Home MMBIZ News The Bonds That Will Tie The Nation (Part I)

The Bonds That Will Tie The Nation (Part I)

Traffic problem in Yangon, drinking water shortage across Myanmar, high unemployment rate in the country and sustaining peace with ethnic groups – viable solutions for all these challenges and problems come down to one critical component that will dramatically reshape the future of this nation: “capital.”  

The development and growth of both public and private sectors demand large sums of capital in emerging economies like Myanmar. Without sufficient capital it will merely be a distant dream to become a thriving modern nation.

It is obvious that raising revenue for the development of the country is the utmost priority for current as well as future governments of Myanmar no matter who wins in 2015 election. On the other hand, spending and investing those revenues are even more critical because it will also play an important role in sustaining peace with ethnic groups after peace agreement deal is attained at nationwide levels. Without proper economic development plan, or a budget, in those ethnic provinces it will be very challenging for the government to keep the peace going.

Like private profit-and-loss business entity the government and the public need to understand and monitor where the money comes from and where the money goes, especially in times of sovereign financial crisis, which happened in Greece, Ireland and Portugal. It is no longer true that a government must absorb loss in order to serve its own people, a perception widely rooted among Myanmar public. Therefore, it is a matter of national emergency to come up with a plan that will deploy the country’s precious financial resources.

The main source of revenue or capital for most governments like Myanmar is tax. Myanmar government’s tax revenue is about 4 percent of the GDP – ridiculously low compared to other peer emerging countries like Vietnam (25 percent), Cambodia (15 percent) and Bangladesh (10 percent).

Vietnam launched a series of tax reforms from 1996 to 2010 to reach a 23 percent tax revenue to GDP ratio. The tax revenue collection grew at a rate of 19.6 percent annually during the reform period. Now Myanmar government has launched its own tax reform but even if it grows 20 percent annually, it will take five years to achieve double the current figure of tax earnings to GDP ratio. At this present moment or years to come, tax revenue will not be a reliable source of the Myanmar government’s revenue. To persuade and educate individuals and business organisations to pay tax is a time consuming and complicated process.

The international bestselling author Michael Lewis points out in his bestselling book “Boomerang” that the main component of financial crisis of Greece was the government having failed to punish tax evaders.

Myanmar’s narrow tax base and overreliance on resource-based revenues is laying the foundation for a future fiscal crisis. If reforms are not urgently undertaken, the government may not be able to provide basic services and may risk becoming seriously indebted. The government cannot afford to dwell on the problem of narrow tax base and focus on solutions available for economic development other than tax.

International Organization for Migration (IOM) estimated that 10 percent of Myanmar’s population, then estimated to be 50 million to 55 million people, was living abroad. Although some 5 million Myanmar are working abroad for their livelihood, only $566 million (or 1.1 percent of GDP) worth of remittances went through the Central Bank of Myanmar last year. In neighbouring Bangladesh, monetary authorities managed to get their hands on nearly $14 billion (or 12 percent of GDP) in remittances, channelled through their formal banking system.

According to a recent report sponsored by the International Fund for Agricultural Development (IFAD) and the World Bank, a migrant worker in Asia sends home nearly an average $4,000 annually. Even when average amount is cut into half, 5 million Myanmar overseas workers will send home $10 billion annually, which is equal to 20 percent of GDP and more than the value of Myanmar’s annual gas exports to Thailand, the Economist reported. Over the recent years, the positive impact of overseas remittances on emerging economies has been a subject of considerable debate. Again, these remittances are often referred to as the ‘third pillar’ of development alongside foreign direct investment and overseas development assistance, and the value has outweighed that of official development assistance.

Remittances have now become the second largest inbound resource for the developing countries after foreign direct investment (FDI), followed by official development assistance (ODA) and private debt and equity. In 2008, remittances received in 20 countries were at least as large as 11 percent of their GDP. Tajikistan received remittances as much as 50 percent of GDP, which is quite a portion. It is also found that 10 percent increase in per capita official international remittances will lead to a 3.5 percent decline in the share of people living in poverty.

While governments cannot tell migrants and their families how to spend their own money, policymakers can put in place sufficient incentives and mechanisms for migrants and their families to invest remittances in capital-accumulation projects involving both human and physical development that are beneficial to the whole country.

Another way to tap into Myanmar migrants’ population is selling diaspora bonds to Myanmar living and working aboard. The idea of diaspora bond is nothing new. Israel was the first country to sell diaspora bonds, issuing them for the first time in 1951 and boasts having sold $33 billion worth of bonds worldwide since the program’s inception. The Indian government raised over $11 billion from diaspora bonds it issued in 1991, 1998 and 2000. 

These bonds were issued to support balance of payments and raise financing during times when they had difficulty accessing international capital markets. Since 2001, the government of Sri Lanka has raised well over $580 million through the Sri Lanka Development Bond. This scheme encourages citizens in the diaspora to invest in their home countries by providing the much-needed revenue at lower than market interest rates, a patriotic discount.

Unlike remittances, which often go towards domestic consumption, diaspora bonds offer nations an avenue to couple revenue towards infrastructure and other development projects. Money generated from diaspora bond sales can be used for specific objectives such as health care or education or building roads and bridges. However, the government will need to lay down a tangible plan to establish an independent authority or a department to manage the fund that is generated from diaspora bond to build trust with potential bond buyers.

Development of financial infrastructure in Myanmar such as banks, stockmarket and other financial institutions is critical for both private and public sector. Less known function of a stock exchange is that government can also raise bond (debt capital) through Myanmar stock exchange to finance government operations and projects.

Bond is a debt instrument through which government borrows money from public. But sovereign bond is another kind of bond that is issued to international investors through international capital markets and the total amount of bonds sold can be $500 million to $1 billion. On the other hand diaspora bonds can rake in $100 million to $200 million.

Encouraging news is that in 2013, a lot of emerging economies from Africa issued foreign currency bonds in international stock markets: Ghana issued $1 billion, Rwanda $400 million, Tanzania $500 million and Zambia $750 million. Most of their bonds were oversubscribed, meaning there were more buyers in the market than the amount of bonds issued.

Tapping capital from stock market for both government and private institutions has never been easy as it takes time to prepare or restructure for both to meet the stiff requirements. Before one government can issue sovereign bonds, it needs to obtain credit rating from international credit rating agencies and it is a daunting process, but Myanmar government must prepare today so that they can start issuing bonds in the next two to three years time.

“The rating process, as well as the rating itself, can operate as a powerful force for good governance, sound market-oriented growth, and the enforcement of the rule of law. From a business perspective, sovereign credit ratings serve as a baseline for evaluating the economic environment surrounding investment possibilities and as a benchmark for investors to distinguish among markets, which provides valuable information and a basis for evaluating risk,” said the US State Department stressing the importance of sovereign credit rating for countries of sub-Saharan Africa in 2006.

“The beauty with bonds is that their very existence lends further credibility to the country seeking funds, thereby encouraging a broader range of high quality investment. More credibility equals more money, equals more credibility, equals more money and so on,” Dambisa Moyo, author of “Dead Aid” encourages African countries to sell bonds for their countries’ development.

Poor countries obtain credit ratings not only for sovereign borrowings but also for sub-sovereign entities’ access to international debt and equity capital. This means that least developed minority provinces and regions in Myanmar like Chin or Kachin states can issue their own municipal bonds or sub-sovereign bonds to international investors to borrow money for their regional development projects.

Credit rating from international credit rating agencies will also enhance FDI inflow to the country. Vietnam issued international bonds in foreign currency in 2005 worth $750 million and Vietnam’s FDI to GDP rate also picked up from around 3 percent before 2005 to over 8 percent in 2007, and remained above 5 percent until 2013.

But issuing international bonds and getting credit rating are not the only solutions to increase FDI. Investment in infrastructure is still key to attracting FDI. Although Indonesia issued international bond, FDI to GDP rate remains at the rate of 1 percent to 2 percent. Even if Myanmar government can issue $1 billion worth of sovereign bonds in the next two years this would still be short of the annual infrastructure investment requirement of $4 billion.

Kyaw Myo Htoon (John) is a bestselling writer and a financial consultant. His recent book “Understanding Equity and Project Financing” became a bestselling business book in Myanmar. He is also a director at Young & Rubicam advertising agency. He can be reached at: john@myanmarpinnaclefinancial.com.

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