Myanmar’s long-anticipated plans for economic liberalisation have finally gone into overdrive. To usher in the new year, the government announced radical changes to the insurance sector and removed some of the barriers to foreign insurance companies operating in the country. This follows several other reforms in the financial sector in recent weeks, including further easing of restrictions on foreign banks, setting up of a credit rating bureau and formation of a ‘project bank’ to encourage investment, especially from foreign businesses.
Privately ministers and government officials have told the South Asian Monitor that 2019 will be a “year of ‘real’ economic reform”. This seems to be the National League for Democracy-led government’s response to growing concerns within the local business community and among potential international investors that Aung San Suu Kyi’s administration—which took office at the beginning of April 2016—had failed to implement its long-promised policies of economic liberalisation.
“Currently, and for many decades, the country has been without the financial institutions it needs for economic growth and development,” Sean Turnell, a senior economic advisor to State Counselor Aung San Suu Kyi told SAM in an email. “One of the primary reasons why these have not emerged in Myanmar has been an overly-restrictive regulatory framework,” he added.
It seems that this maybe about to change, though plans to reform the insurance and financial sectors have been on the drawing board for some time. But the original plans to introduce change to these sectors, agreed more than 12 months ago, have been delayed because of resistance within the local business community and the bureaucracy, according to analysts familiar with Myanmar, like George McLeod, a regional economic and political risk consultant.
“The local players are not happy with these reforms,” said McLeod, and may have been responsible for the government apparatus dragging its feet up till now.
“Myanmar is unusual in ASEAN because it never had a 1997-style economic crisis to shake out the oligarchs and give breathing space for competition,” he told SAM. “Consequently, the economy is dominated by a narrow elite of Sino-Burmese and Shan who largely control land, production and finance. Like in pre-crisis Thailand and Indonesia, these business interests have disproportionate sway over economic policy,” he said.
Foreign insurers from 14 countries have established some 30 representative offices in Myanmar, in anticipation of the government allowing full foreign investment in life insurance and joint ventures in general insurance. The government originally granted 11 licenses in 2013, which have not been able to do business in Myanmar.
For over a year there have been strong hints from government—and growing speculation in the market—that the insurance industry was on the verge of liberalisation, with foreign companies allowed to enter the market. Now the ministry of finance has finally announced the changes, including allowing three wholly owned foreign insurance companies to offer life insurance policies and for those international insurance companies that already have representative offices in Myanmar, to be able to partner with local companies and offer a variety of insurance policies.
Foreign insurers from 14 countries have established some 30 representative offices in Myanmar, in anticipation of the government allowing full foreign investment in life insurance and joint ventures in general insurance. The government originally granted 11 licenses in 2013, which have not been able to do business in Myanmar, except in the Thilawa special economic zone. Three Japanese insurance companies have been granted special permission to conduct nonlife insurance business in the Thilawa SEZ—a Myanmar-Japan joint venture—just outside Yangon.
Shortly before the end of last year, Thant Zin, director of the finance ministry’s Financial Regulatory Department (FRD) told a USAID-sponsored seminar on the insurance and capital markets in Yangon that the government had adopted a roadmap for the liberalisation of the industry, which would be rolled out in the new year. The government has also ordered local insurers to split their business into two entities—life and nonlife—to make it easier for foreign companies to find potential partners to operate joint ventures.
The government’s decision to press ahead with the liberalisation of the insurance sector has been widely approved by local and international financial analysts. “Myanmar was supposed liberalise its insurance sector years ago, but the government repeatedly stalled,” said McLeod. “So, these reforms are most welcome news.”
Domestic insurance companies have already had a five-year start and market penetration remains very low, especially with regard to life insurance-related products, Maung told SAM. Less than 10 percent of the population has insurance, including fire, theft, accident and life insurance. This makes the country attractive to foreign investors, according to SandarOo, managing director of state-owned Myanmar Insurance.
The government’s announcement earlier this week also invited expressions of interest (EOI) and requests for proposals (RFP) from local and foreign companies. It is hoped that foreign insurers can start operations early in the new financial year which starts in April, according to government insiders. A short-list of licensees would then be chosen, according to ministry officials. This would be followed by granting provisional licenses for foreign insurers and brokers. But many drawbacks remain, according industry analysts. The regulatory framework needs to be radically improved.
“Foreign competition should help the local industry provide better services and a wider range of products,” said William Maung, a Yangon-based financial consultant specialising in the insurance sector. But local companies lack human resources, skills and expertise to meet these demands he insisted. “So, in theory at least, foreign insurance providers could help fill this gap with technical know-how.”
Domestic insurance companies have already had a five-year start and market penetration remains very low, especially with regard to life insurance-related products, Maung told SAM. Less than 10 percent of the population has insurance, including fire, theft, accident and life insurance. This makes the country attractive to foreign investors, according to SandarOo, managing director of state-owned Myanmar Insurance. Only two out of more than 50 million are insured, so foreign insurance providers could help expand the market, she said.
But the recently announced reforms of the sector still only scrape the surface of the changes that are needed to allow the industry to flourish, according to Maung. The regulator maintains a tight grip on insurance business and domestic companies are not allowed to develop their own products or set their own rates and premiums. But this maybe about to change once the insurance liberalisation takes root and insurers have full autonomy to set premiums and rates. Unless the regulator loosens its grip on the industry, foreign investors are unlikely to be impressed by the business potential in Myanmar, warned Maung.
In fact, several foreign companies have already grown impatient with the delays in liberalising Myanmar’s insurance market. South Korea’s largest insurance company—Samsung Life Insurance, a subsidiary of the Samsung Group—recently confirmed it has closed its offices in Myanmar, which were originally set up in 2013. Other foreign companies have effectively shut down too, or kept a skeleton staff, until it was clear when the government’s liberalisation plans would come onto effect.
Insurance sector liberalisation is essential Myanmar to develop and keep a grip on the budget deficit. “Insurance companies, especially life insurance, build up long-term liabilities as they grow their business,” said Turnell. “But these need to be matched by long-term assets – the most relevant of these are government bonds.”
In other words, this is an important step in providing the government with a form of budget financing. The government understands it must develop the bond market, and that by opening up the insurance sector to foreign companies it will deepen the bond market and enable the government to meet the debt from the budget deficit.
“If we allow foreign players we will be able to get the funds we need to develop the government bond market,” said Thant Sin. “Foreign insurers will need to fork out $14 million for a license to provide general insurance,” he said.
“Once an insurance company is given the license, 30 percent of their required capital should be used to buy government bonds,” he added. Working capital would represent 60 percent of their capital requirement, with the other 10 percent deposited with the Myanmar Economic Bank.
But insurance industry liberalisation is to go hand-in-hand with the reform of the banking sector. The Central Bank recently announced the relaxation of interest rate restrictions, expanded the allowable activities of foreign banks and broadly extended the country’s banks freedom to operate.
“The recent moves by the Central Bank will assist the creation of a more liberal and effective financial system,” said Turnell. “These changes and continued interest rate liberalisation will allow banks to provide financing to young entrepreneurs who might not otherwise have the collateral or credit-worthiness of the more established firms,” he added.
There is a consensus amongst analysts at least that banking reform is essential for Myanmar’s economic development. “What is clear is that the current rate of 8 percent paid on deposits and 13 percent on loans is unsustainable,” said McLeod. “But while reducing interest rates is the most reasonable thing to do, other measures need to be in place, especially dealing with the banks’ non-performing loans (NPLs).”
More than 50 percent of bank loans are actually bad debts and should be written off, according to knowledgeable sources in the banking sector. But if the government insists on this course of action, there is a danger of it precipitating a disastrous bank crash. Instead the Central Bank is allowing the banks time to resolve their NPL problems and put their respective houses in order.
“Myanmar’s banks have been governed by a confusing grab-bag of rules based largely on the socialist-style regulations left over from the military period,” McLeod said. But the NLD has made headway in reforming this – for example by rationalising rules around interest rates for deposits and loans. “But more work needs to be done as Myanmar remains the least developed banking system in all of ASEAN,” according to McLeod.