In the run-up to Myanmar’s historic November 2015 national elections, public opinion appeared split as to what impact the results of the contest would have on the nation’s economy. “Everyone seems to think that the election is the beginning of Myanmar’s problems, or that electing new leadership will inevitably lead to more growth and economic expansion,” U Soe Win, the managing partner of Myanmar Vigour, which has partnered with Deloitte, told OBG. Win’s concerns, which centred on the potential for short- and medium-term instability due to a handful of underlying structural challenges, have been echoed by a growing chorus of observers and local players since late 2014.
Among them is the IMF, which sounded a cautionary note in its September 2015 Article IV consultation for the country. “Myanmar’s economic growth remains strong, but macroeconomic imbalances have increased significantly over the past year,” it said. Noting various signs of economic overheating – including strong currency depreciation pressure, rapid credit expansion, a widening trade deficit, related current account deficit (CAD) growth and a rising fiscal deficit – the IMF argued that action to “tighten policies and enforce prudential measures is needed to address the underlying causes of the growing macroeconomic imbalances”.
Addressing the issues brought up by the IMF in an effort to ensure macroeconomic stability is widely expected to be a key area of focus for the National League for Democracy (NLD) in the coming years. Indeed, in August 2015 Yangon-based weekly Myanmar Times published a series of excerpts from the NLD’s in-house economic strategy, which served to underline the party’s commitment to fixing structural issues currently threatening the economy. “[ Myanmar’s] fiscal system weakness principally comes from misallocation, unproductive expenditure and extravagant spending,” stated the document. Furthermore, while the strategy calls for increased liberalisation of the financial sector and the economy as a whole, the NLD maintains that these initiatives will not move forward without “the design and implementation of rigorous prudential supervision.”
However, the development of broad plans is one thing, while implementing them effectively is quite another. In November 2015, George McLeod, a Bangkok-based adviser on Myanmar at PwC, told the Bangkok Post, “When it takes over the government, the NLD faces some major challenges. It lacks administrative experience; its economic policies are imprecise and there are questions whether the bureaucracy is ‘on side’ to put its policies into action.”
In the meantime, the downside risks to stability are expected to continue to expand alongside the economy as a whole, which posted GDP growth of 8.5% in FY 2014/15, according to data from the Asian Development Bank (ADB). “To sustain economic growth at the rate experienced by Myanmar over the past five years would require continued progress on structural reforms, responsible economic and social sector policies, and follow through with implementation,” Habib Rab, a senior country economist at the World Bank’s Myanmar office, told OBG.
Three main factors have contributed to macroeconomic imbalances in Myanmar. First is the government’s expansionary fiscal policy. Since 2011, and particularly in the run-up to the 2015 elections, public sector expenditure has increased rapidly, as the state instituted large public sector wage hikes and public pension increases, big boosts to health care and education expenditure, and rises in military spending, the latter of which accounted for 27% of government spending in 2013, according to the ADB. Given Myanmar’s low level of development compared to many of its neighbours in South-east Asia, this expenditure is widely regarded as necessary in the long run, despite the short-term risks of rising inflation and a steadily increasing CAD.
Indeed, according to the IMF, as of May 2015 inflation was at around 8%, up from 6% a year earlier. At the same time, as of late 2015 the government was running an estimated CAD of around 6.3% of GDP. In order to reduce inflationary pressure the IMF has recommended that the country lower subsidies and tax incentives, boost tax collection and shift military spending to other sectors. “The CAD is large at the moment,” said Habib Rab. “But this has been driven by capital imports for productive investment, so it will likely pay off in the long term.”
Looking At Credit
The second factor creating imbalances is that pent-up demand for imports has helped fuel rapid growth in credit and a widening of the trade deficit in recent years. In FY 2013/14 credit to the private sector grew by 53.5% year-on-year. As of March 2015 this figure had fallen slightly to 35.5%, though the IMF projected lending to grow by 45.2% in FY 2015/16. According to IMF forecasts, this dramatic increase in deployed credit over the past few years is a major factor in pushing inflation to an expected high of around 13% by the end of FY 2015/16 and widening the CAD to just under 9% of GDP in the same period. At the same time, strong import growth has resulted in a steadily increasing trade deficit, which grew from around 4.6% of GDP in FY 2013/14 to 8.2% in FY 2014/15, according to the IMF, and is projected to continue to expand to 11.6% in FY 2015/16.
The third contributing factor to macroeconomic imbalances has been depreciation of the Myanmar kyat, especially over the course of 2015. In the first 11 months of 2015 a widening CAD contributed to the kyat’s 30% slide against the US dollar. Much of this value loss took place earlier in the year, with the kyat recovering some value in the run-up to the election before starting to slide once more in late November 2015. Domestic issues, including easy credit conditions, continued strong demand for imports and steadily increasing inflation, have been the primary drivers here, though various other factors have also contributed. The decline in the price of natural gas, which accounts for a large percentage of Myanmar’s exports, has not helped, and neither has the strengthening of the US dollar over the 2014-15 period. Torrential floods, which inundated in excess of 485,000 ha of farmland in mid-2015 and wiped out a considerable percentage of agricultural exports, were another exacerbating factor.
The Central Bank of Myanmar (CBM) has moved to shore up the kyat. In October 2014 the institution set the CBM reference rate higher than the parallel market rate, which caused a gap between the two rates, led to a shortage of US dollars in the economy and stoked fears of instability. Then in July 2015 the CBM realigned the reference rate with the market rate, which has restored near parity between the two rates but resulted in further kyat depreciation. The disparity caused issues in the foreign exchange market, with many market players reluctant to sell US dollars, which underpin not only trade but much of the domestic economy as well. “The exchange rate fluctuation is a big challenge for foreign investors and exporters,” Daw Khin Thida Maw, the International Finance Corporation’s country officer in Myanmar, told OBG. “The markets are not fully developed yet to employ monetary policy instruments, such as interest rate policy and open market operations. Therefore, the CBM has faced limitations in sopping up the excess kyat liquidity in the market so as to stabilise the currency.”
A New Game Plan
Nonetheless, over the past two years the CBM, Ministry of Finance, and Ministry of National Planning and Economic Development have enacted various initiatives aimed at shoring up Myanmar’s monetary situation. Given that Myanmar has no secondary bond market, the CBM has held deposit auctions twice monthly since 2012 in an effort to mop up excess liquidity. On the IMF’s recommendation, the CBM announced that it would increase the size of these auctions. It also increased the interest rate on auctions, offering a rate of 8%, as compared to 4-5% a year ago. The CBM has also worked to tighten its control over the banking sector, primarily in the form of a new reserve requirement ratio that requires banks to keep 5% of total deposits in cash at the CBM, in addition to the previous 10% reserve.
Given the changes, and taking into account the current political transition, many market observers are concerned about the potential for short-term monetary instability. However, at the same time, local players and foreign analysts agree that these issues are temporary and that Myanmar’s long-term prospects remain bright. “We recently reduced our GDP growth forecast for 2015/16 to 6.5%, down from more than 8% previously,” Habib Rab told OBG. “This was linked to preliminary estimates of the devastating floods that hit Myanmar over the summer and an expected slowdown in investment after several years of rapidly rising investments. Our medium- and long-term outlooks, however, are broadly positive.”