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Myanmar's progress towards a bond market boon to private, state firms
MYANMAR has been pursuing its "Capital Markets Development Roadmap" since 2008 to set up a bond market. The country is on the correct path, but now it needs traffic in the form of corporate bond issuers and both foreign and domestic investors.
And it should accelerate the speed of moving towards its destination - to create new avenues of raising funds for local private and state companies through bond issues.
The country has endeavoured to develop a sovereign bond market in order to reduce borrowing from the central bank to fund the fiscal deficit. It intends to totally end its reliance on loans from the central bank, and would fund the debt mainly through the bond market by 2020 or 2021.
In a timely suggestion, the MP, Daw Thet Thet Khaing, stated in parliament in March 2018 that the country needs to adopt a strategy of raising funds through the sovereign bond market. Myanmar had domestic debt of around 18 billion Kyat (S$16 million) and foreign debt of around US$9.1 billion in January 2017, according to the Ministry of Planning and Finance.
Currently, the government is the only issuer of bonds in the country, and it sets the interest rates. Its Treasury Bills and Bonds carry higher interest rates (9.5 per cent from three months to three years) than the rates the state pays on its external debt (5 per cent for 10 to 40 years). But after a secondary market is developed, the rates would be decided by market forces.
The local banks have been purchasing more than 99 per cent of the bonds issued by the government, while the foreign banks buy less than 1 per cent. The government is cautiously thinking about allowing foreign pension funds and insurance companies to buy bonds.
The role of foreign investors will be critical. They are allowed, in principle, to participate in the bond and stock market. But at present, they have not entered the market. Although the rules governing the entry of foreign (non-resident) issuers or investors have not been defined, the present laws and regulations do not place restrictions on them. The government is expected to soon clarify the role of foreign participants.
For now, the country faces tough challenges and great opportunities in pursuit of establishing its capital markets. First, the pace at which rules and regulations are translated into English is not happening in a timely manner, which deters investors, according to an Asian Development Bank report.
Secondly, there is a need to convert more private companies into public companies. At present, understandably, the Yangon Stock Exchange (YSX) has only five listed companies because listings only began in March 2016. But there are not too many companies waiting in the wings to make their market debut. The Securities and Exchange Commission of Myanmar (SECM) is trying to bring more investors into the market.
Thirdly, a lot of preparatory work is needed to shift the trading of government bonds from the interbank market to a secondary market among institutional investors. An auction process was introduced in September 2016, but it cannot immediately bring large numbers of institutional investors into the market.
Fourthly, it may be difficult to implement ambitious expansion plans because there is a lack of market expertise among the regulatory authorities, as well as the providers of market infrastructure, and the participants. A shortage of experienced staff in both the SECM and the YSX makes it all the more challenging.
Fifthly, the authorities are gradually addressing the need to provide investor protections through bondholders' representatives, or by setting up an investor protection fund, and a system to address complaints and disputes. The SECM has announced that it will invest in educating the public on the benefits and risks of investing, and that it will protect investors in the future. Finally, there is a lack of clarity both on taxes to be paid, and tax incentives.
There are other challenges that the market authorities are addressing in order to create a system to issue municipal bonds that would fund the development of nation-building projects. The SECM is expected to issue rules on municipal bonds.
Beyond that, the SECM is creating a regulatory environment for public companies to issue corporate bonds, and to establish a secondary market in these instruments, possibly on the YSX. For its part, the YSX is supposed to put in place a system for listing, trading and settlement of bonds.
Many investors believe that these challenges will be addressed, and they are looking at a range of opportunities in the bond market. The positives are, first, that with the rules and laws in place, the bond and securities market and the participants should be confident in tackling the challenges.
Secondly, the SECM has identified 30 to 40 companies as good prospects for listing among the some 230 public companies in Myanmar. (A public company has 50 or more shareholders). Two or three listings each year are likely by companies in information technology, tourism and the services sector.
Thirdly, the new Myanmar Investment Law that took effect in April 2017 has clarified the definition of a foreign company. Previously, a company was considered to be foreign if even one share of the entity was held by a foreigner. Under the new law, a certain percentage of the company's shares must be held by foreigners to classify as a foreign company.
The new definition of a foreign company is expected to create a larger pool of Myanmar public companies as candidates for listing or issuing securities because the local companies will benefit from technology transfers by the foreign owners.
The present scale of the debt market is fairly modest. The Central Bank of Myanmar has authorised two financial institutions, Myanma Economic Bank and Myanmar Securities Exchange Centre (predecessor of the YSX) to sell T-bonds to financial and non-financial institutions, and to private investors since 2010. The central bank had sold T-bonds to financial institutions until the introduction of competitive auctions in September 2016.
The country has a long-term goal of linking the YSX with the stock markets in the Asean countries (along with the cross-listing of public companies on those exchanges), under the Blueprint 2025 of the Asean Economic Community.
Myanmar has developed both roadmaps and blueprints, and it knows the way to its destination. The market authorities need to keep their eyes on the road - but not drive too slowly.
- The writer is editor-in-chief of The Calcutta Journal of Global Affairs.