Burma Must Brace For Post-Sanctions Cash Deluge

Agenda-Setting Financial Insight.
May 18 2012 3:02 PM

Burma Must Brace For Post-Sanctions Cash Deluge

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A Burmavendor sells fruits at a train station in Yangon on May 17, 2012. After 50 years of isolation, Myanmar now faces the "danger" of being deluged by foreign cash.

Photo by Soe Than WIN/AFP/GettyImages

After 50 years of isolation, Burma now faces the danger of being deluged by foreign cash. With U.S. sanctions suspended, it is open season for investment. While inadequate legal and financial infrastructure is unlikely to deter them, they’ll need to work with authorities to make sure their cash doesn’t fuel inflation, inequality and corruption.

Rich in gems, timber and natural gas, Burma needs just about everything else: modern consumer goods, hospitals and schools, roads and phone systems, banks, power plants and hotels. And though the global economy may be sputtering, Burma’s GDP is growing at roughly 10 percent. Clearing away sanctions altogether will take time, but the suspension frees foreign investors to seal deals in the hope that Burma doesn’t backslide on political reform.

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Great care is required, though. Would-be investors may be surprised to find payments still conducted using pallets of cash. ATMs are not linked, credit cards still a novelty. With the economy dominated by state enterprises, banks have little experience in commercial finance. And the law still requires that imports be paid for in export receipts.

Burma appears keen to encourage foreign-owned ventures and reward them with tax holidays, but it has yet to publish finalised laws or implementing regulations. Its judiciary is not independent and official corruption is rife. Property rights are murky and land grabs increasingly common. Keeping corruption in check may require hiring independent auditors to keep public contracts above suspicion. And for UK and U.S. investors whose governments prosecute corruption abroad, venturing into Burma will mean laying a paper trail visible from London and Washington.

The IMF estimates that foreign direct investment will soar roughly 50 percent this year to $3.4 billion, equivalent to roughly 7 percent of GDP. But incoming foreign-exchange is managed by state banks, not the central bank, which has few tools to mitigate the inflationary impact of such inflows. Burma has floated its currency, the kyat, doing away with a system that valued it 120 times the black-market rate. The IMF reckons the kyat is still overvalued and demand from foreign investors is likely to push it even higher.

In the context of what went before, these are good problems to have. But Burma, and its potential investors, must brace themselves for a post-sanctions cash deluge. 

Read more at Reuters Breakingviews.

Wayne Arnold is Breakingviews’ Hong Kong based Asia strategist. From 1999 to 2008, he served as the Southeast Asia business and finance correspondent for The New York Times and the International Herald Tribune.