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For some, Myanmar is ultimate frontier market
BANGKOK (Reuters) - Asset manager Douglas Clayton calls it the ultimate frontier market: a country rich in natural gas, timber and gemstones strategically located between China and India with enormous potential for infrastructure.
But as army-ruled Myanmar heads into its first election in two decades on Sunday, mainland Southeast Asia's biggest country remains one of the world's most difficult for foreign investors, restricted by Western sanctions, blighted by 48 years of oppressive military rule and starved of capital.
Some investors expect the parliamentary election to change that by introducing reforms that could slowly prise open the country of 50 million people that just over 50 years ago was one of Southeast Asia's most promising and wealthiest, the world's biggest rice exporter and major energy producer.
"It seems that the situation could not get much worse but has huge room to get better," said Clayton, a former hedge fund manager who is now chief executive and managing partner of Leopard Capital, a private equity fund focused on emerging Asian markets and backed by overseas investors.
"It has more natural resources than other frontier markets. It is basically four times the size of Cambodia. So the scale is attractive to people who deal in billions of dollars instead of millions," he added. "The election is potentially a seminal event in changing the perception about Myanmar."
Most political analysts advise against such exuberance.
Under the army-drafted constitution, the military has a 25 percent quota of all legislative seats and most of the remainder are expected to go to recently retired generals and their proxies running against minimal opposition due to tough election laws.
The pro-army parliament would appoint a president responsible for the government.
There's no chance the election will be a catalyst for lifting Western sanctions, which depend more on whether the government releases an estimated 2,200 detained political activists or opposition politicians including Nobel laureate Aung San Suu Kyi, whose house arrest expires on Nov. 13.
But some U.S. and European companies are exploring how to navigate sanctions to get in early.
"Recently we've seen companies mostly from Europe and the United States -- not just the usual Chinese, Southeast Asian and Indian investors -- looking to go in," said a source at at a political risk consultancy who declined to be identified because he was not authorised to talk about clients.
"They are approaching this in a way where they are willing to take a big of a hit on their reputation to navigate some of the political risks to simply be there, to get in there first.
Telecommunications and construction materials companies, in particular, are interested, he said, noting the election, while widely dismissed as a sham, will create a framework for a democratic system that might yield changes in years ahead.
"The perception is that, rightly or wrongly, Burma is about to open up in a big way," he said.
China, Thailand, India and Singapore are already big investors in Myanmar. Chinese companies poured in $8 billion from January to May, mostly in energy-related projects, according to official Myanmar statistics.
India's dominant state-owned oil explorer has announced it wants to invest in Myanmar's gas fields, Thailand has ramped up investments, mostly in natural gas and infrastructure.
The country's proven gas reserves doubled in the past decade to 570 billion cubic metres, equivalent to almost a fifth of Australia's, according to the BP Statistical Review.
Revenues from those reserves are tightly held among the ruling military elite whose cronies dominate other businesses.
"In the short term, it is not in anyone's interest among the ruling elite to make big changes," said Sean Turnell, an expert on Myanmar's economy at Sydney's Macquarie University.
"There are deep, deep vested interests. And those vested interests will be trying to protect themselves."
CONTENDING WITH CRONIES
Turnell points to the sale of about 300 state assets -- from real estate, gasoline stations and toll roads to ports, shipping companies and an airline -- that have been privatised, mostly this year, in highly opaque sales.
As military brass swap fatigues for civilian clothes in the poll, the sales put major assets under their control via holding companies or through allies, turning the ex-military elite into the financial powerbrokers of a new era of civilian rule.
Myanmar has also expanded its number of private banks ahead of the election to 19 from 15, but the four businessmen opening them are among the closest allies to the top generals.
Turnell said tension among businessmen over who gets better favours could to lead to rifts and be an eventual catalyst for reforms, but he casts doubt on a theory circulating among investors that Myanmar will develop like Vietnam or Indonesia, where investment friendly policies thrived amid hardline rule.
Myanmar has few technocrats and shuns outside advice, unlike Indonesia, for instance, where former president Suharto worked closely with U.S.-educated Indonesian economists known as the "Berkeley mafia" after coming to power in 1967.
"There is the risk that companies are caught in a false dawn, but there could also be some opening up," said Jacob Ramsay, senior Southeast Asia analyst at consultants Control Risks. "Instead of focusing on the illegitimacy of the election, it is time to start thinking about how the landscape could change, particularly if business gets involved."
Clayton at Leopard Capital is more bullish. "Everyone knows that fortunes will be made here once the sanctions are lifted and the economy opens up," he said.
(Editing by Robert Birsel)
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