A vote of no confidence from Myanmar’s oldest
US law firm

Myanmar Times, Feb 12, 2018 by:  THOMPSON CHAUSU,  THIHA KO KO

“The govt has published a 12-page economic policy paper 18 months ago. Since then ... nothing!"  Eric Rose said.

NEW York-based Herzfeld & Rubin PC (H&R) was the first American law firm to set up a base in Myanmar back in 2013, its team made up of advisers to the ex-president U Thein Sein and State Counsellor Daw Aung San Suu Kyi. But due to the combination of government inaction, the Rakhine crisis and US financial sanctions, the firm is now packing its bags. On February 1, Herzfeld Rubin Meyer & Rose Law Firm Limited (HRMR), the Myanmar office affiliate of H&R, announced that it would shut down by the end of this month.

In an interview with The Myanmar Times, HRMR lead director Eric Rose explained why he no longer has confidence that Myanmar’s economic reforms would recover lost ground after almost two years of stagnation under the National League for Democracy-led government. In the past, he had tirelessly promoted US investments in Myanmar. Nevertheless, American investments into the country have lagged behind neighbouring Vietnam and Thailand.

Three-legged stool

Eric Rose said the absence of a widely anticipated American and Western investment boom in Myanmar is attributable to three major reasons akin to a three-legged stool: the remaining US sanctions, the Rakhine crisis and Nay Pyi Taw’s inaction in reforming the economy.

The American sanctions, imposed in 2003 under Sections 311 and 312 of the USA Patriot Act, require US financial institutions and those operating in the US to undertake enhanced due diligence in any transaction with Myanmar, thus imposing additional risks and costs. As a result, no US banks will finance trade with, investment in, or repatriate profits from Myanmar.

“In a nutshell, although the US stands alone in the world maintaining such financial sanctions, the result is that in the vast majority of dollar-trade a US bank will be involved somewhere in the payments chain. Given the banks refusal to deal with Myanmar, as outlined above, almost all US-based SMEs, and even large US companies will think twice about involvement with Myanmar due to the enhanced costs and risks associated with the extra due diligence involved,” he said.

The second reason is the Rakhine crisis, as this created a reputational risk for most companies. This risk is “in particular due to the lack of a coherent response from the Myanmar government.”

“In effect, this situation is a risk to the respective reputation of Western companies due to the lack of a reasonable explanation to the plea of more than three-quarter of a million people who, for no fault of their own, have been forced away, whether by ARSA or by the military, from their homes and became refugees outside of Myanmar’s borders,” the lawyer argued, referring to the Arakan Rohingya Salvation Army by its abbreviation.

Government inertia

Then, there is also the NLD-led government’s lack of momentum in reforming and liberalising the economy.

Mr Rose listed some of the priorities the current administration was expected to tackle after being voted into power by over 80pc of the eligible voters. This ranges from reforming the judiciary by introducing a rule-of-law programme and improving the physical infrastructures such as roads, railways, power stations and utilities to eliminating protectionist measures which concentrated economic power “in the hands of a few”, tackling land disputes, streamlining the bureaucracy and investing in education. In short, Nay Pyi Taw was expected to “raise all boats” at the same time.

However, it has so far failed to do so, according to Mr Rose. This is despite the US Chamber of Commerce making a series of recommendations, which he co-authored, to the NLD-led government in June 2016.

“I am sad to notice that none of these suggestions have been adopted, despite our willingness to help explain and implement them.

“The government has published a 12-page economic policy paper eighteen months ago. Since then ... nothing,” he noted

“Baby steps have been taken” to start liberalising areas of trade to foreign companies in the likes of fertilisers, seeds, pesticides, hospital equipment and construction materials. Meanwhile, the new Investment Law and related rules which offer more certainty to foreign investors.

However, the lack of a clear and coherent policy, with transparency in its implementation, has created a “fog” for investors, who are unsure of how Nay Pyi Taw will carry out the reforms. This uncertainty has led to a reluctance to commit and come in.

Bureaucracy remains a headache for foreign businesses.

“Furthermore, the NLD has set up a pyramid approval system, where the ‘higher authority’ needs to give prior approval. The result is that those leaders who have the authority to approve are overwhelmed with requests for their time, which results in huge project bottlenecks and delays,” he remarked.

The last straw for HRMR was “the EU’s decision not to sign an IPA with Myanmar during the remaining term of this government”. The lawyer cited Myanmar Business Today quoting U Aung Naing Oo as saying on January 7 that “there is no more hope” of inking the IPA this year.

The final “nail-in-the-coffin,” though, has been the EU’s decision not to sign an IPA with Myanmar during the remaining term of this government. - Eric Rose, HRMR

“As US investors were not coming anyway, and trade with the US is rather anemic, our hope was that European investors would fill the gap. Now, that is very much in doubt,” he said.

Vote of no confidence

The lawyer said it’s hard to see “even spouts of hope” that economic liberalisation will recover lost ground before the next general election in 2020. He cited an example: at 7.5pc of GDP, Myanmar has one of the lowest rates of taxation in the world, compared to compared with 16pc in Thailand and 14pc in Cambodia. Furthermore, the government’s overall debt ratio to GDP is quite low at 36pc.

“In order to have the money with which to speed up its economic growth, reform the IRD [Internal Revenue Department] and increase its tax collection, invest in infrastructure, etc., it would first have to establish a sovereign credit rating, as almost all countries have. This rating will also allow domestic banks to establish their own rating, and give an opportunity to the government to offer international bonds. Given the current popularity of sovereign debt instruments from frontier and developing markets, one would think that Myanmar would follow up.

“Yet, the initial efforts started by U Soe Thane with Citibank in New York city in 2014 have not been followed through, and Myanmar finds itself short of investment capital while, at the same time, its banks are starved for cash due, in part, of the draconian rules of the Central Bank. Furthermore, a ready-made source of domestic borrowing which would be a healthy and developed insurance market, is not available due to the reluctance of the government to permit foreign insurers to enter this market, even though insurance is not a prohibited investment for foreign companies,” he said.

Mr Rose called the lack of a sovereign credit rating, combined with lack of meaningful reform of the financial markets, the biggest setback in economic policy under this government.

Myanmar finds itself short of investment capital while, at the same time, its banks are starved for cash due, in part, of the draconian rules of the Central Bank. - Eric Rose, HRMR

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