Raft of investment to unlock trade and economic potential in Myanmar

Trade and investment has expanded rapidly in Myanmar since 2011, bolstered by economic liberalisation, legal reforms, a large untapped domestic market and a favourable geographic position bordering Bangladesh, China, India, Laos and Thailand, which together comprise 40% of the world’s population. However, several factors are weighing on 2018’s investment outlook, including ambiguous legislation and red tape, depressed global commodities prices and India’s agriculture import quotas (see analysis). Concerns over the country’s human rights record could also act as a deterrent to Western financiers, even as Chinese firms move in to fill the funding gap in infrastructure, real estate, transportation and industry. Indeed, new opportunities created by China’s Belt and Road Initiative (BRI) are set to play a significant role in supporting Myanmar’s trade and investment growth over the medium term.

The country’s network of special economic zones (SEZs) is also expected to act as an important catalyst for growth, helping to boost exports and reduce the trade deficit under an export strategy prioritising value-added manufacturing, although two of three planned SEZs continue to face delays.

While FDI inflows have fallen below government targets in recent years, the ongoing opening of Myanmar’s economy, new regional trade opportunities within ASEAN, and steady progress on legal and policy reforms should see both exports and foreign investment rise considerably, helping the country capitalise on its strategic advantages and transform into a regional trade and investment target.

Government Oversight

Trade is overseen by the Ministry of Commerce (MoC), which is responsible for encouraging private sector participation in economic development, expanding international trade activities and setting policy for foreign companies. The Department of Trade, the Department of Consumer Affairs and the Myanmar Trade Promotion Organisation all operate under the MoC. The ministry follows five policy objectives: free market policymaking, using ICT to promote exports and enhance trade, expanding trade activities through regional cooperation, improving the overall trade environment, and maintaining sufficient domestic supply of essential and important goods to ensure price stability.

According to the MoC, between 2015 and 2017 the government launched seven trade-related development plans and frameworks, including the National Export Strategy (NES), the Master Plan for the Establishment of the Myanmar Trade Promotion Organisation, the Private Sector Development Framework and Action Plan, and a Gaps Assessment on the ASEAN Trade in Goods Agreement. Each is included in the Medium-Term Programme for Coordinated Aid-for-Trade Resource Mobilisation and Delivery, a trade development agenda supported by the World Trade Organisation (WTO) and runs from 2017 to 2021.

Export Strategy

One of the most important trade policies in place is the NES 2015-19, which created in cooperation with the WTO’s International Trade Centre and launched in March 2015. The NES is a roadmap aimed at supporting sustainable, diversified economic development through trade. It identifies seven priority sectors which will help reduce dependenc on raw, unprocessed petroleum gas and agricultural exports (see analysis). In correlation with the NES, the government launched a 12-point economic strategy in July 2016, which outlines its own trade policy objectives. Included are plans to increase agriculture’s GDP contribution; support entrepreneurship and promote inclusive development; boost agricultural exports, and expand value-added crops and livestock; and emphasise job creation to reduce poverty, with a focus on SEZs and infrastructure.

Another important change in export strategy, rolled out in March 2018, is the Export Negative List, which requires export licences for more than 3000 goods, including agricultural and forestry products, as well as heavy machinery, precious gems and fertilisers. Investors will be closely monitoring the bureaucratic procedures related to this new policy.

SEZ Incentives

SEZs are slated to play a critical role in boosting exports, reducing the trade deficit and supporting diversification. The government has actively sought to promote investment in priority sectors through development of the Thilawa, Dawei and Kyaukphyu SEZs, following the enactment of the SEZ Law of 2014. The legislation separates SEZs into free zones, which are home to export-oriented industries, and promotion zones, which serve the domestic market and offer support services. Incentives for free zones include a seven-year income tax exemption, followed by a 50% reduction for the next five years, and a 50% reduction on capital gains taxes for any profits reinvested as a reserve fund. Free zone businesses are also exempt from value-added tax, and Customs duties for raw materials, production machinery, spare parts and materials needed for construction. Promotion zone incentives include a five-year income tax exemption, a 50% income tax reduction for the following five years and a 50% break on capital gains taxes for any reinvested profits. Investors are also eligible for the same Customs duty exemptions as free zone investors, although exemptions are capped at five years, after which import duties are reduced by 50% for five more years.

Investment

Regarding investment, the Ministry of Planning and Finance is tasked with overseeing the Directorate of Investment and Company Administration (DICA). Any investor, foreign or local, planning to conduct business in Myanmar must register their company through DICA under the Myanmar Companies Law, a newly updated version of which was signed into legislation in December 2017.

The updated law will begin implementation following the passing of enabling bylaws and the establishment of a company registry, which will allow for effective enforcement. Authorities have indicated that this should happen by August 2018 (see analysis). Registration for joint-venture companies and non-profit organisations is also overseen by DICA.

The Myanmar Investment Commission (MIC) is a separate entity responsible for approving local and foreign investment, and assisting potential investors in acquiring permits for a new project. The MIC also verifies and approves investment proposals. Projects meeting the necessary criteria are now accepted within 15 days, and the MIC is required to review each accepted proposal and reach a decision within 90 days, following a series of legal reforms aimed at boosting foreign direct investment (FDI) and improving the country’s business climate (see analysis).

Resource Dependence

Myanmar is the largest country in mainland South-east Asia, and its neighbours accounted for $15trn, or 20%, of global GDP in 2016. The country is well positioned to benefit from its large and untapped domestic market, and sizeable resource base, which includes fertile agricultural land, significant mineral deposits and unlocked natural gas reserves. The country’s rapid urbanisation and massive infrastructure agenda are expected to require at least $60bn of new investment over the next 15 to 20 years, according to a September 2017 report by the Ministry of Transportation and Communications. “Myanmar is still in a superior position to achieve high levels of growth,” Mark Bedingham, president and CEO of Singapore Myanmar Investco, told OBG. “It has a lower economic base, but a population size and natural resource wealth greater than some of its neighbouring countries.”

Trade and investment activities are heavily concentrated in the hydrocarbons and agriculture sectors. The Observatory of Economic Complexity (OEC) at the Massachusetts Institute of Technology reported that unrefined petroleum gas was Myanmar’s largest export product in 2016, worth $3.17bn, or 27% of the total, followed by dried legumes ($1.39bn, 12%), raw sugar ($1.07bn, 9.1%), non-knit men’s suits ($577m, 4.9%) and rice ($439m, 3.8%). “Investors in general are very interested in the agriculture sector, but infrastructure gaps are an issue,” U Aung Zaw Oo, chairperson of Aung Naing Thitsar Group, told OBG. “The soil management system is very weak. There’s no proper logistic network in the rural area, including housing, storage facilities or transport.” Furthermore, the country’s dependence on extractive industries makes it relatively vulnerable to external shocks, with nearly 80% of foreign investment concentrated in the oil, gas, power and telecoms sectors as of January 2017, according to the World Bank. Nonetheless, Myanmar holds significant growth potential for investment in manufacturing, which accounted for only 7% of FDI in 2017. Indeed, the World Bank has pointed to labour-intensive manufacturing in agriculture and food processing as priority areas for diversification, with industries including beer production, toiletries and technology garnering considerable investor interest. Rising investment in these segments should help reverse the widening trade deficit and boost flagging exports, which have been negatively affected by lower commodity prices.

Diversification Potential

Boosting agricultural productivity will be especially important after rules eliminating all non-tariff barriers within the ASEAN Economic Community (AEC), of which Myanmar is a member, come into force in 2018, allowing for the free movement of goods and services within the region. Although the AEC rules were implemented in 2015, Cambodia, Laos, Myanmar and Vietnam were given a three-year grace period to address concerns about removing protectionist tariffs on agricultural goods; farmers in Myanmar were concerned about the impact of eliminating a 5% import tariff on rice, beans and fisheries products.

Myanmar’s trade deficit with ASEAN has expanded steadily in recent years, rising from $2.13bn in FY 2014/15 to hit $2.46bn in FY 2015/16 and $3.42bn in FY 2016/17, according to MoC data. This has weighed heavily on Myanmar’s overall trade balance, which fell from a $100.5m surplus in FY 2011/12 to a deficit of $91.9m in FY 2012/13. The deficit then increased to $2.56bn in FY 2013/14, $4.1bn in FY 2014/15 and a high of $5.44bn in FY 2015/16, driven primarily by rising vehicle and refined petroleum imports, as well as falling natural gas export receipts (see analysis). In FY 2016/17 the deficit moderated to $5.29bn.

Investment Rising

Supported by rising inflows to value-added manufacturing, FY 2017/18 appears on track to post moderate FDI growth, which should offset outflows in the oil and gas sector. Approved FDI has risen significantly since the early 1990s, climbing from $7.75m between 1988 and 2005, to $6.07bn in FY 2005/06 alone, according to DICA. Inflows peaked at an all-time high of $20bn in FY 2010/11 before dropping to $4.64bn in FY 2011/12 and $1.42bn in FY 2012/13. Since then, a recovery has seen inflows reach $4.1bn in FY 2013/14, $8.01bn in FY 2014/15 and $9.48bn in FY 2015/16.

While approved foreign investment in FY 2016/17 dropped to $6.65bn, the country looks set to regain some of its momentum following delays in implementing the new investment law. DICA reported in October 2017 that $4.35bn of foreign investment had already been approved for the first half of FY 2017/18, a significant jump from the $1.25bn during the same period in FY 2016/17.

Included in this are 129 foreign companies that received government approval to invest $3.5bn, with $214.08m set aside for the Thilawa SEZ and $600m in capital going to existing foreign enterprises. The agency also reported that MMK1.47trn ($1.1bn) of investment funding from 53 enterprises had been approved between April and September 2017. In addition, a single meeting in September 2017 saw DICA officials approve nine new foreign projects valued a $403.4m, with 3200 jobs expected to be created as a result. Promisingly for NES stakeholders, seven of the nine projects are in industry, with the remaining two in real estate and services.

Inflows By Sector

DICA statistics show that manufacturing has outpaced extractive industries to become the most popular sector for foreign investors, with approved FDI rising from $1.06bn in FY 2015/16 to $1.18bn in FY 2016/17, and $1.45bn during the first half of FY 2017/18. Manufacturing projects accounted for 35% of approved FDI in FY 2016/17. Approved investment in real estate has also risen, reaching $728.68m in FY 2015/16 and $747.62m in FY 2016/17. The was up further in the first half of FY 2017/18 at $1.06bn, compared to $105m in the same period of FY 2016/17.

At the same time approved FDI in the oil and gas sector dropped from $4.82bn in FY 2015/16 to zero in both FY 2016/17 and the first half of FY 2017/18, reflecting both the government’s increased focus on channelling FDI into value-added, labour-intensive and export-oriented manufacturing, as well as depressed global oil markets (see analysis). A further 15 foreign and 12 local investment proposals valued at $400m were under consideration as of October 2017, with more funding expected during the second half of FY 2017/18, according to local media reports.

Regional Tension

Although the country remains on track to exceed the level of investment inflows in FY 2016/17, regional disparity is a persistent problem, with DICA reporting that the states of Kachin, Kayah, Chin, Rakhine and Magwe did not receive any new investment during the first half of FY 2017/18. Such discrepancies, combined with the internal conflict in Rakhine State, have raised the prospect of new economic sanctions, which could pose serious challenges to investment inflows, particularly from Western governments and companies. EU/US IMPACT: Since European governments lifted sanctions against Myanmar in 2012, the country has greatly benefitted from the EU’s generalised scheme of preferences status, meaning all exports, barring ammunitions and arms, are exempt from EU market duties and quotas. This has supported significant growth with European partners. Indeed, approved FDI from France, Germany, the Netherlands and the UK reached $741.1m during the first six months of FY 2017/18, against just $61.26m in FY 2016/17.

The amount of trade has also grown, with EU-Myanmar trade volumes rising from $653m in FY 2015/16 to $1.4bn in FY 2016/17. Trade volumes for the first half of FY 2017/18 reached $1.2bn. Myanmar’s largest surplus by trade partner or bloc in the first half of FY 2017/18 was with the EU, according to the MoC. Exports to the EU, which are dominated by textiles and agricultural products, reached $815.5m over the period, against $605.2m of imports, resulting in a $210.3m surplus. This is much larger than the respective $130.95m and $16.2m surpluses with Thailand and South Asian countries, including India.

The US government, meanwhile, lifted the majority of its remaining economic sanctions on Myanmar in September 2016, most of which targeted individuals and select companies. Approved investment from the US rose from $2m in FY 2014/15 to $2.61m in FY 2015/16. Approved investment in the first half of FY 2017/18 hit $128.68m. Total trade between the two countries rose from $196.9m in FY 2015/16 to $690.63m in FY 2016/17, with figures for the first half of FY 2017/18 reaching $452.29m.

However, unrest in Rakhine State puts burgeoning trade ties between Myanmar and Western financiers at risk. The European Parliament’s Committee on International Trade postponed a planned visit to the country in September 2017, for example, announcing the delay on the same day the European Parliament publicly condemned the situation in Rakhine State.

Chinese Ties

Bilateral trade and investment with China outweigh that of the US and EU, with approved Chinese investment rising from a three-year low of $482.59m in FY 2016/17 to $829.12m during the first half of FY 2017/18, equivalent to 19% of total approved foreign investment, and surpassed only by Singapore, with $1.7bn, or 39%, of approved foreign investment. According to the OEC, China accounted for $4.77bn, or 41%, of exports from Myanmar in 2016, followed by Thailand ($2.24bn, 19%), India ($1.04bn, 8.9%) and Singapore ($891m, 7.6%).

The MoC, meanwhile, reports that trade between China and Myanmar reached nearly $11bn in both FY 2015/16 and FY 2016/17, and stood at $5.53bn during the first half of FY 2017/18, making China Myanmar’s largest trading partner. However, more needs to be done to address Myanmar’s significant trade deficit with China, which reached $1.8bn in FY 2015/16, before easing to $743.88m in FY 2016/17 and $603.25m in the first half of FY 2017/18.

Belt & Road

In recent years Myanmar has been trying to improve relations with its Asian neighbours. Thailand, Singapore, Japan and India have never imposed sanctions on Myanmar, and if the threat of new Western penalties comes to fruition, this is likely to push Myanmar further into Asia’s economic orbit. Indeed, the country’s massive infrastructure agenda is already expected to receive a sizeable influx of funding as the Chinese government advances its BRI. The initiative will see Chinese companies investing heavily across land and sea routes linking Asia to Europe, the Middle East, South Asia and Africa.

The Myanmar government is keen to leverage BRI prerogatives to reduce its infrastructure deficit and support further development, especially as the recently signed ASEAN-Hong Kong free trade agreement (FTA) facilitates access to BRI financing. China signed an FTA with ASEAN in 2004.

However, growing domestic concerns about rising Chinese influence have caused the cancellation of a number of large-scale projects and dampened Myanmar’s trade and investment outlook. The $3.6bn Myitsone Dam project, for example, was suspended after strong local opposition and concerns about its environmental impact, while projects including a copper mine and rail line linking Myanmar to China have also been cancelled in recent years.

Kyaukphyu

China has spearheaded development of the $10bn Kyaukphyu SEZ, a planned manufacturing and transport centre located in Rakhine State. A consortium of firms led by Chinese conglomerate CITIC Group, including construction engineering company China Harbour Engineering, state-owned China Merchants Group and Thailand’s Charoen Pokphand, was awarded a contract to develop the project in December 2015. Under the 2014 proposal request, the foreign consortium would hold an 85% stake, with the Myanmar Kyaukphyu SEZ Holding Company (MKSHC) owning the remaining 15%.

In support of the NES’ diversification objectives, the Kyaukphyu SEZ will include the country’s first deepwater port; an industrial park comprising textile and garment factories, construction materials manufacturing and food-processing industries; and marine supply and maintenance facilities.

However, the Kyaukphyu SEZ has also faced a number of setbacks as local authorities attempted to renegotiate the deal to give Myanmar a larger stake in the project, with MKSHC reportedly asking to increase its share in the deepwater port to 30%. In a statement to local media in October 2017, Yuan Shaobin, executive president of CITIC Group, described progress on Kyaukphyu’s development as “limited” despite two years of negotiations. The parks three development frameworks – investment, shareholder and land lease agreements – had yet to be finalised, following the decision by MKSHC to renegotiate its financial obligations and stake in the SEZ’s deepwater port development.

Although CITIC Group agreed to renegotiate and granted the MKSHC’s request, the government reportedly rejected terms that would require it to increase its investment in the project in exchange for receiving a larger stake. According to CITIC Group’s Shaobin, the Chinese consortium had already paid $7.2bn in the project, against MKSHC’s $74m.

In November 2017 the two partners settled on a 70:30 split for the port project. Myanmar is expected to pay $2.16bn of total project costs under the new agreement, as well as 50% of the SEZ’s $2.7bn industrial park. This will bring its total commitment to the project to $3.51bn, or 5% of the country’s annual GDP, a spending commitment that has been criticised for running the risk of becoming prohibitively high, according to industry media reports. On conclusion of financing arrangements, the authorities are expected to move forward on environmental impact assessments, which will take between 18 months to two years to complete. This means the SEZ will not come on-line in the near term.

Dawei

Kyaukphyu is not the only large-scale project to experience some delays. Authorities at the Dawei SEZ are also facing hurdles. The project officially launched in 2008, led by the Italian-Thai Development Public Company (ITD), Thailand’s largest construction company. Upon its completion, the Dawei SEZ is expected to include a deepwater port; manufacturing clusters for canneries, electronics, pharmaceuticals and automotive parts; and supporting infrastructure. A road link to Thailand via Kanchanaburi will facilitate transport with Bangkok located approximately 350 km away. When completed, the SEZ is expected to span 196 sq km in total, with its first phase stretching across 27 sq km.

However, project development experienced setbacks due to a lack of available financing, leading the governments of Thailand and Myanmar to take over control of the project from ITD in November 2013. In December 2015 the Japanese government signed on to become a third equal partner, which had the added benefit of boosting waning investor confidence. Work on the proposed 138-km highway linking the Dawei zone to Thailand was suspended, however, after Japanese firms expressed safety concerns regarding construction.

Widespread local opposition to the SEZ’s development is also growing due to social and environmental concerns, including pollution and its impact on local health, and high levels of water consumption. In addition, there were concerns regarding unfair business practices, such as land-grabbing. Indeed, according to industry media reports, the Dawei SEZ was being viewed by authorities in Thailand as a mechanism to export high-pollution industries, following reports of water and soil contamination at its Map Tha Phut Industrial Estate. Adding to these challenges, Myanmar’s Ministry of Environmental Conservation and Forestry has reported that it does not have the capacity to effectively monitor the implementation of the project.

Nonetheless, work on the project appears to be progressing. In June 2017 Thailand and Myanmar finalised a $133m agreement to continue construction of the Kanchanaburi highway, and the MoC reported in July 2017 that it hopes to expedite work on the SEZ. In December 2017 two government task forces were formed to address issues with the project and look into restarting construction and development. Like Kyaukphyu, the Dawei project is not expected to begin operations in the near term.

Thilawa

Despite the hurdles at the Dawei and Kyaukphyu SEZs, recent successes at the Thilawa SEZ have highlighted the opportunities for Myanmar to boost investment and trade in value-added manufacturing. Opening in September 2015 just outside of Yangon, the Thilawa SEZ remains the largest and most advanced SEZ in the country.

Its development dates back to October 2013, when the government partnered with Japanese authorities to launch Myanmar Japan Thilawa Development (MJTD), with both governments holding a 10% stake in the project. Myanmar Thilawa SEZ Holdings, a consortium of nine local companies, holds a 41% stake in MJTD, while a consortium of private Japanese firms holds the remaining 39% share. This arrangement leaves the Myanmar government and domestic companies with 51% share of the project’s holdings.

Thilawa benefits from a strategic location next to two port terminals; the Myanmar International Terminal Thilawa, which is a multi-purpose container port, fully owned by Hutchison Port Holdings, and Myanmar Integrated Port, which handles general cargo, such as steel products, vehicles and agricultural goods. The SEZ will eventually encompass two sub-zones after work on the second phase is completed. Construction on the 396-ha Zone A launched in September 2015 and was completed in 2017. Meanwhile, construction on the 700-ha Zone B began in 2016 and is expected to be finished by August 2018. In October 2017 DICA reported that 96% of the plots in Zone A and 26% of the plots in Zone B had already been sold.

Since its inception, the Thilawa SEZ has attracted 85 companies. Of these, 36 firms have already begun launching operations, with 34 additional projects under construction as of October 2017. Japanese firms accounted for 43 of the 85 tenants, followed by 11 Thai companies and six firms from South Korea. SEZ authorities also reported that 51 companies, which comprise approximately 60% of the tenant base, are manufacturing products for the domestic market, while 25 are undertaking export-oriented activities; the remaining nine firms are active in distribution. The total number of companies operating in the park is expected to double in 2018, bolstered by tax incentives and the establishment of a onestop administrative centre for foreign firms, which handles permits, and labour and tax registration.

Some $1.14bn in investment was allocated to Thilawa SEZ between November 2014 and October 2017. Of the total, firms involved in the industrial sector attracted $842.9m, or 73% of the total, followed by trade ($101m, 8.8%), services ($81m, 7.1%), transport and logistics ($77m, 6.8%), real estate ($30m, 2.6%), and hotels ($12m, 1.1%), according to DICA.

Investors have reported that Thilawa’s transportation networks remain underdeveloped; however, Thilawa’s early successes in attracting diversified investment indicate the strong potential for future expansion into labour and capital-intensive manufacturing activities (see Transport chapter).

Outlook

Although delays in SEZ development, low global oil prices and India’s agricultural import quotas will likely weigh on trade growth, the country remains well positioned to boost investment in priority industries, diversify its export base and generate jobs in value-added manufacturing as it moves to advance its economic liberalisation agenda. Recent legal reforms, including the Myanmar Investment Law, the Myanmar Companies Law and the SEZ Law should support industrialisation targets. Despite a slowdown in FDI, the country is on track for moderate growth during FY 2017/18. Moving forward, the government will likely continue to prioritise value-added manufacturing and agri-processing, as well as intensify its efforts to close the $60bn infrastructure gap, helping Myanmar become a major regional – and potentially global – trade and investment destination.

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The Report: Myanmar 2018

Trade & Investment chapter from The Report: Myanmar 2018

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