Executive Summary of Monthly Financial Sector Discussions 04/2018

Executive Summary of Monthly Economic Development & Outlook Discussions

Wednesday, April 04th, 2018

A diverse set of discussions that ranged from the Economic Outlook for the Pharmaceutical to Micro Finance industry followed by an Insurance Industry liberalization update. Discussions concluded by a brief assessment of Fiscal Receipts from the Internal Revenue Department.

A brief overview of all the subject matters discussed.

1. Pharmaceutical Industry Assessment Outlook

The Myanmar Pharmaceutical industry is estimated to have annual market size of USD $750 million which translates into approximately less than $15 per capita spend in Myanmar versus more than $65 in neighboring Thailand.

Multi-Nationals that represented 11% of the market share and much of the optimism for industry growth have seen some erosion to an estimated 10% at current year over year comparisons according to industry sources. Branded Generics have held firm at 50% with Generics making the balance 40%.

The market which was estimated to see rapidly expanding economic growth from a base of 12% growth rates have actually seen a momentum loss to approximately 7% growth in the last two years. Given the low base this is not an encouraging statistic and perhaps the rationale for two large multi-nationals to make tough business decisions. It is reported by industry sources that Roche has decided to downsize operational staff by about 80% and Takeda to withdraw entirely for economic reasons.

Implementation of Pharmaceutical Procurement by the Government remains challenged. A reported USD $120 million budget in previous years has been downsized to approximately USD $77million in the current 2017-2018 Fiscal Year. This downsizing has resulted in lack of adequate supplies in Government hospitals which imposes further limitation of critical choices amongst the patient population. Additionally, it has been observed by industry sources that the earlier cost sharing model, where the Government provides the healthcare services (via hospitals and clinics) and the consumable were to be purchased by the patient is perhaps counter-productive in a market where ‘affordability’ remains the biggest problem. A discussion on investments on public health subsidies and investments in infrastructure amongst local and government stakeholders was encouraged.

At the current growth rate trajectories, it is expected by market sources that the pharmaceutical market growth will range between 8% to 10% for next 3 years.

A forward-looking thought would be for Government to guide Investment and Expenditure policy which should achieve a 12% to 15% growth rate for the industry, which would also be an indicator of robust improvement in health care diagnosis and treatment to a larger patient population where “affordability’ remains the critical issue.

2. Micro-Finance Industry (MFI) Assessment Outlook

There are a total of 173 MFI’s serving 3.2 million clients in Myanmar. As a percentage of the financial sector these customers represents approximately 23% of the market. As the numbers suggest the market presents numerous growth opportunities however several challenges persist and not limited to the following:

  1. Access to funding: The supply side of the market is fairly competitive with a number of foreign and domestic participants, however structural imbalances on access to funding remain a key impediment as illustrated by:
    1. Interest Rate caps for the Banking sector (13%)
    2. Long approval process: All funding needs to be approved by Regulators which makes for long lead times with a median estimated at 6 months
    3. Supervisory constraints to capital intake: Currently only six of the MFI participants are allowed to take deposits from the public as the regulatory capacity to supervise these savings activities remains challenged.
  2. Lack of experienced staff: One of the core challenges is the retention of experienced management and staff. MFI participants are finding it difficult to fulfill strategic positions and have the necessary industry expertise to continue with their growth and expansion plans.
  3. Legacy regulatory environment: The industry currently operates under a framework of legacy regulations wherein no collateral is required for some type of loans to the constraints of the lack of approvals for the introductions of new products or expansion of new branches.
  4. Lack of rural market coverage: Several industry participants are concentrated in urban areas with no incentive to move towards rural markets creating an extremely competitive landscape in one small geographic sector with a majority of the unbanked having no access to even this basic form of financial services.

As a backdrop to this assessment discussion it was reported that although the MFI Credit Bureau Law has been approved and the implementation of a Credit Bureau is under way, the lack of a formal mechanism together with lack of responsible finance practices increase the risk of over indebtedness of the industry to the detriment of its stakeholders.

3. Insurance Industry Liberalization Update

The Myanmar Insurance Industry first liberalized to 11 local private sector participants in 2012 and now through its regulator, the Insurance Business Regulatory Board (IBRB) has signaled its intentions to allow for further liberalization to foreign participants as the second phase. It is further contemplated that they will be allowance for 100% foreign ownership for Life Insurance and 35% maximum participation via Joint Venture formation, however within the Property & Casualty segment only Joint Venture formation (35% max) will be permitted according to Myanmar Insurance Association sources.

The official announcement from the Regulator is expected by month end with a call for submission of expressions of interest and business proposals. The screening process is thereafter estimated to take another 15 weeks after submitting the initial proposals. It was further reported that a global strategy consultancy firm will be hired as official consultant for selection of successful candidates.

There was some apprehension amongst both global and local stakeholders about the timelines, as previous industry announcements and messaging have not translated into specific developments.

4. Fiscal Receipts Overview and Assessment from the Internal Revenue Department

A general discussion on the role of the Large Taxpayer Office was held by the Internal Revenue Department. This candid exchange of perspectives helped highlight some of the friction points attributed between the revenue side of government and industry. Further multi-stakeholder’s engagement was suggested to help create a more business friendly environment especially if the objective is to help bring in additional foreign direct investments into Myanmar.

The Discussions thereafter adjourned, with the next monthly Discussion date confirmed for Wednesday, May 02nd, 2018.