Removal of most US economic sanctions against Myanmar unleashes economic potential

 

The business environment is set for dramatic improvements after several burdensome trade restrictions were lifted in 2016. Most notable for foreign investors was the US government’s move to end sanctions on seven state-owned companies and three state-owned banks, with US President Barack Obama promising to further ease sanctions, even as a number of new companies were added to the sanctions list. Domestic trade restrictions are also loosening, with the Ministry of Commerce (MoC) announcing plans to allow foreign-local joint ventures (JVs) to buy and sell construction materials for the first time, a move expected to improve the quality of new projects and reduce smuggling. Although stakeholders continue to await further improvements, including opening up machinery trading to foreign firms, these developments are expected to lead to an influx of new foreign investment, particularly from Western investors.

Democratic Reforms

The US government imposed a number of damaging trade sanctions on Myanmar following a military crackdown on protestors in 1988, including a ban on the export of financial services, as well as freezing the assets of certain institutions. Sanctions were intensified in subsequent years and included a ban on both investment and imports, severely affecting economic growth and investment in the country. The situation began to shift in 2009 under the Obama administration, which maintained sanctions but announced a willingness to open high-level discussions with the country’s State Peace and Development Council. Hillary Clinton, then secretary of state, visited Myanmar on a goodwill mission in 2011, meeting with former President U Thein Sein, announcing plans to boost humanitarian aid and remove sanctions prohibiting assistance from the IMF and World Bank.

Unthawin

Ties between the two countries improved further in 2012, when Washington announced plans to re-establish an office of the US Agency for International Development in Yangon and moved to relax some bans on the export of US financial services and new investment, simultaneously naming its first ambassador to the country in 23 years. Two landmark visits then followed, including President Obama’s November 2012 trip to Yangon – the first visit to the country by a sitting US president – which was reciprocated when President Thein Sein travelled to Washington in May 2013. President Obama returned to Myanmar again in 2014 for the East Asia Summit, where he re-iterated US support for a peaceful political transition.

In December 2015 the US government announced it would temporarily allow all shipments to go through its ports and airports for six months, after reports emerged that major US banks including Citigroup, Bank of America and PNC Financial, as well as third-country financial institutions, were avoiding providing trade finance to exporters due to the fact that Asia World Port Terminal, one of the country’s largest shipping terminals, is controlled by a US-blacklisted businessman. The policy shift allowed banks to finance shipments through blacklisted trade hubs, although banks were still barred from dealing directly with banned companies and individuals. US officials told Reuters in December 2015 that they would likely extend the six-month relief period, though no further news has been announced since then.

Sanctions Lifted

The US government has moved to lift a number of sanctions in recent months, beginning in May 2016, when the Office of Foreign Assets Control at the US Department of Treasury (DoT) announced it had removed seven state-owned enterprises and three state-owned banks from its Specially Designated Nationals (SDN) list, following the landslide election victory of the National League for Democracy (NLD), led by Daw Aung San Suu Kyi. The companies include Myanmar Timber Enterprise, Myanmar Pearl Enterprise, Myanmar Gem Enterprise, No.1 Mining Enterprise, No. 2 Mining Enterprise, No. 3 Mining Enterprise and the Co-operative Export-Import Enterprise. The three de-listed banks included Myanma Economic Bank, Myanmar Foreign Trade Bank and Myanma Investment and Commercial Bank.

The Myanmar Times reported in May 2016 that the US treasury department simultaneously added six companies to the SDN list. All were majority-owned by either local business tycoon Steven Law, whose father was blacklisted by the US for alleged involvement in drug dealing, or Asia World Company, the country’s largest conglomerate, of which Law is managing director. These sanctions were subsequently lifted the following October, with the signing of an executive order by then-President Barack Obama permitting the removal of selected Myanmar nationals and their business interests from the SDN list.

Trade Support

Further positive developments came in July 2016, when Ben Rhodes, assistant to the US president and deputy national security advisor, visited Myanmar to announce that the US will pledge $21m to improve trade and economic governance in the country. Speaking at Yangon University, Rhodes told audience members that the government will continue to focus on assisting Myanmar with its political transition, while it has identified strengthening the agricultural sector and improvements to the business climate as particularly critical priorities. In addition to this assistance, Rhodes said the US is also considering increasing military-to-military cooperation; military ownership of land, assets and businesses had long been considered a sticking point between the two governments. Areas of cooperation could include exchanges, outreach and support for humanitarian assistance and disaster relief.

Perhaps most significantly for long-term trade growth, President Obama announced in September 2016 that he had written to Congress for approval to add Myanmar to the country’s Generalised System of Preferences list, which would exempt US-bound exports from high import taxes, another significant trade restriction. Although the US continues to maintain a blacklist of roughly 100 companies and individuals with links to the former military government or known criminal ties, in addition to a ban on the trade of jade and rubies, President Obama’s most recent announcement bodes well for long-term export growth, particularly in the agriculture, textiles and furniture manufacturing segments.

Impac

 

Growing diplomatic and trade ties with the US have had a dramatic impact on Myanmar’s economy, with a number of global powers including the EU, Australia and Japan following suit in dropping many economic sanctions. Major multinational companies have also moved to invest in areas such as the food and beverages sector (see Industry & Retail chapter), retail chains, mining, energy and real estate.

Lending, trade and investment have also soared in the years since 2012, when the World Bank allocated $245m in credit and grant funding for the country, the first international loan Myanmar had received in 25 years. The US committed $170m to support a peaceful political transition in the same year. Japan signed a $504m soft loan agreement with Myanmar in 2013, its first such facility in 26 years, in addition to forgiving around $5bn in debt.

Trade between the US and Myanmar stood at $400m in 2015, according to the IMF, while total foreign investment in the country hit $9bn during fiscal year 2015/16, which ends in March. In 2013 global consultancy McKinsey reported that Myanmar’s economy could grow from $45bn in 2010 to $200bn in 2030, while the de-listing of banks in May 2016, combined with regulatory changes permitting more transactions with designated Myanmar-based financial firms, left few external restrictions on lending and borrowing in the country, opening the door for domestic reforms and new foreign investment.

Domestic Reforms

The new administration has also moved to improve the business climate through trade liberalisation. The construction industry, which has long suffered from counterfeit, low-quality materials and rampant smuggling, welcomed the MoC’s July 2016 announcement that the government had opened onshore trade of construction materials to foreign-local JVs for the first time. Until 2015 foreign companies had been banned from import and export activities, which were tightly controlled by a small group of firms. In November 2015, however, the government began allowing foreign players access to onshore trade, though such activities were limited to agricultural and medical equipment, and entailed partnering with a local company.

The decision demonstrates Myanmar’s commitment to World Trade Organisation (WTO) policies and bodes well for future liberalisation. The country has been a member of the WTO since 1995, and despite the 20-year gap between its joining the organisation and implementing its policies, the government is expected to further loosen trade restrictions in the future, particularly those on heavy machinery, having opened the country to automobile imports in 2011.

The MoC expects the move to reduce incidence of low-quality, counterfeit and smuggled construction materials, which have had a negative impact on the construction industry. It reported that licences for materials trading will be awarded to JVs provided they obtain permission, meet the relevant local-foreign shareholding ratio requirement, trade using only foreign currencies brought in by official channels, submit a bank statement and appropriate documentation to the Directorate of Investment of Company Administration when applying for an importer/ exporter registration certificate, and comply with all relevant department standards. The removal of these restrictions demonstrates the country’s commitment to trade liberalisation and investment promotion, according to a July 2016 analysis by law firm Tilleke & Gibbons. While the exact types of materials permitted for trade had not been released as of December 2016, construction growth and building standards should show a marked improvement as a result.

 

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The Report: Myanmar 2017

Trade & Investment chapter from The Report: Myanmar 2017

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