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Burma, once isolated, seeks global investment

Reuters - October 16, 2011

Aung Hla Tun & Jason Szep, Rangoon – Reforms in Burma, the former British colony, that gathered speed this year are likely to continue and possibly accelerate, even if this week's release of prisoners was disappointingly small.

Recent overtures by the government have included calls for peace with ethnic minority groups, some tolerance of criticism, an easing of media controls and more communication with Nobel Peace Prize laureate Aung San Suu Kyi, who was released last year from 15 years of house arrest.

Southeast Asian diplomats expect the 10-member Association of South East Asian Nations to approve at their summit next month in Bali Burma's bid to take its rotating presidency in 2014, two years ahead of schedule, giving the new government some long-sought international recognition.

Reasons behind the wave of reforms are varied. A local currency crisis is forcing the government to seek urgent help from multilateral institutions. Populist anger is rising over neighbor and historic rival China's expanding economic influence.

And Western sanctions are no longer merely a nuisance. They have begun to bite. The government, say those familiar with its thinking, has begun to covet US and European investments as a counterweight to billions of dollars of Chinese money flowing into its energy industry – from natural gas to hydro-power and pipeline projects that cater almost exclusively to energy-thirsty China.

Sanctions, they add, also keep some of the Burmese elite's children out of American schools – a frustration that has grown more acute among a new generation.

And, crucially, since the army nominally handed over of power to a civilian parliament in the first elections in two decades, President Thein Sein has defied sceptics by reaching out to pro-democracy leader Suu Kyi, daughter of assassinated independence hero General Aung San.

Thein Sein, a retired general and first civilian head of state in half a century, surprised Suu Kyi's supporters by appointing one of her friends, U Myint, as chief economic adviser, a step that more than any other could yield reforms in months ahead, say economists who track the country.

U Myint is a dramatic break from decades of staid autocrats and policy blunders by military juntas since a 1962 coup.

The 73-year-old former senior UN economist has been openly critical of the former junta but is well regarded on both sides of the political divide, a bridge between pro-democracy forces and conservative former generals who dominate parliament.

Recently he called for a crackdown on graft, a bold step in a country ranked second on Transparency International's 2010 list of most corrupt nations, worse than Afghanistan. His views on Burma's currency, the kyat, offer a glimpse into a nation desperate for help. They alone form perhaps the strongest argument for why more reforms are likely.

While the currency is pegged at six kyat to a dollar, it changes hands unofficially at about 850, up about 15 percent this year on sales of natural gas, jade and gems, a surge of foreign investment from China and swelling private capital from neighboring countries and the Middle East.

U Myint sees trouble ahead if the largely Chinese-investment fueled black-market rate keeps rising. In a paper presented to the government in June, he warned that it could destabilize Burma and urged the government to reach out to the International Monetary Fund for help.

"If the exchange rate continues to appreciate unchecked, a stage will be reached when earnings from exports in local currency are no longer able to cover costs of production, huge losses are incurred, and enterprises have to close down," he wrote, according to a translation of his paper.

Workers could lose jobs, farmers and fishermen will struggle to sell produce, he said, adding that "the economic, social and political consequences of this chain of events can be serious."

But more reforms – economic and social – are likely to be the price of their full support.

"The key event will be the re-engagement of the World Bank and the multilateral organizations," said Douglas Clayton, a former hedge fund manager who is now chief executive and managing partner of Leopard Capital, a private-equity fund focused on emerging Asian markets and backed by overseas investors.

"At some point it will be very hard for the West to justify continuing economic sanctions against a country that is undergoing reform."

He sees opportunities "in almost every sector" if sanctions come down – from manufacturing to infrastructure and agriculture in a country that just over 50 years ago was one of Asia's rising stars, the world's top rice exporter and a major energy producer with a well-educated workforce.

Government sources say U Myint is set to roll out more financial reforms, including allowing some private and semi-government banks to handle foreign currencies, reviewing foreign investment laws and clearing the way for three state-owned banks to open overseas branches.

The pricier currency also points to deeper changes Mynamar's wealthy converted dollars into kyat last year during a wave of privatization as the junta strengthened control over major assets before ceding power to the civilian government.

About 300 state assets – from real estate, gas stations and toll roads to ports, shipping companies and an airline – were privatized in opaque sales. That put valuable assets under the control of former generals through holding companies, or in the hands of their allies, turning the ex-military elite into financial power-brokers who stand to benefit from increased trade if sanctions are brought down – another reason why reforms are under way.

"These moves are about the regime's survival," said Bertil Lintner Thailand-based author and expert on Burma.

The country, as big as France and Britain combined, sits strategically between booming India and China with ports on the Indian Ocean and Andaman Sea, all of which have made it a vital energy security asset for Beijing's landlocked western provinces.

Backed by Chinese money, Burma is building a new, multi-billion-dollar port through which oil can reach a 790-km pipeline now under construction – with Chinese investments and Chinese workers – that will be cut across Burma and link refineries in western China. Another parallel pipeline will pump Burma's offshore natural gas to China. Total foreign direct investment promises to soar to $20 billion from just $300 million a year before, official data showed.

India and Southeast Asia have sought to ramp up engagement, largely to counterbalance China's influence and to gain a toehold in a country whose proven gas reserves have tripled in the past decade to around 800 billion cubic meters, equivalent to more than a quarter of Australia's, BP Statistical Review figures show.

Even if the reforms continue, Burma faces a daunting public relations exercise to end its image as a backwater run by autocratic former generals and drug lords, blighted by conflicts and years of brutal suppression of pro-democracy uprisings.

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