By Alex Lew
On 25 March, the Yangon Stock Exchange commenced trading. For a country that has just been opening up economically, there are questions as to how urgently Myanmar needs a new stock exchange at this point, and what sort of value that could add to its the economy.
This is not the first securities exchange that Myanmar has in history.
In the 1950s and 60s, there was also a Rangoon Stock Exchange. The over-the-counter market was sizable. It was operated by seven European firms. The Rangoon Stock Exchange died out in the 1960s, when these firms were nationalised by the military government.
The Rangoon Stock Exchange was one of the first exchanges in Asia, established even before the Singapore Exchange (SGX), which is now one of Asia’s leading capital markets. While analysts blame the lack of entrepreneurship and talent for the currently fragile financial markets in Myanmar, one has to acknowledge that the political situation played a key role.
We may argue that Myanmar’s economic growth story lagged their colonial cousins in the south, Malaysia and Singapore. The more convincing story is how the policies of the military government short-changed its people.
A new stock exchange is, undeniably, an exciting development for Myanmar. Even if Myanmar is led by a more democratised form of government, and a government that is unlikely to renationalise firms, there are basic characteristics of a stock exchange that must be met before the project can actually add any value to the country.
What’s needed for a successful stock exchange?
Myanmar Investment Co. Ltd, Myanmar Thilawa SEZ Holdings and Myanmar Citizens Bank are among the first companies to be listed on the Yangoon Stock Exchange. There is a slate of other companies set to be listed at a future date.
But the larger problem is the liquidity within the stock exchange. Myanmar has one of the lowest gross national income per capita in Asia, and in the ASEAN region.
One may rightly question – how much money is in the hands of the public, and which can be invested in the Yangoon Stock Exchange?
The primary factors of a successful stock exchange lie in liquidity and the depth of market. If there are limited buyers – both in the size and number of orders – that market will inevitably fail. Bid-ask spreads will be huge, and the cost of trading will balloon.
Imagine a bid-ask spread of 2,000 basis points, where the buyer immediately loses 20% of stock value upon buying into the stock.
Would a market like this attract financially healthy participants?
Perhaps some may argue that market makers and algorithmic trading can help churn the volume of the stock exchange. But liquidity providers will only participate in market-making activities if there are sufficient buyers and sellers to act as middle men.
Without liquidity and market depth, the Yangoon Stock Exchange is anything but a functioning stock exchange that will never add any useful value to national wealth.
A cross-border stock exchange collaboration?
Some argue that it is imperative for the government of Myanmar to start developing its financial markets at some point of time, and that this effort is praise-worthy.
Perhaps a better starting point would be to cross-list stocks with a stock exchange in a neighbouring ASEAN country. Potentially, the Yangoon Stock Exchange can collaborate with other exchanges such as that in Vietnam, or even Singapore’s.
That said, collaboration between stock exchanges across borders can be challenging, because of time differences and currency fluctuations. It would be prudent not to focus on an equity market – arguably the market with toughest competition.
Alex Lew is project manager of ASEAN Today.