The upcoming stock market in Myanmar in 2015 is part of a comprehensive capital market, which consists of stocks and, in the later stage of the capital market development, bonds. The fundamental of capital market is about organising fragmented financial resources in one country into a system that will fund financial needs of the government and business organisations and contribute to the economic development and growth of a country.
Like all living organisms, a country as well as business needs growth, and growth demands capital. Without sufficient capital long-term growth cannot be sustained. The immediate question that follows is: “Why not borrow such capital from banks around the world for development and growth?” The answer is that we can borrow from the banks but too much of debt (loan) is potentially risky and this was the cause of 1997 Asian financial crisis.
Capital comprises both debt (loan) and equity (share), and their ratio must be closely monitored and maintained at optimal level while a business pursues growth. This is why a business organisation needs not only debt (bank loan) but also equity (stockmarket).
The most critical aspect of it is the ratio between debt and equity – known as “capital structure”. The optimal ratio of equity to debt is 70 to 30, which means in every 100 percent capital, equity is 70 percent and debt compose the rest. Furthermore, this is the ideal “capital structure” that attracts attention from the world’s most successful investors like Warren Buffet to invest in such healthy companies. A company or a country with too much debt is like an unhealthy person carrying too much fat and waiting for disaster to strike.
All the above facts indicate that development of Myanmar’s stockmarket (equity financing) has become critical. But do not hold your breath for Myanmar stockmarket yet since all development in life takes some time. Stockmarket capitalisation to GDP ratio is the best yardstick to measure depth and liquidity (development) of stockmarket in a country.
Stockmarket capitalisation is the total monetary value of stock companies sold through stockmarket. The more liquid the stockmarket, the higher the stockmarket capitalisation to GDP ratio. For example, Singapore stockmarket ratio of stockmarket capitalisation to GDP is 150 and for Thailand it’s around 100, while Vietnam’s is around 20 even after more than a decade of existence. For Zambia’s stockmarket the ratio is only 14 after more than 15 years of operation, according to World Bank data.
Vietnam’s stockmarket capitalisation to GDP was very minimal after they started operation in 2000 and till 2005 the ratio was less than 1 percent of GDP. The development of a new stockmarket involves several factors and parties such as government, business organisations and the public.
Another example is China, China’s two stock exchanges in Shanghai and Shenzhen, launched around 1990, grew by leaps and bounds in the 1990s. The capitalisation of the domestic equity market rose from virtually zero in 1990 to $31 billion, or equivalent to 53 percent of GDP, at the end of 2000. But the poor accounting standards, weak corporate governance and lack of transparency made China’s stockmarket capitalisation ratio to slump from its peak of 53 percent of GDP in 2000 to below 20 percent of GDP in 2005. Moreover, Chinese authorities halt IPO process since 2012 (term used when a company comes for the first time to a stockmarket) for more than one year after series of scandals about companies falsifying their IPO documents and eroded confidence of public investors (retail investors).
On the other hand, Myanmar business organisation definitively needs education, training and accountability for raising capital through Myanmar’s stockmarket. In short, Myanmar business organisations need practices of good corporate governance in order to avoid similar pitfalls as the Chinese stockmarket.
We all should be mindful of the old saying “Rome was not built in a day”. It will take some time for Myanmar’s stockmarket to become a liquid market like Vietnam’s. Less liquid market means less trading (buying and selling stock), less trading causes low stockmarket value (price). Therefore, even for the same company listed in Yangon Stock Exchange and Singapore Stock Exchange, valuation of the listed company in Singapore will be higher than the company listed in the newly-opened Yangon Stock Exchange. The company listed in Singapore will then be able to raise more capital to invest and expand their business because of the higher valuation.
Since new Myanmar stockmarket is not liquid, Myanmar companies’ value will be less, so the equity capital they can raise from the stockmarket will be limited. Consequently, Myanmar companies with less capital will face hard time competing with international businesses.
In the meantime, thriving local business like CityMart, KBZ Bank, Shwe Taung should be allowed to get listed on overseas stockmarket like Thailand or Singapore while local stockmarket is building up for some time. Putting growing businesses like KBZ Bank in startup Myanmar stockmarket is like putting a big fish in a small pond and the fish will eventually become weak.
That is why Chinese authorities allowed their SMEs to get funding from overseas stockmarket in early 2000s when their capital market wasn’t very liquid (they still face challenges and problems). Their objectives are not only for capital for the companies but also for Chinese companies to acquire international practice of corporate governance.
Only when Myanmar stockmarket becomes liquid, CityMart or KBZ can do listing in Myanmar stockmarket again as dual listing between Myanmar and Singapore. But such holistic approach will not affect development of Myanmar’s new stockmarket because not all Myanmar companies will be able to meet the rigid listing requirements of Singapore stock market nor do they have ample resources to restructure their businesses to meet such requirements. So, majority of Myanmar companies will remain in Myanmar stockmarket.
The very objective of stockmarket in Myanmar is to inject capital to Myanmar’s business organisations in order to fuel their growth that will create more job opportunities and tax revenue stream for the country. Setting up a stock exchange in Myanmar is only one of the options to raise capital for Myanmar business organisations and stock exchange itself should not be the objective.
On the other hand, authorities must strive to make Myanmar stock exchange liquid by conducting massive public educational campaign about investment in public companies. Simultaneously corporate governance, transparency, financial education and business related training must be provided to business organisations so that they can prepare to list their business on Myanmar stock exchange in the near future.
Such holistic and comprehensive approach is the key to success for the upcoming Stock Exchange as well as thriving Myanmar business organisations to stay ahead of competition. One can only capitalise the benefits of “late mover advantages” when they are willing to learn from the previous mistakes of others.
Kyaw Myo Htoon (John) is the managing director at Myanmar Pinnacle Financial.