The victory of pro-democracy opposition groups in Myanmar’s general election on November 8 is expected to bring renewed investor confidence, as the country continues to pursue an agenda of economic liberalisation.
While the National League for Democracy (NLD), which led the opposition’s successful challenge, has pledged to continue the reforms begun under the Union Solidarity and Development Party (USDP), the new government will likely face new domestic and external headwinds upon taking office in March 2016.
Ahead of the election, the IMF said that Myanmar could see an upside surprise if its election outcome was well received, resulting in higher-than-expected foreign direct investment inflows. Strengthening regulatory oversight for the financial sector, broadening the tax base and reining in the fiscal deficit, together with other reforms, would also be key for improving investor confidence, the IMF added.
While Myanmar is currently in the midst of transition, there are already signs that the international community is responding positively to the election outcome.
In the wake of the ballot results, the US signalled it could further lift sanctions against Myanmar, provided the domestic process continues to move forward.
Continuing restrictions on US investment in Myanmar have limited trade growth to date. While bilateral trade increased to $185m last year, compared to just $10m in 2010, this accounted for a fraction of Myanmar’s total trade of $27bn, which was dominated by regional trading partners.
Sanjay Gupta, CEO of International Beverages Trading Company, said Myanmar’s fundamentals remain promising for investment. “With a population of more than 50m and a growing economy, competitors are eager to enter Myanmar,” he told OBG. However, businesses will be looking for the next wave of reforms to free up more liquidity and facilitate development, particularly in the construction sector.
According to Cyrus Pun, executive director of Yoma Strategic Holdings, the availability of credit continues to pose challenges for the building industry. “Funding is a major issue when it comes to construction projects,” he told OBG. “Local banks lack the resources to fund large-scale projects and foreign banks are currently restricted when it comes to lending to local businesses.”
While Myanmar remains a market of interest for many investors, the new government will likely be faced with weaker economic conditions than the last administration, largely as a result of the slowing of the Chinese economy.
Weaker demand from Myanmar’s main trading partner is expected to drive down exports, with sales of commodities likely to be the hardest hit. This is forecast to weigh on overall economic growth, according to the IMF.
The country is also facing domestic headwinds, including higher inflation, due in part to flooding in July and August, which inundated crops across more than 586,500 ha and displaced some 1.6m people.
According to U Win Shein, the minister of finance, the floods pose an inflationary risk, with the IMF predicting inflation could reach as high as 13% in 2015, up from around 7% last year.
Rice production was especially affected by the floods, with losses of around 200,000 ha. The country blocked rice exports for six weeks in a bid to maintain food security and keep domestic prices stable, which caused Myanmar to lose out on export revenue.
As a result, the World Bank revised its 2016 growth estimates for Myanmar from 8.2% to 6.5% in mid-October.
More modest growth could be a blessing in disguise, after the IMF warned in September that Myanmar’s economy was at risk of overheating.
Credit growth in the private sector, which was up 35% last fiscal year, fed into higher spending and consumer demand, while also lifting debt levels and fuelling inflation, the fund said. The kyat had depreciated by around 20% year-to-date against the US dollar in late November, which has increased the cost of many imports.
The weaker kyat has also widened the current account deficit, which is expected to reach 9% of GDP this year, according to the IMF. Additionally, depreciation has driven up demand for foreign exchange, contributing to the drain on foreign currency reserves, which are forecast to fall to 2.5 months of imports by the end of the year.