Sardor Koshnazarov: ‘Risk-tolerant investors could enjoy high returns’

Mandalay Capital, a subsidiary of investment group Silk Road Finance, provides corporate finance and advisory services to foreign investors seeking opportunities in Myanmar. Mandalay Capital also sees itself as a bridge between international investors and domestic companies. Frontier spoke to Mandalay Capital managing director Sardor Koshnazarov about local investment trends and the upside of high-risk investments in Myanmar.

When did Mandalay Capital enter Myanmar and why?

Mandalay Capital entered Myanmar in 2012 after years of intense attention to this massive frontier market. Positive political shift and pro-investment economic reforms and the launch of large-scale projects solidified our conviction on this market.

We believed then, and we still hold this optimistic view, that Myanmar has strong fundamentals for foreign investments. The local economy has been underinvested for many decades and there is substantial room for further growth to catch up with its peers. We believe there are attractive opportunities across almost all industries.

What is Mandalay Capital’s investment portfolio in Myanmar?

We have a number of potential projects in our pipeline, mostly in the services sector. It includes financial services, digital-based businesses, business consultancy, tourism and hospitality. We are also looking at education and healthcare sectors.

We have also applied for a securities licence. That’s why we are looking forward to the final announcement of the winners of licences by the Securities Exchange Commission. We advised our foreign investor clients on setting up a non-banking financial institution business and teaming up with a local partner in bidding and winning an oil and gas block in the latest round.

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Currently we are engaged in assisting some local companies to raise funding internationally in such areas as oil and gas, power and telecom.

What are the main challenges for foreign companies wanting to invest in Myanmar?

First we need to appreciate the fact that Myanmar is a transitional economy. There are some new rules and regulations yet to be in place, especially in the regulatory and institutional space. We are aware that Myanmar has been and will be facing new objectives. These will require new policies. This has been the case in most transitional frontier markets.

The government and the lawmakers have done a tremendous job in recent years. But by global standards, what has been done in Myanmar is too fast. What is important is to maintain the balance, so that the economy does not get overheated and suffers unfavourable macroeconomic consequences. Too fast is sometimes not favourable for all the stakeholders in the investment process.

The country is heading in the right direction, and we believe investors with a long-term view on Myanmar will be better positioned. From the corporate Myanmar perspective, as local businesses also are facing new realities from foreign companies and investors, they will need to adjust as well. This is a learning process and in coming years understanding and reaching agreements between foreign and local partners will get easier.

Is Myanmar still the exciting investment destination it was one or two years ago?

Myanmar is still an exciting investment destination. More strategic and private equity investors both from the Western and Asian countries are bringing and planning to bring capital into the country. Given the current situation of global capital markets, we are in the era of low interest rates and expensive equities markets in both developed and emerging economies.

Under such conditions, frontier markets such as Myanmar particularly look interesting. Risk-tolerant investors could enjoy high returns.

Investors like stability and predictability. Most investors with knowledge of Myanmar still hold a strong view that there is no turning back from the current reform process. We are optimistic that the new leadership will continue the ongoing investment and business-friendly economic course.

What are the sectors attracting the most investor interest?

Apart from big-ticket investment items such as oil and gas, telecom and power projects, usually dominated by Myanmar state-owned enterprises, we are seeing growing interest in manufacturing, tourism and hospitality.

Retail, financial services, telecom or digital-related businesses also look lucrative as these industries are either at an infancy stage or underdeveloped or underinvested. Agriculture, education, health care, logistics and broader consumer-driven sectors are also on the radar of investors. These industries have all the ingredients to attract investments. Myanmar offers strong competitive advantages compared to its regional peers.

What do you see as the most exciting but unexplored investment opportunities?

Agriculture, education, health care, logistics and consumer-driven sectors are almost untapped. Services supporting the eco-system of banking and other financial institutions, telecom or digital-related businesses also look attractive.

Access to finance is often said to be a big impediment to economic growth in Myanmar.

Indeed, Myanmar is one of the most unbanked countries. The bank loans-to-GDP ratio is the lowest in the region: around 20 versus a regional average of around 70.

The major reason is domestic banks are undercapitalised. Their lending capacity is limited. The low deposit base has not allowed the banks to increase their loan book. Low levels of savings have held back the increase in deposits. Current price level and expected high inflation is another major impediment for potential depositors to hold their savings at a bank. A recent move by the government to issue licences to nine international banks is an encouraging sign towards easing the demand for much-needed capital.

However, what international banks are allowed to bring under these licence terms is a fraction of what the country needs to sustain ambitious growth rates. In our estimate, the Myanmar banking sector needs to increase its loan portfolio by approximately $60 billion in the next five years to reach the regional average. This is a massive number compared to the current size of the whole economy.

In the short-term perspective, I think the major source for domestic banks to increase their capabilities to provide lending facilities will be external ones, primarily international commercial banks.

The ASEAN Economic Community is looming large. Is the domestic corporate sector ready for an influx of companies from Myanmar’s ASEAN partners?

That is likely to be very competitive for the Myanmar corporate, especially with those from the more advanced members of the AEC such as Singapore and Thailand. The corporate community there has a history of several decades in fierce competition with companies from all over the world. It has gained strong experience and substantial competitive advantage, in particular strategy, management, technology and capital.

The experience of many regional integration blocs suggests that several industries of least developed member-countries lose more from competition with companies from relatively developed members.

What is needed to make Myanmar a more attractive investment destination?

Many investment-related laws and regulations have been adopted. Their implementation is key to creating an investment friendly environment and attracting new investments. Procedures, rules and regulations adopted at ministerial and other institutional levels need to be transparent and strictly abided to.

Steps towards ensuring rule of law are most welcome to the investment community in the immediate term. Implementing international conventions related to protecting investments that the country has already signed up for is much-anticipated.

Yangon Stock Exchange is due to open in December. Some say it will be a game changer. What impact do you think it will have on the economy?

In the long term the effect can be tangible, when major business groups and state-owned enterprises are floated and the institutional and the retail investor base becomes stronger. Companies potentially seeking a listing will have to make sure that the stock exchange is the preferred source of raising capital. By then the whole exchange eco-system needs to be in place, including all the players; from underwriters to advisors, rules and regulations, in particular on corporate governance and transparency, to a strong investor base, and liquidity.

Are investors regarding the election as a risk? What’s the likely post-election investment outlook?

Although most of the investors believe that there will be no major departure from the current political and economic course, they would be more confident and ready to commit funding once the new leadership is elected. The fact itself that the current government has already liberalised the political environment, pursued a more liberal economic model by opening up to foreign businesses and allowed other parties to have a broader say in the decision-making process, is a historic positive sign.

Investors are inclined to believe that the elections will result in a stronger, more professional, and a more investment friendly government. There are reasons to believe that the major political forces share the same understanding and policy objectives during and after the elections. Myanmar should benefit from a multi-billion dollar investment influx in the coming years.

Hans Hulst

Hans Hulst

Hans Hulst has been writing about Myanmar since 2000. He wrote three books on the country and published widely in European newspapers and magazines.
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