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Open for business in Myanmar: Hurdles remain for foreign investors but opportunities abound

William D. Greenlee Jr. wrote this article which was published in Volume 43 No. 4 of the American Bar Association’s International Law News publication.

Following the recent transition from military to nominally civilian rule in 2011 and with the removal of the majority of international sanctions, foreign investors are now eager to grab a slice of the action in a fast-emerging economy described by the International Money Fund as the next Asian frontier and even tipped as the next Asian Tiger. With a geopolitically strategic position, a vast wealth of natural resources, an estimated population of around 60 million, strong economic growth, and untapped markets in virtually every industry, the country offers tremendous possibilities for foreign investors. But a number of difficulties remain, making investment here a potentially high-risk enterprise. From 1988 until the end of 2013, pledged foreign direct investment in Myanmar exceeded $44 billion, with the leading investments in power, oil and gas, mining, and manufacturing industries. Increasing investment is expected in the hotel and tourism, real estate, and retail sectors once these are opened to foreign investment in 2015.

The Current Climate

After decades of social and economic isolation, the new government under the presidency of Thein Sein is proactively pursuing an open-door policy to foreign investment. Unlike some of its Asian neighbors, Myanmar has not been able to simply evolve its economic system and encourage foreign direct investment; it first had to begin an evolution of its political system and pursue democracy. Although this presents significant challenges, it is believed by many that the country will be successful and Myanmar will ultimately be a stronger and more attractive economy for it. While Myanmar is currently more stable than it has been for the majority of the time since independence from the British in 1948, concerns remain that the gains made so far are not irreversible. UN Secretary-General Ban Ki-moon and others have identified ongoing ethnic conflict in border areas and increasing anti-Muslim violence as factors that, if not addressed, could provoke more upheaval and undermine the reform process.

The elections planned for 2015 will represent a further test for the current administration because Aung San Suu Kyi of the opposition National League for Democracy party (NLD) has stated she intends to run for the presidency. However, at this time, the Myanmar Constitution does not allow for her to do so. It is reported, though, that she may have up to 80 percent of the popular vote. Most believe that Thein Sein (and the Myanmar government generally) and Aung San Suu Kyi (and the NLD) will be able to come to some sort of agreement prior to the 2015 elections, which will likely involve only moderate constitutional reform initially, and thus avoid any unrest. All of the relevant parties have been working very well together for the past 18 months or so—in other words, since the time Aung San Suu Kyi and various other NLD members were voted into Parliament. The good news is that the Myanmar government appears very committed to continuing economic, political, and legislative reform and to courting overseas investment.

Positive Legislative Changes and Other Developments

There has been steady, although slow, progress with respect to making the changes necessary for commercial laws and other structural issues in Myanmar. According to U.K.-based global risk and strategic consulting firm Maplecroft, Myanmar has made the most significant improvements to its business environment of any country in 2014. Maplecroft points to significant steps being taken to create a transparent, well-understood playing field and to enhance investor protection. While this only translates to a change in ranking from the bottom in 2012 to fifth from the bottom in 2014, it has already resulted in significant improvements for business. Maplecroft forecasts that if Myanmar sustains its current trajectory, it may move out of the “extreme risk” category as early as the next one to three years. By way of comparison, all the hotly tipped economies of Brazil, Russia, India, China, Mexico, Indonesia, Nigeria, and Turkey (BRIC and MINT) are categorized as “‘high risk,” except for Turkey, which is classed as a “medium” risk.

The Foreign Investment Law, Notification, and Rules, 2012–2013 The Foreign Investment Law 2012 (FIL) and the accompanying Foreign Investment Notification 2013 (FI Notification) and Foreign Investment Rules 2013 (FI Rules) are the most notable pieces of legislation to be enacted with regard to facilitating foreign investment. They supersede the previous Foreign Investment Law of 1988 and provide significant incentives for overseas investors including land use rights, government guarantees, and tax exemptions and relief. While foreigners may not own land, in contrast to previous years, foreign investors can now secure control over land through long-term leases of up to 50 years, with the possibility of two extensions of 10 years each.

The FI Notification categorizes business activities into (i) those that are currently prohibited to foreign investment, (ii) those that require a joint venture with a Myanmar citizen, and (iii) those that are possible with 100 percent foreign investment but subject to other conditions, such as approval from the relevant ministry; compliance with other rules, regulations, and guidelines; and/or the requirement to carry out environmental/social impact assessments. Some of the conditions in fact impose a cap on the level of foreign investment, necessitating a joint venture with a Myanmar citizen, or require a joint venture to be undertaken with the state. Foreign investment is being actively encouraged in categories (ii) and (iii) and is also possible in the case of most category (i) activities, which are in theory prohibited subject to special permission from the government, although, in such cases, investment will usually be restricted to joint ventures with a maximum of 80 percent foreign investment.

The Foreign Exchange Management Law, 2012 The Foreign Exchange Management Law 2012 (FEM ) replaced the strict approval requirements of the Central Bank of Myanmar (CBM) that existed under the previous Foreign Exchange Regulations Act 1947. These requirements required every foreign currency payment out of the country to be pre-authorized by the CBM. The law is intended to liberalize transfer payments and foreign exchange transactions relating to current account transactions. However, with respect to capital account transactions, foreign currency may be retransferred abroad only after receiving pre-authorization from the CBM. The CBM involvement in foreign exchange transactions for the time being may represent a hurdle in certain scenarios; however, such transactions have been permitted in the past on a relatively regular basis and are currently so, as well.

New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958

Another development that should lend confidence to potential investors is the accession of Myanmar to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958. This means that foreign arbitration clauses should be permitted in agreements and Myanmar courts will be obligated to enforce foreign arbitration awards. Domestic legislation is still awaited to implement it, however, and the local judiciary must be educated and trained to ensure that the New York Convention and the implementing law are applied in accordance with international practice.

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