Myanmar facing stock market riddle

As economic models of development fail to specify when countries should establish stock markets, determining when Myanmar will establish a stock exchange has turned into a guessing game among analysts of its transitional economy.

Growth rates and income standards, while relevant, are not the primary factors that determine an optimal time for start-up. For Myanmar, the right time will depend on the degree to which a proper regulatory environment is put into place and actual, not rhetorical, commitments to capital markets are made.

Clearly stated rules and regulations for companies that desire to be listed need to be established and the investment community must be convinced that these regulations will be enforced. There will be a need to introduce international accounting standards and specific legal procedures for handling such issues as bankruptcy proceedings. The rights of the stockholder also need to be defined.

Furthermore, regulatory authorities must take the necessary steps to ensure that stocks listed on the exchange meet adequate standards of financial reporting and disclosure. For the investor, access to information will be the key to making decisions on which stocks to buy and sell and the concept of transparency cannot be overemphasized. Transparency, both from the private and public sectors, will be key to building confidence in Myanmar's markets.

Even if the above issues are properly addressed significant changes will need to occur in the way business is currently done in Myanmar, often ranked among the most corrupt countries in the world by international watchdogs like Transparency International. Preferential treatment can no longer be given to firms with connections to the state and management must take the necessary steps to achieve economic efficiency.

This may entail drastic reductions in company labor forces and less reliance on personal relationships in corporate decision-making. Whether Myanmar's business community will be willing or able to make these sacrifices is unclear. Without these changes, however, the establishment of a stock market will have little effect on economic development in Myanmar.

It is speculated that Citizens Bank Ltd and Forest Products Joint Venture Corporation, the two companies currently listed on the failed Myanmar Securities Exchange Center, a joint venture created in 1996 between the Myanmar Economic Bank and Japan's Daiwa Institute of Research, would be the first candidates for listing. The chairman of Eleven Media Group has also indicated he favors taking his media company public in the future.

Myanmar's delay in establishing a stock market is a Catch-22 dilemma. That is, event B cannot occur until A happens, but A cannot occur until B happens.

While the establishment of a stock market has been delayed due to a lack of privatization of companies, the slow pace of privatization is attributed to an insufficient market in which to trade equities, that is, the failure to establish a stock market. Most enterprises in Myanmar do not meet the basic requirements to have their stocks listed on a stock market and those companies that do often generate little profit.

An issue that has not received the attention it deserves is the question of who will manage privatized firms. There appears to be an implied assumption that privatizing state firms will automatically increase efficiency of both management and labor. Although this is a standard hypothesis in market economic models, the degree of efficiency required to make the majority of current state-owned enterprises profitable will not come about merely from the fact that managers and workers become shareholders. (Such individuals are expected to initially become the owners of privatized state firms.)

The institution of a stock market, one purpose of which is to provide liquidity for shareholders, will only work if other investors are willing to buy publicly traded shares. Investors will be willing to buy shares only if corporations are perceived to be managed efficiently. Producing competent managers, as well as individuals skilled in the workings of a stock market, must be a priority issue for both the educational system and regulatory agencies. It should be noted that even competently managed firms go bankrupt and equitization and issuance of shares is no guarantee of profitable success.

Speculative bubbles
Another important issue that will need to be addressed is how to prevent speculative bubbles. The stock market must not be interpreted by Myanmar's citizens as a substitute for the banking system. The banking system and stock market are complements and both must be financially sound for each to work properly. It must be understood among potential Myanmar investors that stocks are inherently more risky than financial assets such as bank deposits and government bonds.

If vast amounts of funds are withdrawn from the banking system in anticipation of higher returns in stocks, then the long-term negative repercussions for the economy might be substantial. Global investors are known for their herd mentality. That is, as more funds flow into the stock market, stock prices rise resulting in more funds flowing into the market. But as history has shown, this process cannot continue indefinitely.

At some point the herd heads for the exits, and stock prices collapse with the outflow of capital. Paper profits, which often fuel excessive borrowing by both the corporate and consumption sectors, too often quickly evaporate. Economies are then saddled with unsustainable debt levels that hinder further economic growth.

A perfect example of the above phenomena can be seen in Japan, which continues to suffer from the collapse of its bubble economy more than two decades ago. Recent economic and financial crises, both in the East and West, have shown that capital flows in both directions at breakneck speed.

To be sure, the establishment of a stock market will not be a cure-all for the many ills now plaguing Myanmar's underdeveloped economy. Economic reforms must continue, and preferably at a quicker pace.

If a stock market is launched before all the necessary rules and regulations are properly put into place it will turn into a legalized form of gambling in Myanmar. While some may win in the short run there is a good chance that most will lose as boom turns to bust. Should this cause Myanmar's people to lose confidence in the concept of a stock market, there will be no place to raise the capital that is so vital to the country's development.

Dennis C McCornac is the Director of Global Studies at Loyola University Maryland. His academic specialty is economics and he has over 20 years experience living in Japan and Vietnam. 

source: Asia Times

http://www.atimes.com/atimes/Southeast_Asia/SEA-01-120913.html