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Myanmar Business Survey #2Significant drop in Myanmar investor confidence – a bump in the road or a sign of more fundamental issues?

December 2017

Investors remain confident about Myanmar's long-term opportunities. However, short-term business sentiment drops drastically from 73% a year ago to 49% now.

NOTE The survey was conducted before the latest developments in Rakhine state, which are likely to have further reduced investor confidence in Myanmar

2 Roland Berger Focus – Myanmar Business Survey #2

In December 2016, Roland Berger published the first Myanmar business survey. The results showed an enormous sense of optimism among both local and international investors: 73% of business people ex-pected the business landscape to (rapidly) improve. This optimism, which was arguably unparalleled worldwide, resulted from the political and economic changes the country had recently undergone, includ-ing economic reforms particularly in the telecom sec-tor, democratic elections and a peaceful transition to a new government led by Nobel Prize winner Aung San Suu Kyi, as well as the subsequent lifting of US sanctions.

To assess how this business sentiment has evolved since then, Roland Berger launched the second Roland Berger Myanmar Business Confidence Survey, conducted in June-August 2017, this time in cooperation with the Union of Myanmar Federation of Chambers of Com-merce and Industry (UMFCCI), the leading chamber of commerce in the country.This second survey captures the latest business senti-ment of almost 500 owners and senior executives from companies of all sizes (compared to 179 responses in the 2016 survey). In the latest survey, 61% of the respondents are local companies (compared to 38% in 2016) and 39% are international firms (compared to 62% in 2016).

A: Business confidence for the next 12 months.How will Myanmar's economy and business landscape fare in the next 12 months?

Source: Roland Berger Myanmar Business Confidence Survey 2016 and 2017

Deteriorate rapidly Deteriorate slowly Remain the same Improve Improve rapidly

All companies

2016

2017

0%

1% 15% 35% 46%

5% 22% 8%

3%

65%

49%

73%

Local companies

2016

2017

0%

0% 15% 35% 47%

1% 23% 8%

3%

68%

50%

76%

International companies

2016

2017

0%

1% 15% 35% 45%

7% 22% 9%

4%

62%

49%

71%

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Myanmar Business Survey #2 – Roland Berger Focus 3

A DRASTIC DECLINE IN SHORT-TERM OPTIMISMThe survey results show a drastic decline in short-term business sentiment, with only 49% of executives expect-ing the business landscape to (rapidly) improve within the next 12 months, compared to 73% in 2016. The drop is consistent across local companies (from 76% to 50%) and international firms (from 71% to 49%). It should be noted that the survey was conducted before the latest developments in Rakhine state in August and Septem-ber 2017, which is likely to have further reduced investor confidence in Myanmar. AThe decline in business confidence cuts across all sec-tors, with every industry reporting a drop in confi-dence of between 14 percentage points (professional services) and 32 percentage points (tourism). Given the immense need for electric power, international firms are most optimistic in the utilities and energy sector (71%) and least optimistic in the retail & distri-bution sector (43%), a market that is still mostly dom-inated by local firms. Local firms on the other hand are least optimistic in the construction and real estate market, likely driven by Yangon's real estate market slowdown and a lack of approvals of large infrastruc-ture construction projects. BThe drop in investor confidence also goes hand in hand with the stagnation of foreign direct investment (FDI) in the country. FDI has only averaged USD 739 million per month in the period April-August 2017, in line with 2016 but below levels recorded in 2015 and early 2016 and down on the investments that were expected to flow in after US sanctions were lifted. C

DROP IN INVESTOR CONFIDENCE DRIVEN BY LACK OF COMPREHENSIVE AND CLEAR ECO-NOMIC POLICY AND FRAMEWORKAll companies in Myanmar face a long list of issues and difficulties. The four most significant ones are lack of trained staff (found by 77% of companies to be a signif-

icant or very significant issue), no clear government eco-nomic policy (77%), unpredictable legislative environ-ment (72%) and selective and unpredictable enforcement of regulations (72%). D The lack of trained staff is a well-known problem for companies and is nothing new – in fact, the issue has decreased in importance compared to last year (-3 per-centage points for international firms). In contrast, the lack of a clear government economic policy has be-come an increasing bottleneck for both local and espe-cially international firms (+11 percentage points). It is now found to be a significant challenge by 86% of the international firms (of whom 53% find it a very signif-icant challenge), and the number 1 challenge overall. Hence, this is likely to be a root cause of the failure of FDI to grow significantly.

THE GOVERNMENT HAS TAKEN POSITIVE STEPS IN THE LAST 12 MONTHS, BUT COMPANIES EXPECT MUCH MOREIt is not that companies do not appreciate the positive economic steps the government has taken in the last 12 months. For example, the new Investment Law and rules are found to have had a positive impact on the business landscape by 64% of local companies and 62% of international companies. Also, the further develop-ment of the special economic zones (in particular Thila-wa SEZ) is seen as a positive development. Improving the rule of law is found to have positively impacted the business landscape by 41% of international firms.Naturally, the removal of US sanctions is also seen as a very positive development for economic growth. EIn addition, companies believe that the government has started to address the long-term fundamentals of a sound economy. For example, 45% of companies consider that corruption has reduced in the last 12 months. F


B: Business confidence for the next 12 months by sector.How will Myanmar's economy and business landscape fare in the next 12 months?


ImproveImprove rapidly

∆ 2016-17

All companiesInternational companies

Utilities, oil & gas and chemicals -22

54%4%58%

64%7%71%

43%0%43%

Financial services -19

48%10%58%

50%10%60%

45%9%54%

Professional services -14

48%10%58%

44%11%55%

55%9%64%

Hotels & tourism -32

54%0%54%

50%0%50%

56%0%56%

Telecom, media & technology -24

47%3%50%

36%7%43%

55%0%55%

Retail & distribution -19

40%3%43%

43%0%43%

39%3%42%

Construction & real estate

37%6%43%

53%0%53% -22

30%8%38%

Local companies


C: Foreign Direct Investment in Myanmar.Foreign direct investment by permitted enterprises [monthly, USD million].

Source: DICA; Roland Berger

04 15

2,230

02 16

427

08 16

320

06 15

82

04 16

0

12 16

228

08 15

0

06 16

2

04 17

656

10 15

534

09 16

552

06 17

1,038

12 15

973

01 17

2,296

05 15

70

03 16

3,822

10 16

2,025

07 15

268

05 16

0

02 17

229

09 15

614

07 16

379

05 17

266

11 15

146

11 16

15

07 17

1,029

01 16

317

03 17

586

08 17

706

TOTAL: 9,483 [790 monthly average]

TOTAL: 6,630 [737 monthly average]

TOTAL: 3,695 [739 monthly

average]



D: Key challenges faced by companies in Myanmar.How significant are the following business challenges for your company?


Difference compared to 2016



-383%

+1186%

+380%

+780%

-160%

+673%

+661%

+952%

+260%

-445%

+1255%

+1949%

40%43%

33%53%

36%44%

43%37%

49%11%

33%40%

35%26%

30%22%

37%23%

30%15%

39%16%

31%18%

Lack of trained staff

No clear governmenteconomic policy

Unpredictable legis-lative environment

Selective and unpre-dictable enforcement of regulations

Rising labour costs

Too much administration

Kyat volatility

Restriction on access to financing

Market access barriers/investment restrictions

Lack of intellectual property rights protection

Administrative issues

Discrimination against foreign companies

All companies

37%77% -7

77% +3

72% -2

72% +5

67% +2

66% +2

64% +9

57% +8

56% +2

47% +3

44% +1

37% +8

40%

35%42%

39%33%

42%30%

51%16%

38%28%

33%31%

32%25%

39%17%

33%14%

32%12%

25%12%

-1172%

072%

-366%

+564%

+373%

060%

+1469%

+462%

+554%

+1250%

-835%

-226%

35%37%

38%34%

42%24%

40%24%

53%20%

42%18%

33%36%

34%28%

41%13%

36%14%

27%8%

19%7%

Local companies

Significant Very significant


F: Perception of corruption.How do you think corruption has evolved in the last 12 months?


Deteriorate rapidly Deteriorate slowly Remain the same Improve Improve rapidly

All companies

2% 8% 45% 42% 3%

45%


1% 8% 49% 40% 2%

42%

Local companies

3% 7% 43% 43% 4%

47%

E: Perception of government economic policies.How have the following measures impacted business landscape in Myanmar?

Removal of US sanctions

New investment law and rules

SEZ development

Transport policy/public invest-ment in transport

Education policy/public invest-ment in education/training

Healthcare policy/public investment in healthcare

Improving the rule of law

Focus on environmentalsustainability

Electric power policy/public investment in electric power

Some positive impactSignificant positive impact


54% 51%18% 24%72% 75%

53% 54%11% 8%64% 62%

50% 62%10% 9%60% 71%

52% 38%6% 1%58% 39%

48% 25%9% 2%57% 27%

46% 28%5% 0%51% 28%

45% 39%4% 2%49% 41%

35% 21%3% 2%38% 23%

30% 25%6% 1%36% 26%

Local companies


prehensiveness of economic policy and reforms (both in breadth and depth), and the speed with which the pro-gram is implemented.The good news is that the government can still count on Myanmar's longer-term attractiveness, and the willingness of companies – both local and international – to increase their investments … when the right conditions are in place.

BUSINESSES REMAIN BULLISH ABOUT MYANMAR'S LONG-TERM OUTLOOKDespite the short-term challenges that companies face in Myanmar, they remain bullish about the country's mid-to-long-term economic potential. 93% of local com-panies are either optimistic or very optimistic about Myanmar's longer-term potential. The long-term confi-dence among international companies is lower (82%) than among local firms, but still very high. H

Companies are aware of the positive steps taken by the government in terms of economic policy. The govern-ment's 12-point economic guideline launched in July 2016 is a good example. Subsequently, several minis-tries have clarified certain positions in their sector de-velopments on an ad hoc basis. However, what the pri-vate sector has been looking for and what is missing so far is the communication of an overall economic trans-formation roadmap, with clear targets, timeline and quick wins, followed by clear, comprehensive and con-sistent sector policies, at least for key sectors such as fi-nancial services, electric power & energy, agriculture, transport infrastructure, tourism and manufacturing.A myriad of reports by international organizations has been issued, covering many of the above topics. Howev-er, what the private sector seems to be looking for are much more specific plans, endorsed by the government.Indeed, many companies are highly confident that the government has the potential to boost economic growth. The most crucial government measure, as proposed by the business community, is the provision of stable elec-tricity supply (96%), not unexpected in a country where only 35% of the population has access to electricity and companies face frequent black-outs.Other measures cited by companies are, as noted above, transparent policy making and implementation (95%), rule of law (94%), transportation infrastructure (94%), simplification of licensing and regulatory pro-cedures (92%), regulatory capacity building (90%), financial sector reform (90%) and education reform and training (88%). GThis is a long list of highly important measures to be taken, but it is not an unusual one for a country such as Myanmar that has come out of isolation and is looking at a major transformational change. Given the way polit-ical transformation has taken place, expectations for economic transformation are similarly high – probably too high. That said, more is needed in terms of the com-

What is missing is the communication of an overall economic transformation roadmap, with clear targets, timeline and quick wins, followed by clear, comprehensive and consistent sector policies, at least for key sectors.


G: Importance of potential government measures.How important are the following government measures to boost economic growth?


ImportantVery important

∆ 2016-17

+0

2017

21%

35%

34%

33%

45%

43%

33%

41%

41%

48%

43%

46%

40%

47%

44%

75%

60%

60%

61%

47%

47%

57%

47%

47%

36%

40%

32%

37%

27%

27%

-2

-2

+2

-2

-1

-1

+3

-6

-7

+6

-1

+4

+9

+6

96%

95%

94%

94%

92%

90%

90%

88%

88%

84%

83%

78%

77%

74%

71%

Stable electricity supply

Regulatory capacity building

Land reform

Transparent policy making and implementation

Financial sector reform

Reform of state-owned enterprises and further liberalization

Rule of law

Education reform and training

Peace agreement

Transportation infrastructure construction

Broadband infrastructure development

Environmental policies and enforcement

Simplification of licensing and regulatory procedures

Promoting fair competition

Healthcare reform

Government measure


H: Optimism about Myanmar's mid- to long-term economic potential.How confident are you regarding Myanmar's mid to long term economic potential?

I: Key reasons for international firms to have entered Myanmar.What is the most important reason for entering the Myanmar market?1

Very pessimistic Pessimistic Optimistic Very optimistic New question in 2017 survey – no comparison possible with 2016

All companies

88%

2% 10% 77% 11%


82%

2% 16% 70% 12%

Local companies

1% 6% 82% 11%

93%

∆ 2016-17

+649%

43%

49%

48%

34%

33%

28%

22%

37%

42%

18%

12%

20%

7%

2%

8%

+7

+0

-1

-6

+7

-4

-7

86%

85%

67%

60%

54%

40%

30%

30%

Being one of the last "frontier" markets

Legal and regulatory environment

Large domestic market

Competitive labour costs

Myanmar governments’ commitment to liberalization

Availability of resources

Strategic location

Possibility to "leapfrog"

Source: Roland Berger Myanmar Business Confidence Survey 2017

1 International firms onlyImportantVery important


Indeed, the reasons for companies to enter the Myan-mar market are more fundamental in nature, such as the country being one of the last frontier markets (86%), having a potentially large domestic market (85%) and boasting a strategic location (60%). I

COMPANIES IN MYANMAR STILL PLAN TO EXPAND AND INVEST, ALTHOUGH AT A SLOWER PACE THAN LAST YEARA less dynamic economic development than expected has led to a noticeable drop in satisfaction with compa-ny performance. In 2016, 58% of companies were either satisfied or very satisfied with their performance in Myanmar. By 2017, this had dropped to 37%. JLower performance and less short-term confidence are also impacting investment plans, unsurprisingly. Com-panies in Myanmar still plan to expand and invest, al-though at a slower pace than last year. 79% of local companies plan to expand operations (compared to 90% last year), and 74% of international firms plan to do so – a significant deterioration compared to 94% last year.And if the root causes of the drop in confidence are not swiftly addressed, this may be just the beginning of a potential downward spiral in confidence, investment, and company performance. KThe lower investment plans translate into less hiring of and investment in staff – which is a problem in that more employment and training is something Myanmar urgently needs for its economic transformation. Com-panies plan to hire more staff and increase employee numbers (66%), although less so (-14 percentage points) than in 2016. 72% of companies plan to spend on train-ing and employee development, given that lack of trained staff is one of the biggest issues facing compa-nies, but this also represents an 11 percentage point drop from the previous year. L

Low investor confidence has negatively impacted investment plans. And if the root causes of the drop in confidence are not swiftly addressed, this may be just the beginning of a potential downward spiral in confidence, investment, and company performance.


J: Assessment of company performance.How do you view your company's performance in Myanmar?

All companies

2016

2017

1%

4% 14% 45% 30%

9% 32% 15%

7%

43%

37%

58%

2016

2017

Local companies

0%

4% 10% 50% 30%

6% 33% 17%

6%

44%

36%

61%


2016

2017

2%

5% 19% 38% 29%

11% 31% 13%

9%

43%

38%

56%


Very discontent Discontent Average Satisfied Very satisfied


K: Expansion plans of firms.Are you planning to expand operations in Myanmar in the next 12 months?


Will scale back operations Will not expand Some expansion Aggressive expansion

All companies

2016

2017

1%

2% 21% 62%

6% 15%

15%

78%

77%

93%

2016

2017

Local companies

2%

1% 20% 62%

8% 20%

17%

70%

79%

90%


2016

2017

1%

4% 22% 61%

5% 12%

13%

82%

74%

94%


M: Threat of competition.How much of a threat is competition to your business?

22% 19% 59%

19%49%32%If you are a local company, how do you perceive the competition from foreign companies?

If you are a foreign company, how do you perceive the competition from local companies?

Competition from foreign companies is not threatening my business

Local companies are successfully trans- forming themselves and becoming increas-ingly competitive

Competition from foreign companies is somewhat threatening my business

Local companies are not competitive

Competition from foreign companies is highly threaten-ing my business

Local companies are competing, but not very successfully

L: 12-month company expectation.How do you think the following will change for your company in the next 12 months?


Spending on train-ing and employee development

Increase number of employees

Investments

Export volumes

Increase slightlyIncrease rapidly

∆ 2016-17 [percentage

points]

-11

-14

-14

-8

All companies

55%17%72%

55%11%66%

48%12%60%

31%6%54%


55%13%68%

43%14%57%

38%10%48%

24%0%24%

54%20%74%

64%8%72%

55%13%68%

34%10%44%

Local companies


WHAT DOES THIS MEAN FOR INTERNATIONAL FIRMS?Overall, there has been a significant deterioration in business confidence in Myanmar, among both local and international investors.For international investors, this means that Myanmar may not yet be the investment opportunity it appeared to be in 2015-2016. Myanmar is now one among many investment destinations for international investors, competing with other markets in Southeast Asia, such as Vietnam and Indonesia.International companies wishing to enter Myanmar need to be aware of the many challenges they will be facing. One of the key issues multinationals will en-counter is the difficulty of finding experienced employ-ees. Indeed, only 13% of Myanmar's working population has a high school education or university degree.The only short-term solution to address the lack of expe-rienced employees is to invest in targeted training. Al-though many companies are reluctant to do so, citing the high turnover rate in Myanmar (~80% of employees in Myanmar stay with a company less than 3 years), there is simply no alternative to training. Moreover, training is a mechanism to retain good employees. In-ternational firms should not be frustrated by the lack of experienced people. Rather, they should invest in train-ing and tap into the Myanmar people's motivation.The lack of a clear government economic policy is more difficult for multinationals to address and is more critical in sectors like infrastructure than in sec-tors such as light manufacturing. Multinationals should therefore engage with the government directly rather than waiting for policies or projects to be com-municated to them. The lack of economic policy also presents an opportunity to influence policy and share investment proposals directly with the government. Maintaining an impeccable reputation is critical for this to be successful.

There is one other aspect that may favor entering sooner rather than later, despite all the obstacles. This is the fact that local competition is not yet well prepared to face players operating on an international level. 59% of international firms believe that local firms are not com-peting successfully and a further 19% believe that local firms are not yet competitive enough. MThis notion is reinforced by the current belief of about 70% of international firms that they can enter and oper-ate by themselves rather than working with local part-ners/JVs.Overall, multinationals in Myanmar should be in it for the long run, with a well-defined strategy. However, giv-en the rapidly changing environment, any multination-al must be flexible along the way and look to tap into any opportunities that may arise.

WHAT DOES IT MEAN FOR LOCAL CONGLOMERATES?Local large conglomerates are clearly in a tough spot. Traditional sources of revenue have dried up, new mar-kets are developing only slowly, and they will be working under new and more competitive rules.In addition, the local conglomerates are faced with in-creasing international competitors and liberalization of key sectors. 68% of local firms believe that competition from foreign companies is threatening their business, of whom 19% even believe it is threatening their busi-ness "greatly". And about 60% of local companies would like to partner with foreign firms, though their interest is not yet reciprocated.Some local conglomerates may not survive this challenge. The ones that do will have successfully shifted from their traditional businesses of trading and public sector con-tracts. Such a strategic shift in business activities needs to be accompanied by a transformation in terms of cul-ture, customer focus, skills, corporate governance, re-porting, speed of decision making and execution, etc.


WHAT DOES IT MEAN FOR THE MYANMAR GOVERNMENT? – A CALL FOR ACTION!The Investment Law and other new or revised regula-tions have been an important step forward. But more needs to be done, faster!An example illustrating the importance of this mantra is Myanmar's recent unexpected slip in the World Bank's 2018 "Ease of doing business" ranking: the country moved from 170th to 171st spot and is still ranked last among ASEAN nations. This despite targeted efforts by the government to move up the rankings. But it is a com-petitive game, and other nations have apparently done more, such as Thailand, which with a similar approach moved up 20 spots to a remarkable 26th place globally and third in ASEAN! Similarly, Indonesia moved up 19 spots, and Vietnam rose 14 spots.The Myanmar government will need to come up with a more comprehensive economic reform agenda that in-cludes a roadmap and concrete projects.The business community is not expecting detailed stud-ies or reports on economic policy, but rather a clear agenda with quick wins to restore lost confidence and a balanced longer-term roadmap so that executives can make investment decisions.With a clearer economic policy, Myanmar will be able to tap into the financing that can be attracted to the coun-try and create jobs for the Myanmar people. Based on our interactions with multinationals, significant pock-ets of investment can be deployed in Myanmar – but only if the government creates the right framework and opportunities to do so.It is our firm belief that stronger sustainable economic growth will also facilitate other government priorities, such as healthcare, education and the peace process.So "more and faster" will hopefully be the motto for the government's economic agenda in 2018.

With a clearer economic policy, Myanmar will be able to tap into the financing that can be attracted to the country and create jobs for the Myanmar people.


WE WELCOME YOUR QUESTIONS, COMMENTS AND SUGGESTIONS

AUTHORS

Thomas KlotzManaging Partner, Southeast Asia+65 [email protected]

Damien DujacquierSenior Partner+65 [email protected]

Dieter BillenPrincipal+60 3 [email protected]

This publication has been prepared for general guidance only. The reader should not act according to any information provided in this publication without receiving specific professional advice. Roland Berger GmbH shall not be liable for any damages resulting from any use of the information contained in the publication.

© 2017 ROLAND BERGER GMBH. ALL RIGHTS RESERVED.

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Think:Act BookletMyanmar: A wave of optimism – will it last?(2016)

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Exclusive: Results and analysis of our comprehensive business confidence survey of the country.

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