Myanmar renews focus on trade

In recent years trade and investment in Myanmar have soared, buoyed by ongoing efforts to liberalise the economy and a successful political transition in November 2015 that saw the National League for Democracy (NLD) become the country’s first civilian-led government elected to power in modern history. Political reforms have brought significant economic benefits, as the US government moved to lift burdensome sanctions that had weighed on investor sentiment and trade growth.

With the administration now moving to implement a host of domestic reforms, loosen internal trade restrictions and draft a new investment law, growth is expected to resume apace following a slowdown during the election year. Although port congestion and undeveloped road networks continue to pose problems, plans to channel billions of dollars into new infrastructure are already paying off, bolstered by the development of new special economic zones (SEZs), which should ensure the country remains on an upwards trajectory in 2017.

Government Oversigh

Oversight of trade and investment in Myanmar spans a broad range of government ministries and departments, but responsibility for policy is largely concentrated in the Ministry of National Planning and Economic Development, which manages the country’s primary investment promotion agency, the Directorate of Investment and Company Administration (DICA), and the Ministry of Commerce (MoC). The MoC, which also oversees the Department of Trade, supports the national transformation into a market-oriented economy by encouraging private sector participation, expanding international trade and setting policy for foreign companies operating in the country.

Meanwhile, the Myanmar Investment Commission (MIC), a government body formed in the early 1990s, is responsible for approving major local and foreign investments. In June 2016 the President’s Office announced it had re-formed the MIC, after dissolving the previous body in March 2016. The new commission will be chaired by U Kyaw Win, minister of planning and finance, while U Than Myint, minister of commerce, was named its vice-president. U Aung Naing Oo, who served as MIC secretary under the previous government, has retained his position. The move was welcomed by investors, who had been waiting 10 weeks for project approval, with the MIC reporting that 100 proposals, largely within the garment and fishery products manufacturing segments, had been submitted between April and June of 2016.

Legal Framework

 

Foreign investment procedures and regulations are largely encapsulated in three pieces of legislation: the Myanmar Investment Law (MIL) 2016, which replaced the 2012 Foreign Investment Law (FIL), the Myanmar Citizen Investment Law (2013) and the SEZ Law, which was promulgated in 2014. Foreign investment can take the form of 100% foreign-owned investment companies, joint ventures (JVs) and public-private JV contracts with the Myanmar government, which have been a popular model for infrastructure and real estate projects. The government has also set percentage caps on investments in certain areas.

These restricted areas include: businesses using hazardous chemicals, or activities that may affect public health or cause environmental damage; and any activity which could significantly affect the national economy, social interest or security. Parliamentary approval is required before permits are granted. Foreign investment caps in a JV with a local company or citizen range between 50% and 80% of total equity in a number of restricted sectors, including infrastructure, construction, residential and commercial real estate, and aviation.

Foreign investment is similarly prohibited in the defence and electrical utilities sectors, as well as small-and medium-scale mining, and Myanmar-language sectors. The tax exemptions will vary by geography, with media. Foreign nationals are allowed to own property following the January 2016 passage of the Condominium Law, but only under strict conditions. They are now permitted to purchase up to 40% of a condominium apartment block, provided the units are on the sixth floor or above (see Real Estate chapter).

The application process for either a JV or wholly foreign-owned entity is nearly identical, according to multinational law firm Baker McKenzie. This involves lodging a complete application with the DICA, which jointly with the recently-established MIC oversees foreign investment in the country. Within several days, the DICA will issue a temporary certificate of incorporation or registration and a trade permit after receiving complete documents and activities in terms of capital injection and administrative functions within three days. Duration of that certificate is six months for foreign companies.

Sez Law

Meanwhile, the SEZ Law outlines investor incentives on offer at three SEZs operating in Myanmar: Thilawa, the one that is most developed and is closest to the commercial capital of Yangon; Kyaukpyu in Rakhine State, which is under development by China’s CITIC Corporation; and Dawei, which on completion will become one of the largest industrial parks in South-east Asia (see Industry & Retail chapter).

Referring to the FIL and SEZ Law (the former of which was repealed in October 2016), Baker McKenzie noted that “while there is some variation between the investment incentives offered under these two regimes, they are primarily identical”. Each of them provides long-term leases, corporate-income-tax relief, import-duty relief and protection against expropriation. Unlike the FIL, however, the SEZ Law extends maximum foreign lease limits from 70 years (50 years with two 10-year extensions) to 75 years (50 years with one 25-year extension), according to international consultancy KPMG. The regulations governing land leases remain largely unchanged under the MIL, though some alterations to the tax incentive scheme have been made.

New Investment Law

Signed into law by the president on October 18, 2016, the MIL combines the Myanmar Citizens Investment Law, which regulates local investment, with the FIL, which is now repealed, and was drafted in partnership with the International Finance Corporation. Implementing regulations are expected by April 2017, meaning some delays with licensing may be experienced before that time.

The MIL includes provisions to reduce the number of investment projects that must get a permit from the MIC by introducing an endorsement procedure for projects that are not considered strategic or capital-intensive or that do not have a significant impact on the environment or local community. The new law also introduces strategic tax benefits that are better tailored for specific projects and sectors – a departure from the previous procedure of issuing blanket tax benefits for any MIC project.

Tax exemptions will now vary by geography, with three zones offering tax holidays of seven, five and three years based on the level of development of the area; the least-developed areas attract the longest exemptions. Another key change in the MIL is the removal of local employment rules, giving foreign companies more flexibility in their hiring practices.

In July 2016 U Aung Naing Oo, who is also director-general of the DICA, told local daily Eleven that the government is also planning to release a new domestic and foreign investment policy, which is expected to intensify efforts to channel foreign direct investment (FDI) into labour-intensive industries.

Investment Rising

Local and domestic investment has soared in Myanmar in recent years. The Central Statistical Organisation (CSO) reported that between 1994 and February 2016, 1121 local enterprises with an investment value of MMK8.05trn ($6.5bn) have been established. Domestic investment has maintained steady momentum – although their total value fell from $1.13bn in FY 2013/14 to $455m in 2014/15 – and surged to $1.27bn during the first nine months of 2015/16 (fiscal years start in April). According to the CSO, the real estate, hotel and tourism, and transport sectors were the most popular for domestic investment during 2014/15, comprising 38.81%, 16.77% and 13.4% of total annual investment, respectively. Domestic investment has since risen to 1207 projects worth a combined $7.9bn, dominated by $2.35bn in manufacturing, $1.65bn in transport and $694.84m in real estate.

FDI inflows have also surged. The DICA reported that approved foreign investments rose from $329.58m in 2009/10 to just under $20bn in 2010/11, driven by $10.18bn in oil and gas investments. Approved investments moderated to $4.64bn in 2011/12 and fell to $1.42bn in 2012/13, although they have since regained momentum, rising to $4.1bn in 2013/14 and nearly doubling to $8.01bn in 2014/15. Singapore was the leading investor in 2014/15, accounting for 53.64% of total investments, followed by the UK 9% and Hong Kong with 7.8%. China and Thailand have been the two largest foreign investors in Myanmar since 1989, according to the CSO.

FDI has continued on an upward trajectory despite the uncertainty that accompanied the election in late 2015, with approved investment hitting $9.48bn during FY 2015/16, its highest level since 2010. This can be partially attributed to the MIC’s move to approve 48 projects in March 2016 – the final month of the fiscal year and immediately before the NLD took power – compared to an average of 10 project approvals at any monthly meeting. Between April 1 and August 31, 2016, the total value of approved FDI stood at $701m, according to the DICA, with the government targeting $8bn of FDI for 2016/17. The DICA reported that total FDI stood at $64.4bn as of August 2016, led by $22.4bn in oil and gas, $19.68bn in power and $6.92bn of manufacturing investments.

Trade Growth

Trade volumes in Myanmar have soared over the past decade, with the European Commission (EC) reporting that total trade rose by 32.8%, 28.1% and 24.5% in 2010, 2011 and 2012, respectively, from €12.37bn to €19.72bn over that period. Trade continued recording double-digit growth in 2013 and 2014, increasing by 18% and 51.8%, respectively, to reach a total value of €35.32bn in 2014. Import growth has driven growing trade volumes, as well as an expanding trade deficit, and the EC reported that imports to Myanmar rose by 47.8%, 31.4% and 34.8% in 2010, 2011 and 2012, respectively, to hit €13.29bn, before moderating to 16.1%, 19.2% and 20.1% in 2013, 2014 and 2015, respectively.

Export growth, while robust, has been more uneven, with the EC reporting that total annual exports increased by 14.8%, 23% and 7.5% in 2010, 2011 and 2012, respectively, to total €6.43bn in 2012. Exports surged in 2013 and 2014, rising by 22% and a whopping 115.7%, respectively, although they fell by 32.7% in 2015 to end the year at €11.4bn, which the World Bank attributed to agricultural supply shocks and declining commodity prices, driving total trade volumes down by 5.2% to €33.48bn.

The MoC, meanwhile, reported that total export revenues rose from $8.97bn in 2012/13 to $11.2bn in 2013/14 and $12.52bn in 2014/15, before contracting to $11.14bn in 2015/16. Export revenues stood at $5.69bn between April and September 2016, according to the ministry. Imports increased for four consecutive years to 2016, according to MoC data, rising from $9.07bn in 2012/13 to $13.76bn in 2013/14, $16.63bn in 2014/15 and $16.58bn in 2015/16. Total imports stood at $7.44bn during the first six months of the 2016/17 fiscal year. IMPORT/EXPORT BASE: Myanmar’s major exports, according to the CSO, are agricultural products, including rice, matpe beans, maize, green mung beans and sesame seeds. The country is one of the top global exporters of beans and pulses, exporting more than 1m tonnes worth $1bn annually. “Agricultural processing is one of the catalysts that this country can use to propel itself into the future,” Mark Bedingham, president and CEO of Singapore Myanmar Investco, told OBG. “The sheer variety of environment and potential that the country has in agriculture cannot be ignored, but to tap this, it must develop value-added processing to its portfolio.”

Myanmar’s main manufactured product exports are natural gas and textiles. Its largest mineral export is jade, and the country is one of the world’s largest producers of high-quality, sought-after jadeite. Global Witness, a non-government organisation that focuses on corruption and environmental concerns, reported in 2015 that the total value of jade mined in Myanmar could be as high as $31bn annually. However, it added that much of this is lost to smuggling and corruption (see Mining chapter).

Major imports to the country include capital goods such as machinery, transport equipment, base metals, intermediate goods like refined mineral oil, edible vegetable oil and hydrogenated oil, and consumer goods. CSO data shows that imports of capital goods rose from $4.02bn in 2012/13 to $6.12bn in 2013/14 and $7.61bn in 2014/15. Intermediate goods also recorded consecutive annual growth, totalling $3.03bn, $4.4bn and $5.01bn, respectively, over the same period. Consumer goods imports doubled between 2012/13 and 2014/15, rising from $2.02bn to $4.02bn, although they moderated to $2.88bn during the first 11 months of the 2015/16 fiscal year.

Trade Partners

According to the CSO, China is Myanmar’s largest trading partner, accounting for 37.3% of its export market in 2014/15, followed by Thailand (32.2%), Singapore (6.1%), India (6%) and Japan (4.4%). In Myanmar’s import market, China comprised a 30.2% share in 2014/15, followed by Singapore (24.9%), Japan (10.5%), Thailand (10.1%) and Malaysia (4.5%). In terms of total trade, EC data shwo Myanmar’s top trade partners in 2015 were China, with €13.6bn, or about 41% of the total, followed by Thailand, with €6.99bn, or 20.9%, Singapore, with €2.53bn, or 7.6%, and Japan, with €1.77bn, or 5.3%.

Manufactured products comprised the largest portion of exports from Myanmar in 2014/15, according to the CSO, with a total value of $6.23bn, followed by agricultural products ($2.92bn) and mineral products ($1.47bn). The mix remained largely the same during the first 11 months of the 2015/16 fiscal year, with manufacturing exports reaching $5bn, around half of the total, followed by agricultural exports ($2.35bn, or 23.4%) and mineral products ($938.5m, or 9.3%). In addition to growing bilateral ties with the US, Myanmar is moving to expand regional trade agreements with its Asian neighbours, having already signed bilateral investment treaties with China, India, Israel, Japan, South Korea, Laos, the Philippines, Thailand and Vietnam, according to the UN Conference on Trade and Development.

In July 2016, for example, officials in attendance at the seventh Thailand-Myanmar Joint Trade Commission meeting announced that their governments had targeted boosting bilateral trade to between $10bn and $12bn in 2017. To support these efforts, the two nations have built five border trade zones, including Mae Se in Kayah State, which was expected to be completed by the end of 2016. South Korean trade officials also visited Myanmar in July 2016, announcing plans to strengthen trade with the country after the Korea Trade-Investment Promotion Agency assisted Myanmar in drawing up a strategy for investment promotion in 2012.

Asean Integration

Perhaps most significantly, the launch of a single market under the ASEAN Economic Community – expected in 2018 following a three-year grace period for Cambodia, Laos, Myanmar and Vietnam – could have a major impact on agricultural trade in Myanmar. In July 2016 the Myanmar Times reported on farmers’ concerns that cheap imports will drive local producers out of business. Noting that rice smuggling is already a major challenge for farmers in the Tanintharyi region, U Myint San, director of the Myanmar Research Centre for Economic Development, told the newspaper that once the 5% tax levied on agricultural products is eliminated, production of key agricultural goods including rice, beans, pulses and fish could suffer in the wake of rising competition and imports.

Trade Liberalisation

As economic liberalisation and new free trade agreements advance, the NLD administration is making bold moves to boost value-added exports, launching a 100-day plan in April 2016 in support of a five-year strategy targeting $11.1bn in exports for FY 2016/17, and a threefold expansion by 2021/22. Several developments will support this growth, including a host of trade liberalisation policies implemented domestically over the course of 2016. Prior to 2015, foreign firms were strictly prohibited from undertaking retail or wholesale activities under MoC regulations.

However, the ministry announced in November 2015 that foreign firms are permitted to enter into a JV with local companies to retail or wholesale five types of product, including medical and agricultural supplies. This liberalisation was extended to construction materials in August 2016.

The MoC plans to reduce the number of goods requiring an import licence from 570 to 303, announcing in July 2016 that it is working on a list of 267 goods that will have import licence requirements lifted. Plans are also in the works to remove export bans on a list of items that could include Niger seed oil, mustard seed and oil, and sunflower products. Perhaps most significant, however, has been the US government’s move to bring an end to a host of sanctions, many of which have been in place since the 1980s. Among these was a ban on the import and export of goods through ports and airports, which was lifted for six months in December 2015 (see analysis).

Transport Woes

Despite these positive developments, Myanmar’s trade imbalance continues to pose a problem to future growth. Rising trade volumes, combined with limited port infrastructure and equipment, inefficient cargo handling processes and a limited draught at the country’s main port facilities in Yangon, as well as a long and complex Cutoms process, have created bottlenecks. These are exacerbated by operators’ reluctance to use Yangon’s Asia World Port Terminal, with many Asia World-related companies remaining under US sanctions.

In June 2016 shipping and trade news site JOC.com reported that traffic jams at Yangon’s port facilities had left some vessels waiting up to 11 days to make call, following a challenging May 2016 when wait times reached as long as 16 days. The delays were caused by a spike in imports that kicked off in the beginning of April 2016, including large quantities of construction materials for multiple infrastructure projects. With imports vastly outnumbering exports in 2016, landside costs for shipping lines rose and a number moved to introduce new fees aimed at addressing a build-up of empty containers, including Singapore-based MCC Transport and Japan’s Mitsui O.S.K. Lines. Although the country is working with the private sector to address the issue by forming a working group that includes port owners and terminal operators, development of new port facilities at the country’s three SEZs will likely offer the most viable long-term solution to congestion challenges (see Industry & Retail chapter). Elsewhere, transport system upgrades are already having an effect on cross-border trade as Myanmar moves to expand bilateral ties with Thailand, China and, in the longer term, India.

For example, upgrades to a 50-km stretch of highway between Myawaddy and Thailand’s Kawkareik led to a 40% increase in cross-border trade immediately following completion of the works in September 2015, according to a March 2016 report from the Nikkei Asian Review. Several new projects to upgrade and build new links to China and India by rail and road are also under way, which could bolster cross-border trade and help Myanmar to become a major ASEAN economic centre in the coming years, according to the Nikkei Asian Review, (see Transport chapter).

Trade Deficit Declining

As the US continues to ease sanctions and economic liberalisation progresses, the NLD has overseen rising trade volumes since coming to power. At a July 2016 press conference U Yan Naing Tun, director-general of the MoC’s Department of Trade, announced that foreign trade rose by almost $400m year-on-year (y-o-y) to $6bn during the first three months of FY 2016/17. Of this, maritime trade accounted for the majority at $4.44bn, followed by $1.55bn in overland border trade.

Total first-quarter exports increased by $287m y-o-y to $2.53bn in the same period, while imports were up by $112m y-o-y to reach $3.48bn. Maritime trade was in deficit during the period, recording $1.57bn of exports against $2.89bn of exports, although border trade was in the black, with $964m of exports against $595m of imports.

Outlook

Although Myanmar remains in trade deficit, its trade balance has been improving in recent months, and in August 2016 the MoC reported that in the first quarter of 2016 exports rose by $261.7m y-o-y to reach $2.48bn, while total international trade volumes increased to $5.9bn, a 6.5% gain, with imports growing by $95.2m to $3.42bn, for a trade deficit of $945.7m. The trade deficit stood at $1.11bn in the first quarter of 2015, highlighting the impact rising exports are having on trade growth, and painting a brighter picture for long-term trade trends.

Investment is also set to rise in the coming years, bolstered by the promulgation of the MIL, ongoing developments at the country’s three SEZs and surging infrastructure investment, which should reduce transport and logistics costs. Although low global oil and commodities prices will likely continue to pose challenges to new investment and export revenues, the country’s considerable untapped potential, supportive government policy and emphasis on export-oriented development should keep both trade and investment on a strong long-term growth path.

 

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The Report: Myanmar 2017

Trade & Investment chapter from The Report: Myanmar 2017

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