Stock Market on Track, but Hurdles Remain

By Kyaw Hsu Mon 24 March 2014

As Myanmar’s economic opening continues apace, hopes are high for plans to launch the country’s first full-fledged stock exchange in more than 50 years. But while the new bourse looks set to meet a late 2015 deadline, observers say a number of key issues could still present major obstacles.

Last September, the government and Parliament approved the Securities Exchange Law, clearing the way for the creation of the new Yangon Stock Exchange (YSE) in October 2015. Earlier, in May, the Central Bank of Myanmar and Japan’s Tokyo Stock Exchange (TSE) and Daiwa Securities Group had reached an agreement to establish the YSE as the first market of its kind since the economy was nationalized after a military coup in 1962.

Daiwa, a Tokyo-based investment company valued at US$400 billion, has been working in Myanmar since 1996, when it teamed up with state-owned Myanma Economic Bank—which was recently given the go-ahead from Washington to do business with US companies—to create the Myanmar Securities Exchange Center (MSEC).

While the MSEC was largely ignored (in 2011, Reuters reported that it had a staff of eight employees and was trading stocks in just two companies), the YSE promises to provide a viable alternative to the trade in gold, US dollars, real estate and used cars that for decades were the only places for local business people to put their money in the country’s closed economy.

One consequence of this imbalanced investment was rampant inflation, which has only recently dropped to 6 percent from the 30-40 percent seen in the years prior to the introduction of reforms in 2011. Even now, the real estate market remains overheated, while the relaxation of import duties has seen a dramatic fall in car prices, which reached 100 times their market value between 1988 and 2011.

With the introduction of the YSE—which will be established with a 32 billion kyat ($32 million) investment, including the TSE and Daiwa’s 49 percent stake—the government hopes investors will put their money to more productive use in a variety of sectors and industries, such as services, banking, agriculture and hotels and tourism.

Among those keen to hop on the YSE bandwagon is Asia Green Development (AGD) Bank, owned by U TayZa, one of the country’s richest tycoons. In December, Daiwa announced an “important milestone of efforts to develop capital markets in Myanmar” when it signed an agreement with the bank to assist it in its bid to be listed on the exchange.

But turning a privately owned bank into a public company won’t be easy, especially in a country that has long been notorious for the opacity of its business practices. AGD Bank is confident, however, that it can make the transition.

“Now we are more transparent—100 percent more—than in the past,” said the bank’s managing director, U Ye Min Oo. “We have to show all our profits to shareholders annually, and the decision makers have changed. Now we can’t do anything without the approval of the board of directors.”

One decision the board of directors has made is to hold off until the launch of the YSE to start offering shares, in the expectation that the opening of the new stock exchange will boost share prices. As a company with 30 billion kyat (US$30 million) in capital, AGD Bank can raise up to 70 billion kyat from the sale of shares (the government has set a 100 billion kyat limit on the value of public companies).

But even if AGD Bank is ready for the big day, many in Myanmar’s business community, noting the lack of reliable telecommunications infrastructure and poor public awareness of how stock markets work, wonder if the country is up to the task of hosting a modern stock exchange.

“We will need constant access to up-to-date information about stock shares, but how can we have that without better communications?” said U Ye Min Oo, echoing these concerns. He added, however, that he expected the situation to improve after two major international telecoms companies that have recently been given licenses to operate in Myanmar—Norway’s Telenor and Ooredoo of Qatar—establish much-needed networks.

Fully aware of the challenges it is facing, Daiwa is taking a cautious approach to its second stab at setting up a stock exchange in Myanmar, with plans to list just 10 companies at the launch of the YSE, according to U Ye Min Oo.

U ThetHtunOo, the senior manager of the MSEC, said expectations would be modest for the first couple of years of the YSE, until conditions improve and more companies capable of functioning within a more mature trading system emerge.

“It won’t be easy to develop a stock market right away. First, we need to achieve economic stability and reach a certain level of development. Also, the private sector has to improve, and exact laws and regulations will be required,” he said.

Among the problems that will need to be addressed, he said, were most Myanmar companies’ deficient management and accounting systems, their lack of transparency and adequately trained staff, and illegal practices such as fraud and tax evasion.

“We will need collaboration between the government and the private sector, as well as foreign expertise, to tackle these issues,” he said. “I don’t think we have enough time, but we’re trying to work within the government’s timeline.”

In the end, however, he said the development of the stock market would be a boon to the economy. “As the market develops, the country’s economy will also improve. But that will probably take another five to 10 years,” he said.

U Maw Than, a retired professor who is currently acting as an economic advisor to President U TheinSein, agreed that the new stock market would face many challenges. However, the most pressing, he said, is the country’s flimsy legal infrastructure.

“Even though there is a new stock exchange law in place, many more rules need to be introduced, such as liaison rules for brokers and dealers, so that the public can participate,” he said.

“Any company that wants to be publicly listed should also be required to disclose who is on their board of directors, as well as information about the past histories of the directors and the companies themselves. When these conditions are met, the public can play a more active role in helping businesses to develop,” he added.

Although the country clearly has some way to go before it is ready to expand the ranks of investors to include a broader cross-section of the general public, the demand for a move in that direction is already evident.

In January, the First Myanmar Investment Co., Ltd. issued an additional 2.5 million new ordinary shares for 10,000 kyat each after selling out an earlier offering of 2,500,000 shares to existing shareholders amid overwhelming demand.

With plans by the Thilawa Special Economic Zone Committee to form a public company and begin selling shares to the public early this year, a modern stock exchange is looking increasingly like an idea whose time has come, whether the country is ready for it or not.

This article was first published in the March 2013 print issue of The Irrawaddy magazine.