Myanmar’s Seething Property Bubble, Redux

I was shocked to learn that office space rental prices in Myanmar has zoomed past their equivalent in New York’s Manhattan

From Bloomberg: (bold mine)

Sean Danley has spent the past six months scouting office space in Yangon after being sent to establish the Myanmar branch of his U.S.-based employer.

He looked in the city’s three sole 1990s-era towers, where annual rents have climbed to more than $100 a square foot, compared with less than $75 in downtown Manhattan, according to broker CBRE Group Inc. Too expensive, he said.

The villas he considered either didn’t have safety exits, weren’t clean, required sharing space with other companies or were in odd locations -- all unsuitable to the image of his $29 billion in revenue engineering and construction company, which he said he wasn’t authorized to identify. After seeing 10 places and losing one possibility to someone faster with his “bag of money,” Danley is still looking.

In 2011, I pointed out that Burma, which officially is known as Republic of the Union of Myanmar, has commenced to liberalize her previously closed political economy governed by military autocrats. Such structural change obviously should be a welcome development.

BUT the global yield chasing phenomenon has apparently seeped or spread into Myanmar’s economy, as evidenced by escalating the inflating property bubble as I earlier noted in June of 2012

One can sense mania when the investing public imprudently ignore risks. From the same Bloomberg article:

International developers will probably seek partnerships with local counterparts in a country where they’re not yet sure of rules and regulations, Pun said. For large-scale projects, some foreign companies bring their own workers from outside, while also using local resources available, he said.

Foreigners have been stampeding into Myanmar in the anticipation that foreigners will “no longer require a local partner to start a business in the country, and will be able to legally lease but not own property” based on a March 2012 draft foreign investment law (Wikipedia.org). 

But foreigners are prohibited to own land and immovable property (PWC).

So the massive influx of foreign investments on the non-property sectors has played a significant role in driving up Myanmar’s property prices to stratospheric heights.

Yet one would wonder how such eye-popping scale of property price inflation has been financed.

Myanmar has a dysfunctional, “outdated and debased” banking system as a result of decades of “abuse by the previous regime”. The banking system has effectively been “shunned by about 90% of the population” (CNN) where the average Burmese simply hold their savings or cash at home. 

Financial services such as loans, financial products, interbank operations and other forms of credit barely exists.

And the absence of a viable banking system and capital markets has prompted residents to turn into “real estate as a place to stash their cash” according to a Myanmar based finance analyst (Quartz). 

Myanmar is slated to open the Yangon Stock Exchange in 2015.

And because of the largely cash based nature of the transactions in the property sector, some analysts opine that the boom-bust cycle in Burma has been “overstated”.

I believe that the cash transaction segment of Myanmar’s markets sizzling hot property markets represents only part of the story. 

According to a survey conducted by an IFC report only 16% of households use the formal financial services. The other sources of loans emanates from family, friends and moneylenders [IFC: Microfinance in Myanmar Sector Assessment] So Myanmar has a huge shadow banking system which essentially eclipses the formal banking sector.

Importantly, the idea of the absence of leverage in Myanmar’s property boom may not entirely reflect on reality. 

Singapore has played a big role in providing financial services to Myanmar even when US sanctions were in place. According to Hans Vriens of the Insight Bureau Briefings, “Most overseas transactions are handled in Singapore, which acts like an off-shore banking platform for Myanmar and using the informal hundi system” 

Additionally, aside from the $2.4 billion of bilateral trade, there has been “significant business presence by Singaporean firms on Myanmar” as well as a “large Myanmar community in Singapore and a pool of Myanmar companies using Singapore as an intermediary hub to expand overseas”. 95% of Myanmar’s foreign transactions reportedly has been coursed through Singapore’s United Overseas Bank (UOB) (Asia One Business). 

So loans by the informal sector may have partly been financed by Singaporeans and or Myanmar based investors domiciled in Singapore.

This also implies that while property transactions may have mostly been executed through cash, the source of funding  may have been conducted through shadow banks, or through overseas lending via Singapore’s banks or both.

Whatever the source of transactions, one thing is clear, Myanmar’s money supply has been exploding, according to the World Bank’s Data.

Myanmar’s excessively high property prices (or property bubble) is likely either to fall from its own weight or would likely recoil from the prospects of monetary tightening as consequence to ongoing instability in the global bond markets. 

It's unfortunate that central bank's inflationism will act as spoiler to what has generally been a positive development.

How Despotism Promoted Ignorance in Myanmar

Many people nurture the mystical impression that noble intentions drive actions of governments pertinent to social welfare concerns.

Well, not in Myanmar’s case, where the former rulers opted for policies that resulted to a massive black hole in education.

From Wall Street Journal, (bold emphasis mine)

The University of Yangon was once one of Asia's best colleges. Today, abandoned buildings rot away on its overgrown campus, with some walkways deserted except for dogs.

Its state of affairs embodies a crucial challenge for leaders as Myanmar opens to the outside world. The military junta that dominated the country for five decades all but destroyed the university system after a series of student protests convinced its leaders that schools were breeding grounds for dissent.

But now that the lifting of most Western sanctions has paved the way for an expected wave of investment, companies are finding a nation largely bereft of skilled workers. Doctors and lawyers often lack up-to-date training, and other professions are desperately short of qualified staff with even basic critical-thinking skills, employers say.

The lack of expertise in the country was sometimes used by military leaders as a justification for handing big business contracts to associates of the regime. A small number of Myanmar students went overseas to study. Only over the past year, since the military regime stepped down, has the government actively encouraged those educated abroad to return and share expertise.

Of course such policies reflected on the “rule of thumb” for politicians where the principal concern of politics has been about political control or political power.

The difference lies in the nature of political institutions in Myanmar. The ruling military junta relied on a regime whose power has been rooted on ignorance and fear rather than from getting the consent of the governed. So the curtailment of dissent was then seen as a political imperative.

In addition, the past regime profited from society’s ignorance through the “justification for handing big business” or by awarding economic opportunities to favored network of families, friends or allies: cronyism in socialist clothing.

But all these have backfired.

Compounded by the snowballing opposition to the military junta, eventually the military junta was forced into a referendum that transformed Myanmar’s politics into a presidential republic with a bicameral legislature. 

And thus, the pronounced turnaround in Myanmar’s political economy, through economic reform policies of liberalization.

The political and economic developments in Myanmar seem to be confirming the position held by the great Professor Ludwig von Mises (Liberalism p.46),

Only a group that can count on the consent of the governed can establish a lasting regime. Whoever wants to see the world governed according to his own ideas must strive for dominion over men's minds. It is impossible, in the long run, to subject men against their will to a regime that they reject. Whoever tries to do so by force will ultimately come to grief, and the struggles provoked by his attempt will do more harm than the worst government based on the consent of the governed could ever do. Men cannot be made happy against their will.

For as long as economic liberalization will be the premier thrust, Myanmar looks like a promising compliment to ASEAN, whom likewise needs to have more economic freedom.

Myanmar’s Property Bubble

The impact from global negative real interest rates and monetary measures such as QEs seems to have percolated to Myanmar.

From Global Post,

Hoping to set up shop in Yangon? Bring duffel bags full of cash.

You might assume that property in Myanmar, one of Asia’s most impoverished and dysfunctional nations, would rent for a pittance.

But as the long-shuttered pariah zooms towards political and economic reform, it is swarmed by foreign investors speculating that Myanmar’s big boom is nigh. There are now too few hotels and office buildings in the crumbling commercial capital, Yangon, to cope with the influx of moneyed outsiders.

It doesn’t take an economics whiz to guess what happens to property markets with a glut of interest and a paucity of supply.

Yangon hotels that once charged $60 a night are charging $250 or more. The average rental price for office space has surged to $60 per square meter, according to Antony Picon, an associate director of research with the Colliers International real estate services firm.

“I’ve seen a swamp in the middle of nowhere and they’re asking the same thing they’d ask in the center of town,” Picon said. Houses that recently rented for a few hundred bucks a month are going for thousands.

While economic reforms through liberalization has been a good development, unfortunately this has been accommodating the international monetary policies fueled ballooning property bubble in Myanmar.

The Emergence of Capitalist Cuba?

I previously pointed out that the post-Fidel Castro Cuba has broken the proverbial ice of electing to take the road of economic liberalization.

Eric Margolis at the lewrockwell.com examines and predicts Cuba’s future…

Thanks to Raul’s recent reforms, small private enterprise is bubbling up everywhere. Aid and oil from Venezuela has kept the island afloat. People are more outspoken, a little less wary of the secret police and informers. One feels growing energy pulsating into Havana’s delightful old city. With its beautiful buildings, friendly, attractive people, and little music bars with their electrifying salsa bands, Havana is poised to resume its role of 50 years ago as the most fun – and perhaps wickedest city – in the world. All it needs are more hotels, better food, and waves of young Yankee partyers. Already, some 100,000-200,000 Americans sneak into forbidden Cuba each year.

America’s Great Satan, Fidel Castro, is sidelined by age and illness, but Cubans still love their national papa figure. Brother Raul, now pushing 81, has gained respect for his leadership. But once the Castro era is over, what will happen?

Either a power grab by the military and old guard, or the half million Miami-based Cubans will return and rebuild Cuba. A tsunami of US money will swamp Cuba, washing it into the modern world but erasing much of its austere charm and sense of community. Many friends of Cuba do not look forward to this change, though Cubans desperately need relief from their threadbare existence.

More evidence of Cuba’s reforms from Kansas City.com (bold emphasis added)

Across Cuba, there are entrepreneurs like Suarez and Hidalgo, striking out on their own as locksmiths, plumbers, electricians and the like. They've always existed, but operated on a smaller scale, illegally, in the informal economy.

"I can make more money," Suarez said, comparing his take with the official government monthly salary of $20.

In the past 24 months, Cuba's communist government has announced a series of economic openings intended to ease its announced plan to trim the country's bloated government payroll by 1 million jobs and to buy time as the country transitions away from the reign of the two Castro brothers who've ruled since 1959 but now are in their 80s.

The reforms include expanded self-employment, a liberalization of rules for family-run restaurants, more flexibility for Cuban farmers to sell their products, and even creation of fledgling real estate markets in big cities such as Havana and Santiago.

Most of the 181 newly allowed self-employment categories involve menial labor, and services such as beauty salons, barber shops and plumbers. The government says it has granted 371,000 licenses.

The reforms, however, remain far from free-market capitalism. Not included among the openings are medicine, scientific research and a range of technical jobs that the government has kept under its control. There are no wholesale businesses to provide goods and services to entrepreneurs.

What Cuba’s gradualist reforms has done so far has been to legitimize parts of her huge informal economy.

And the direction of Cuba’s reform will likely deepen and accelerate overtime as political leaders realize that their survival will depend on a wealthier citizenry from economic freedom.

Perhaps like Myanmar, whom has been slated to open a stock exchange by 2015, Cuba may even consider reviving the Havana Stock Exchange which was closed in 1960.

Bottom line is that globalization vastly aided by the internet, or the information age, have begun to pry open formerly closed economies. Forces of decentralization have swiftly been diffusing across the world.

And given the huge potentials of the reformist nations of Cuba and Myanmar, especially coming from a depressed level, investors ought to keep an eye on these prospective frontier markets.

North Korea’s Failed Missile Launch Reflects on Dire Economic Status

So it appears that I’ve partly been validated on my view that the much hyped threat from North Korea’s military might has been no less than media bubble that has apparently been pricked.

From USA Today

North Korea's much-touted satellite launch ended in a nearly $1 billion failure, bringing humiliation to the country's new young leader and condemnation from a host of nations. The United Nations Security Council deplored the launch but stopped short of imposing new penalties in response.

The rocket's disintegration Friday over the Yellow Sea brought a rare public acknowledgment of failure from Pyongyang, which had hailed the launch as a show of strength amid North Korea's persistent economic hardship.

For the 20-something Kim Jong Un it was to have been a highlight of the celebratory events surrounding his ascension to top political power. It was timed to coincide with the country's biggest holiday in decades, the 100th birthday of North Korean founder Kim Il Sung, the young leader's grandfather.

The United States and South Korea declared the early morning launch a failure minutes after the rocket shot out from the North's west coast. North Korea acknowledged its demise four hours later in an announcement broadcast on state TV, saying the satellite the rocket was carrying did not enter orbit.

The launch brought swift international condemnation, including the suspension of U.S. food aid, and raised concerns that the North's next move could be even more provocative — a nuclear test, the country's third

It would seem that the actions of North Korea’s political leadership deserves more the ridicule “for nearly $1 billion failure” than ‘condemnation’.

$1 billion lost on unproductive military spending from an impoverished nation is simply suicidal!

Here is what I wrote earlier,

Such totalitarian state has engendered massive poverty represented by rampant shortages of many goods and services which includes the rationing of electricity that has personified what “earth hour” truly means.

And in spite of the North Korea’s vaunted war machinery, wherein much of the misallocation of the nation’s resources had been directed, the North Korean army is in a state of dilapidation and obsolescence: they seem ostensibly good for parades and for taunting, but not for real combat.

The North Korean political economy has been so immersed in abject poverty such that the country has functioned as real life paradigm of the essence of the environmental politics of “earth hour”.

North Korea’s command and control political economy cannot even afford to provide basic lighting services to their citizenry! (satellite images from my earlier post)

And this only implies that for most of North Korea’s army—except for Presidential units—have not only been poorly equipped, but they are famished, insufficiently trained and most importantly they could be mentally or psychologically unfit for any prolonged military skirmishes.

And in case the freshly installed North Korean political leadership of Kim Jong Un becomes whacko enough to openly engage in military conflagration, the administration's downfall will be underwritten by a coup d'état or a massive defections of North Koreans (both from the army and from the citizenry) more than from foreign military interventions.

A clue from Salon.com

Yet more and more North Koreans are prepared to take such risks as they flee hunger and oppression in search of a new life in South Korea, where their newfound freedom is clouded by discrimination, mental health problems and financial hardship.

At around 12 percent, the unemployment rate among defectors is far higher than the 3.4 percent among South Koreans. Those working earn significantly less than their southern counterparts, despite government subsidies and three months of mandatory resettlement training, according to the government-affiliated North Korean Refugees Foundation.

Even so, a recent government survey showed that seven out of 10 adult defectors are satisfied with life in the South; only 4.8 percent said they were dissatisfied or very dissatisfied, according to the unification ministry poll.

About half of those questioned left the North due to food shortages, while 31 percent said they came to the South in search of freedom. Just over a quarter fled because of the North’s political system.

They are among more than 23,000 North Koreans who have defected to the South since the Korean War ended in a truce — not a peace agreement — in 1953. The trickle of defectors through the 1990s rose dramatically about 10 years ago, the result of a prolonged famine in which more than 1 million people may have died.

Last year 2,737 people — one of the highest figures on record — defected to the South.

And the botched missile launch was apparently timed with the unveilment of the statues of Kim Il Sung (left) and Kim Jong Il. (from Business Insider)

And all these attention grabbing destabilization moves are most likely representative of attempts to diversify the public’s attention from the real rapidly deteriorating state of North Korea's economy, as well as, use these events as leverage to hand wring concessions from her neighbors, allies and other patrons or the geopolitics of blackmail.

North Korea should instead follow Myanmar’s reforms of gradually adapting economic freedom. Myanmar is slated to open a stock exchange by 2015, with the help of Tokyo Stock Exchange.

And reforms towards economic liberalization by closed economies has usually been initiated with the symbolical opening of stock exchanges.

For North Korea's despotism, what is unsustainable will not last.

Will Burma Embrace a Market Economy?

Forbes Magazine’ Simon Montlake thinks so (bold highlights mine)

It usually pays to be bearish on Burma. But a flurry of initiatives by a new, semi-elected government has raised hopes of a fresh start. Since taking power in March, it has begun tackling barriers to economic growth, such as commodity import cartels and restrictive investment and labor laws. President Thein Sein, a retired general, has pledged to support local entrepreneurship and to attract foreign investors to special economic zones. He's also tapped independent thinkers as economic advisors and appointed businessmen as ministers. In much of Asia this would be mainstream politics. In Burma it's almost a Tea Party movement. Even the political standoff that has defined Burma on the world stage--the Lady versus the Generals--appears to have eased with a warm presidential reception on Aug. 19 for Aung San Suu Kyi, the opposition leader. "Things have moved surprisingly quickly," says a European diplomat. A veteran foreign aid worker concurs: "The political conversation has changed."

Burma's political history is strewn with false starts and reversals. The question on everyone's lips is whether this time is different. Skeptics say Thein Sein has yet to deliver on his reformist rhetoric and faces resistance from political hardliners and conservative bureaucrats, as well as rent-seeking tycoons who thrived under the dictatorship.

This uncertainty, as much as sanctions and boycotts, prevents many Western firms from taking the plunge, says Luc de Waegh, founder of West Indochina, a consultancy in Singapore. "The business environment isn't friendly to foreign investors yet. It's challenging to do business there," he says. Asian manufacturers have also been deterred by high costs for inputs and dilapidated infrastructure, despite a cheap labor pool. Only Burma's natural resources have attracted significant investment, led by China, though this has proven controversial.

Still, some Western executives are keen to size up a potential market of 54 million people with an estimated GDP of $43 billion. Tourist arrivals rose 23% in the first half of 2011, and not all were vacationers. "The big guys from the big companies are going there for tourism and business curiosity. It's like the last frontier," says De Waegh, who used to run British American Tobacco's Burma operations. Under political pressure at home, BAT exited in 2003.

While some will think that a seminal market economy for Burma will pose as threats to them, I think Burma’s possible conversion should be very positive, not only for Burma, but for ASEAN and for the world.

This means more business opportunities and access to a previously closed market that is not only resource rich but likewise has significant human capital and also fabulous recreational sites or vacation spots for potential tourists (like me).

A universal axiom is that de-politicization of any economy extrapolates to the empowerment of the masses through the markets, where the interests of the consumers should reign supreme than the interests of the political overlords.

As the great Ludwig von Mises once wrote,

The fundamental principle of capitalism is mass production to supply the masses. It is the patronage of the masses that makes enterprises grow into bigness. The common man is supreme in the market economy. He is the customer "who is always right

I hope Burma will indeed commence on the path of embracing a market economy.