Injecting new life into Yangon Stock Exchange

THE Yangon Stock Exchange (YSX) will be the last of the region's markets to open up to foreign investors. The normally tight-lipped Yangon market regulator announced on July 12 that it would allow foreigners to own shares of companies listed on the bourse.

No date was set, but analysts expect trading to be liberalised by the end of this year.

Foreigners are allowed to invest in the Ho Chi Minh Stock Exchange, as well as the markets in Laos and Cambodia. Myanmar, however, has not been in a hurry.

The latest announcement may spark interest among foreign retail investors resident in Yangon, but the major foreign investors, such as global asset and fund managers, may remain cautious until the YSX completes its ongoing reforms, such as improving corporate governance, protecting minority interests, as well as listing of substantially more companies than its present stable of just five listed companies with a market capitalisation of around US$400 million.

The five listed companies - First Myanmar Investment (FMI), Myanmar Thilawa SEZ Holdings (MTSH), Myanmar Citizens Bank (MCB), First Private Bank (FPB), and TMH Telecom Public Co Ltd - have not generated much interest as the average daily trading volume was just 46 million kyat (S$41,463) over the past year.

The YSX itself is well managed by its joint owners - the Myanmar Economic Bank, Japan's Daiwa Securities, and the Japan Exchange Group. Its small trading volumes are understandable as it is a relatively new bourse that began trading in March 2016.

The market regulator, the Securities and Exchange Commission (SEC) of Myanmar, stated that foreign individuals and locally-registered entities would be allowed to invest up to 35 per cent in listed shares.

The timely declaration is crafted to demonstrate the positive intent of the market authorities, who are aiming to inject new life into the YSX. Until the new trading rules are published, it remains unclear whether both resident and non-resident foreigners will be allowed to trade.

The liberalisation of trading by foreign investors is being carefully managed under a new Companies Law that was announced last August. Under the law, foreign individuals and companies may hold up to 35 per cent minority stake in Myanmar companies. But so far the law has not been implemented.

The 35 per cent cap is being maintained to ensure that local companies do not lose their domestic registration which is required for them to be listed.

In order to stimulate interest in the fledgling bourse, the Japanese investment bank Daiwa Securities Group earlier this month launched a Myanmar-focused fund with US$30 million worth of capital to nurture startups, and to eventually get them to stage their initial public offerings (IPOs).

These moves are necessary because foreign direct investments (FDI) were in the doldrums in the first three months of this year, with inflows declining by 37 per cent to US$3.6 billion over the same period last year.

Investments slowed due to security jitters after the Myanmar military launched a violent campaign against the country's Rohingya Muslim minority community.

FDI, however, began picking up slightly in the first half of this year compared to the same period last year, but it remains at just a third of annual FDI commitments worth US$5.8 billion in 2017-18.

The YSX faces a conundrum: local companies are not motivated to involve themselves in cumbersome listing and corporate governance requirements because the investor base is very small and there are no easy returns. The bourse, therefore, is banking on foreigners to step in.

According to the SEC, as many as 50 to 60 high-achieving local companies may list on the exchange, and about half of them have begun consulting with local brokerages in preparation for their IPOs that may happen over the coming five years.

Myanmar can take lessons from Vietnam where the stock market has recently beaten all regional markets by reaching US$190 billion in value (compared to about US$400 million in Myanmar).

A key problem is that Myanmar currently lags the other Asean countries on corporate governance, according to a joint study by the International Finance Corporation (IFC), the SEC of Myanmar, the YSX, and the country's Directorate of Company Investment and Company Administration (DICA).

The first IFC-led study of its kind, the Myanmar Corporate Governance Scorecard 2018, released in April this year, assesses the performance of 24 companies in Myanmar. In the study, these companies scored an average of 30 per cent, compared to the Asean average of 69 percent. It found that some Myanmar companies were performing much above the average, and listed companies were outperforming public and private ones.

The report recommends that companies should work harder on improving their performance in the following areas: safeguarding the rights of shareholders; raising the level of companies' disclosure; transparency; governance structures; and the composition and accountability of the boards. It suggests how companies can close the gap with other Asean markets, and identifies areas for rapid improvement.

Myanmar companies have begun improving their corporate governance. In April, the Myanmar Institute of Directors and DICA offered the country's first Director Certification Programme in collaboration with the Singapore Management University.

Prospects for the YSX have improved with the stabilisation of the wider economy. According to the World Bank's June 2019 Myanmar Economic Monitor, the economy is expected to expand at 6.5 per cent in the current 2018-19 financial year, after a period of volatility between April and September 2018.

Economic growth should be sustained because of the implementation of mega projects under the China Myanmar Economic Corridor, underpinned by an improvement in the transport, energy and manufacturing sectors.

Yet, there remains some cause for concern because the agriculture sector is underperforming due to weak foreign demand for locally grown commodities. And there are other barriers to growth, such as an electricity shortage, which deters investment. In its half-yearly update on Myanmar in December last year, the World Bank had warned about softening consumption, slowing investment, and rising production-cost pressure from fuel price increases.

The country has the benefit of the best advice on market reforms, and it now needs to implement them. There's no lack of potential and prospects; Myanmar should not continue to lag behind the Asean countries.