HomeMMBIZ NewsThe Bonds That Will Tie The Nation (Part II)

The Bonds That Will Tie The Nation (Part II)

Infrastructure project financing is entirely different from the way private businesses raise capital. They very much depend on large amount of long-term debt or loan. Usually debt is composed of 70 percent to 80 percent of total capital requirement, and such long-term debt can only be sourced from capital markets – both local stock exchange and international stock markets – as bonds.

The benefits of a well-developed capital market are immense and these have been well researched. An oft quoted study by the World Bank has clearly demonstrated that GDP grows faster in economies with more liquid capital markets. Financial institutions like IMF strongly recommend developing deep and liquid local stock and bond market. But the challenge is that development of local Myanmar bond market may even take longer to become liquid than Myanmar stock market.

If the local capital market absorbs a large amount of government bonds there will be a “crowding out effect,” which means the government will use all the capital in the Myanmar capital market and less money will go to private business sectors thus hurting their development.

There are challenges too for Myanmar government to sell foreign currency bonds via international capital markets since it will be exposed to currency exchange rate risk. Nevertheless, under current circumstances, it is the only viable solution to issue foreign currency bonds to spur the economic growth in years to come. Bond is borrowing against the expenses of the future generations so it must be invested wisely and properly.

Government revenue can be used in various activities and sectors that greatly enhance productivity of a country. A nation’s productivity is measured by its GDP (Gross Domestic Production) growth. In matured economies like Japan and the United States GDP growth rate is about 1 percent compared with developing countries like Myanmar (6 to 7 percent). But such growth will not take place automatically. Vietnam and China both deployed massive financial resources to develop the countries’ infrastructure such as power and road. From 1996 to 2007, Vietnam maintained a higher infrastructure investment rate than its GDP growth and as a result maintained consistent average Foreign Direct Investment (FDI) rate of 8 percent to GDP, while China’s miracle GDP growth rate (now slowing down) in the last few decades came from Chinese infrastructure investment rate of 10 to 12 percent of its GDP annually.

Case in point, the out of control traffic problem in Yangon is just simply a result of lack of infrastructure and it is starting to affect both employers and employees, and will soon impact productivity in Yangon and the domino effect can create far reaching consequences. Yangon is heading for Jakarta style gridlock traffic, one of the most notorious traffics in the world, and it is no wonder because Indonesia only invests below 5 percent of GDP in infrastructures. Yangon city can issue municipal sub-sovereign bonds for roads and transportation after sovereign bonds are issued by the government.

Organisations like the Asian Development Bank (ADB) and World Bank recommend at least 5 percent of GDP for infrastructure investment. If Myanmar wants to follow Vietnam’s investment model with current GDP growth rate at 6 percent, infrastructure investment rate should go around 7 percent of the GDP which translates to $4 billion in 2013 and up to $7 billion in 2022 (Myanmar GDP will range from $98 billion to over $100 billion in 2022). So, the total requirement of infrastructure investment for the next 10 years for Myanmar will be $57 billion.

McKinsey Global Institute analysis suggests that an increase in infrastructure investment equivalent to 1 percent of GDP could translate into an additional 3.4 million direct and indirect jobs in India, 1.5 million in the United States, 1.3 million in Brazil, and 700,000 in Indonesia. In Myanmar, Infrastructure investment implies both business infrastructure like road, power and social infrastructure and also educational and healthcare institutions. In order to attract FDI, it will take development of both business and social infrastructure components.

There are ongoing infrastructure activities in Myanmar too. The Japan International Cooperation Agency (JICA) has been preparing a master infrastructure plan for Myanmar as well as a Yangon Urban Development plan, while ADB and World Bank have been working hand in hand for infrastructure development areas such as power and transportation.

Even funding all those infrastructures with bonds, ODA and loans, there’s shortfall in countries like India, Vietnam and Indonesia. They are increasingly seeking investment from their private sector to fill in the financing gap. In order to attract private investment in infrastructure projects, sound and transparent PPP legal framework play a major role. Recent Myanmar government’s effort to raise electricity tariff was a right move to attract private investment into the sector although how it will manage this sensitive issue is debatable. Despite all these efforts, funding those infrastructures will remain a major challenge for years to come for Myanmar as well as other emerging economies. Einstein once said, “Insanity is doing the same things and expecting different results.” Simply put: bold results require bold actions.

Infrastructure investment is politically, economically and socially important and most of Myanmar’s challenges today are basically infrastructure challenges. Ethnic conflicts also create transportation and communication gap that creates wider divide development among cities and provinces, and the ethnic groups. Most people in remote provinces never have been to major cities and lack exposure, breeding conservative minds to create racial and religious conflicts in the country. Moreover, development and investment of infrastructure in ethnic areas and provinces is the only way to strengthen the fragile peace process.

Therefore, infrastructure investment will play critical role in Myanmar long-term economic development but having a plan is just the beginning of the journey. The plan itself will not take off without a capable management team. At the end of the day, it is the people that matter the most. But having a competent team in place is only half the journey – their way of management practices need to comply with the accepted code of conduct besides being transparent.

Last but not least, having all the above three ingredients in place will not suddenly earn trust from the public. The government still needs to communicate their plan that will align with public interests in simple and plain language.

At this initial development stage of a country like Myanmar, it is very hard to show big tangible and physical results. What the government can do right now is sell hope (or a tangible plan) to the public and earn their trust so that they can minimise public resistance along their way. The government also needs a public relations agency too.

The knowledge will give control to the people and control in turn will give hope to them in the future. People with hope will behave well. There are several road junctions in Yangon without traffic lights where drivers act desperately to escape the mess. But same drivers at junctions with traffic light act totally opposite. Those traffic lights are like a plan that will control the public and such control will spawn hope that they will escape the mess when the time comes. In other words, highly capable leadership will bring public in the back seat of the leader’s car and will see the challenges and opportunities on the road ahead. Leaders have to earn trust and sympathy while driving along a bumpy road drive to achieve a common destination.

Former US President Bill Clinton defined leadership during an interview with Fortune magazine as “bringing people together in pursuit of a common cause, developing a plan to achieve it, and staying with it until the goal is achieved.”

Myanmar leaders and policy makers can learn a lot of development lessons from Vietnam and India to take the advantage of being a “late mover” instead of inventing a “Myanmar way” (of course there will be some customisations) that has stunted the country for the last five decades.

The very first step of leadership will be having a solid plan. Without one at hand, no matter who wins the 2015 election, Myanmar leaders will face a troubled time in leading the change that Myanmar people has been yearning for so long.

Kyaw Myo Htoon (John) is a bestselling writer and a financial consultant. His recent book “Understanding Equity and Project Financing” become 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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