlier broad prohibitions on investment and trade imposed on this Southeast Asian country of around 51 million over the past two decades. The more targeted restrictions that ended earlier this month were mostly on dealings with army-owned companies and officials and associates of the former ruling junta. A ban on imports of jadeite and rubies from Burma also ended.

Up to now, the rush to invest in Burma has been dominated by Asian countries, especially China, its main investor and trading partner during its years of isolation. Most US businesses and many other Western ones stayed away, mindful of fines potentially in the millions of dollars and jail terms of up to 20 years.

Foreign investment slowed earlier this year, as companies awaited changes in the investment law, company law and other regulations.

“Genuinely a lot of American business was extraordinarily wary of the sanctions, especially for financial services because of the massive fines,” said Sean Turnell, a Burma expert and adviser to the National League for Democracy (NLD) led government.

For many Western, not just US, firms, restrictions on financial transactions in US dollars, which are processed by banks doing business in the US, were the biggest constraint.

“It was too hard, the market is too small and profits were pretty small beer compared to the fines they could get,” said Turnell. “You had great difficulty just moving money in and out of the country.”

The garment industry could be one of the biggest beneficiaries of the end to sanctions. The United States stopped giving Burma special market access under the Generalized System of Preferences in 1989 due to workers’ rights concerns. When those benefits are restored on Nov. 13 it will regain the right to export about 5,000 products to the United States duty-free.

Nay Aung, whose travel services company, Oway, has launched a car-booking app that is providing about 500-600 rides a day in Rangoon, is hoping that will help drive an export boom.

“If multinationals come in, we will benefit,” he said. “For us, if the country grows, we are the beneficiary of those investments.”

Burma was governed by the military for more than a half-century. Five years since it began its shift toward a civilian government and a year since the NLD led by Daw Aung San Suu Kyi won a landslide election, the country is still just beginning to develop a modern financial sector and rebuild its crumbling roads, ports and buildings, many of which date to Britain’s colonial rule.

The new leadership is grappling with extreme poverty, civil war with several ethnic minorities, rampant corruption and narcotics and human trafficking. Massive illegal trade in goods like jade and timber continues.

The sanctions were just part of the problems laid out in a report by the American Chamber of Commerce in July. Chief complaints included a decision by the city government in Rangoon, the country’s commercial capital, to stop issuing the licenses for new parking spaces that are required to buy new vehicles. That was a blow to big foreign automakers like Chevy and Toyota that want to sell new cars there, but a boon for the already thriving trade in used vehicles from Japan, left-hand cars and trucks widely used on Burma’s right-hand drive roads.

Still, the country’s young, inexpensive workforce and low living standards offer huge potential for growth. GE, on its website, describes Burma as a “new sweet spot” for growth in Southeast Asia.

Japanese and other Asian investors have been piling in.

Aeon, Japan’s equivalent of Walmart, opened an office in Rangoon in 2014 and has a thriving microfinance business. Its first supermarket in Burma, a joint venture with a local retailer, opened in the city’s Okalapa Township in late September, offering thousands of products, most of them imported from Thailand.

Even the KFC, which opened across the street from Rangoon’s Bogyoke Market in 2015, is a franchise set up by Singapore-listed Burma conglomerate Yoma Strategic Holdings.

Some other major US brands got a head start, including Coca-Cola, which has a factory producing for the local market. Ball Corp. has a factory in Rangoon’s Thilawa Special Economic Zone making cans for Coca-Cola. MasterCard is expanding in the area of ATM cards.

GE is active in energy and other sectors and leases Boeing 737-800s to the country’s national airlines. ConocoPhillips and Chevron have stakes in oil and gas exploration and development. Some US businesses, like Caterpillar, have distribution tie-ups in Burma with local or other foreign companies.

But the total US$248 million US companies have committed since 1988 amounts to less than 1 percent of total foreign investment of about $60 billion. China has invested more than $25 billion, according to Chinese figures.

Trade with the US has also been modest.

Burma’s imports from the US totaled $227 million in 2015, while exports from Burma to the US amounted to $142 million, mostly dried peas, rattan and wood products and travel goods like backpacks, according to the US Trade Representatives website.

The lifting of sanctions is bound to benefit big players no longer on the sanctions lists, like the ex-junta chief, Than Shwe, and Stephen Law, founder of one of the nation’s largest conglomerates, Asia World, whose late father was once described by Treasury as one of the world’s key heroin traffickers.

But at the other end of the spectrum, there likely will be little immediate impact, said Jes Kaliebe Petersen of Phandeeyar, a local non-profit devoted to helping start-ups and entrepreneurship.

Ending sanctions has a “signal value,” suggesting lower risks of doing business in Burma, says Petersen, who is Danish. What remains, though, are problems typical of a frontier economy, such as a dysfunctional financial system, bad roads, and a legal system that has yet to catch up with the country’s political evolution.

“It took three months to get money wired into Rangoon just to pay my rent,” Petersen said when asked about the challenges of doing business in Burma. “But on a micro-level, I’ve never had a single conversation about the sanctions.”