International Finance Corporation (IFC), a member of the World Bank Group, and the Securities and Exchange Commission of Myanmar (SECM) signed a memorandum of understanding (MoU) in March to strengthen corporate governance regulatory standards and practices in Myanmar.
In its press statement, the IFC said that a better regulated market will bolster investor confidence and help attract international investment to the country.
During his visit to Myanmar, IFC Vice President and Treasurer Jingdong Hua sat down with the Myanmar Times to discuss capital markets, the Asian financial crisis and a range financial of issues concerning international investors.
According to Mr Hua, the IFC has just celebrated six decades of investing in the emerging markets: the organisation has operated more than 6000 projects in over 120 countries and brought more than a trillion dollar of impact, including investing directly from IFC’s own balance sheet, US$250 billion worth of investment. For the IFC, private sector development has to be the engine of economic growth and job creation because the private sector in many countries routinely creates over 90 percent of employment opportunities.
Myanmar’s demand for international investment is enormous. The transport sector alone, for instance, would require US$45-60 billion by 2030. And despite the high growth rate, the country’s financial system is still small, even by the standards of low-income countries with 19 percent credit/GDP in 2015-16, according to data from World Bank’s Myanmar Economic Monitor published in December 2016.
The IFC wants to do more lending, and its remit is to the private sector. Sometimes it can be difficult to find local private sector businesses which meet the lending criteria. Do you expect this to change? What is holding Myanmar back?
Private businesses in frontier markets like Myanmar often face the same challenges. In fact, investors are often waiting for the markets or businesses to meet certain lending criteria. At the IFC, we believe we should go beyond waiting and look beyond financing. We should create a market which can allocate the resources including capital efficiently. To do that, we need both interventions with governments to strengthen the business environment and direct support to the private sector when risk/return profiles are not conducive to investment.
For Myanmar, we believe it means changes such as a better business climate, modern infrastructure, stronger banking and financial sectors, a productive agricultural sector and good corporate governance practices.
We have seen strong commitment from the government to reform. International investors like us also prepare to help. But the demand is vast. As IFC’s treasurer, I would argue that capital markets are essential for Myanmar’s private sector to get the funding necessary for growth.
Why are domestic capital markets important for Myanmar’s private sector?
First of all, deep, vibrant capital markets create access to long-term, local-currency finance. When companies borrow from local capital markets, they can do so in the currency in which they earn revenue. This protects them from foreign exchange risk and enables them to focus on expanding and creating jobs.
The second reason is that the lack of access to infrastructure services also limits private sector growth. The ADB estimates that Asia needs to invest $26 trillion by 2030 to resolve a serious infrastructure shortage to maintain its growth momentum. Local capital markets can mobilise funds to finance infrastructure, housing, and other priority sectors.
Additionally, countries with strong local capital markets are more resilient to economic crises. Efficient local capital markets protect economies from capital-flow volatility and reduce dependency on foreign debt.
Institutional investors based in the OECD countries alone had nearly $100 trillion under management, according to the World Bank. Capital markets can effectively connect international savings in investment.
There are many changes needed for the business environment to improve, such as stronger infrastructures and stronger banking sectors. What is the IFC doing to support Myanmar to achieve those issues?
As Myanmar just started opening up to international investments and to encourage private sector growth, I think there is a very huge potential to improve the environment. Through our advisory services and through our capacity-building programs, I think we can offer a lot of experiences and support to the government.
But one area which I particularly want to mention is our MoU with the SECM. The IFC just signed a MoU with the SECM to help improve corporate governance standards backed by sound legal and regulatory regimes, which is a prerequisite to the development of a more mature and robust capital market. And of course, it is just the beginning.
I am very excited about this MoU because it gives us institutional arrangement whereby we can share global experiences and how to support improving corporate governance, supporting SECM roadmap or eventually developing a vibrant liquid domestic capital market.
The fact that Myanmar started opening up later than that of other ASEAN countries actually gives Myanmar some advantage, as the country can learn from others’ experience. Therefore, the process of encouraging private sector investment could be much faster than the neighbours in ASEAN.
How is the IFC planning to support the development of domestic capital markets in Myanmar? What are the challenges?
Establishing capital markets may look like a revolutionary idea. It depends on a few criteria. First, it depends on the creation of a macroeconomic and regulatory environment that supports markets. Second, principles and policies governing the capital markets need to be transparent and enforced. Third, setting reasonable fees for companies to issue bonds or access the markets. Economic stability and low inflation are also the key to encourage savings and make loans feasible. And it is about human capacity.
But the IFC has the experience, ideas and record of innovation to be part of the solution.
We have expertise in creating structure finance and local currency solutions in countries where capital markets are not developed. Our triple-A credit rating underscores our success in managing risks in these environments and helps us attract investment.
Additionally, the IFC has an established syndications program and innovative co-financing platforms to efficiently mobilise funding from commercial banks and institutional investors.
We offer an array of financial instruments to help businesses manage currency exchange risks and access international capital markets, and we have worked with many emerging markets to find creative capital market solutions for their development needs.
For illustrative purposes, we have issued bonds in 18 emerging-market currencies to expand local-currency finance and provided more than $13 billion in local-currency financing across 63 currencies to grow capital markets.
Apart from the MoU, how does the IFC plan to support the SECM?
I would like to share why we want to support the SECM. For Myanmar to achieve full economic potential, three classes of infrastructures have to be built: the social infrastructure, physical infrastructure and financial infrastructure.
By financial infrastructure, what I mean is the country needs a very strong banking system. You need to have banks that can provide credit to businesses, can provide mortgage financing and can accept savings from its citizens.
Currently, the penetration of banks to Myanmar citizens is still very small. In terms of how we can support rapid expansion, financial inclusion and banks services to Myanmar citizens are fundamental.
At the same time, Myanmar needs to build a functioning capital market.
I’m referring to its component parts, including an equity market. You already have a stock exchange but hopefully more companies can be listed and traded on an active basis. For the government and corporate bond market, the government bond market is in the process of maturation but the corporate bond market is not there yet. Then, obviously, the commodity market and derivative market are important because these markets enable the financial market infrastructure which can efficiently recycle investments and savings and direct them to the right risk/return profiles of any investment. So this is the medium to long-term plan.
The SECM, as a government agency, has a central task of facilitating the development of a deep liquid open transparent capital market. That’s why supporting the SECM is so critical.
The IFC approach in strengthening Myanmar’s regulatory framework is by implementing the Financial Institutions Law and updating the Companies Act.
Capital markets can connect international savings in investment. How can that work in Myanmar?
I can give you an example what we have done in India. The IFC over the past three years has issued about US$1.8 billion equivalent-worth of offshore Indian rupee bond listed on either the London or Singapore Stock Exchange.
People who bought IFC’s bonds are international investors. The IFC, by issuing the bonds, received Indian rupees which we have invested in private sector companies in India. Therefore, we connected directly international savings to India’s private sector development. The key benefit here is that the bond is denominated in Indian rupee so the international investors can manage some exposures in Indian rupee. IFC’s clients, in India by borrowing in Indian rupees, then do not have to worry about foreign exchange risk.
I hope one day the IFC could issue an offshore Myanmar kyat bond and then connect to international savers. It will take some time for bonds to be issued by the IFC both domestically and internationally. If we want to issue, we need to make sure the legal framework, the capacity, the regime, the market infrastructure are all in place.