Myanmar's economy expands with new investment incentives and trading relationships

 

Since initiating the process of liberalising its economy and encouraging greater foreign participation, Myanmar’s international investment inflows and trade have expanded significantly. This has gone hand in hand with strong domestic economic growth, even at a time of global trade slowdowns and protectionist headwinds. Capitalising on its strategic location as a crossroads between China, India and South-east Asia, as well as leveraging its abundant natural resources and youthful population, Myanmar has indeed made remarkable progress in just a few short years. Yet the horizon is not without storm clouds, both in the form of economic responses to the country’s internal conflicts from the international community and continuing challenges to the ease of doing business. Nevertheless, investment from Asia’s economic powers remains strong, even if Western commitments are limited.

Commerce

According to the Ministry of Commerce (MoC), the government body responsible for overseeing imports and exports, Myanmar’s total trade volume from September 2018 to August 2019 stood at $32.12bn. The MoC breaks such figures down into overseas trade and border trade. The latter refers to the overland trade conducted with neighbouring China, Laos, Thailand, India and Bangladesh, which are connected via 17 border-crossing points. For the above period, overseas trade stood at $22.65bn and border trade at $9.46bn. The total for FY 2017/18 was comparable at $33.54bn, and a mini-budget period from April to September 2018 recorded a further $18.69bn in total trade. Furthermore, when the mini-budget period is compared year-on-year, total trade was up more than $2bn, according to the MoC.

In terms of exports, these accounted for $15.54bn of total trade in the September 2018-August 2019 period, with imports at $16.58bn for a trade deficit of $1.04bn. This was considerably less than the $3.84bn deficit recorded in FY 2017/18. The main export earner in the September 2018-August 2019 period was manufactured products, worth some $9.23bn, followed by agricultural products at $3.03bn and mineral products at $1.36bn. Exports that have increased significantly in recent years include mineral products, which rose by 84% from FY 2015/16 to hit $1.78bn in FY 2017/18; marine products, which increased by 49% over the same period to $699m; and manufactured products, which were up 21% to $6.95bn. A new export item is live cattle, which had been banned up until FY 2018/19, with some $500m generated from this by June of that financial year. Meanwhile, in FY 2017/18 imports were dominated by raw materials, which totalled approximatively $7.68bn, and $6.59bn worth of investment products.

Myanmar has run a trade deficit in goods in recent years, as is typical of a developing economy where demand for imported intermediate and manufactured goods is strong. Myanmar’s service performance has been more positive. IMF figures show a services trade surplus for FY 2015/16, FY 2016/17 and FY 2017/18 of $1.07bn, $1.19bn and $1.07bn, respectively.

Trading Partners

China was Myanmar’s largest trading partner, with combined trade standing at $10.79bn in FY 2017/18. This broke down into $5.7bn in exports and $6.09bn in imports. Thailand was the next-largest partner, with total trade of $5.07bn, composed of $2.85bn in exports and $2.23bn in imports, followed by Singapore, with $3.84bn in total, made up of $753.5m in exports and $3.08bn in imports. Japan was fourth, with $1.92bn in total trade, composed of $956m in exports and $965.87m in imports. India came fifth, with $607.25m in exports and $860.94m in imports totalling $1.47bn. The largest Western trading partner was the US, with $718.38m in total trade, and the largest EU trading partner was Germany, with $584m.

National Export Strategy

The authorities are currently rolling out the new National Export Strategy (NES), the first iteration of which ran from 2015 to 2019. One of the central goals of the strategy is to diversify the country’s trade mix. Beans, pulses, oilseed, fisheries, forestry products, textiles and garments, rice, rubber and tourism services were singled out for development. In addition, the NES 2015-19 identified and sought to address constraints faced by potential exporters, such as access to finance, logistics and capacity.

The NES 2020-25 has shifted focus to the role of micro-, small and medium-sized enterprises, competitiveness constraints and regulatory inefficiencies, among other areas. It also adds fruits and vegetables, gems and jewellery, handicrafts, processed food products and digital business services to the list of goods and services for promotion. As of November 2019 consultations for the NES 2020-25 were still being held, with the strategy expected to commence in 2020. The NES 2020-25 also dovetails with the Trade and Investment Project, which was launched in March 2019 with a $5.28m grant from the UK’s Department for International Development. The project is aimed at tackling the country’s major competitiveness bottlenecks.

FDI

In the last decade Myanmar’s foreign direct investment (FDI) has grown substantially, but has had mixed results in more recent years. In 2012 annual FDI stood at $1.4bn. By 2017 this figure had increased by almost six-fold to $9.5bn. The number of FDI projects also rose from 94 to 213 over the same period. In August 2018 the new Companies Law was introduced, which allowed up to 35% foreign ownership in local businesses, without firms having to be reclassified as foreign and thus be subject to restrictions under the Myanmar Investment Law (MIL) of 2016. The MIL states that a permit from the Myanmar Investment Commission (MIC) is required for any projects that may have a major impact on the environment or local community; use state land or buildings; are specially designated by the government; or are strategic, large or capital intensive.

Since 2015, however, there has been a declining trend in FDI value, if not in the number of projects. In 2015 national elections took place, leading some investors to adopt a wait-and-see approach. Subsequently, the Rakhine crisis that began in 2016 resulted in concerns over reputational risk for some foreign companies. In 2018 total FDI stood at $3.6bn across 224 projects.

In terms of countries of origin, Singapore is consistently the top source of FDI, though this is partly because many multinational corporations are headquartered there. In 2018 FDI from Singapore stood at $1.8bn, across 26 projects; followed by China, with $558m and 97 projects; Hong Kong, with $311m and 28 projects; the UK, with $180m and five projects; and Thailand, with $161m and eight projects.

When it comes to economic sectors, oil and gas has received the most FDI in terms of approved projects in the past three decades, according to figures from the MoC. The sector accounted for a cumulative $22.4bn, or 28.55% of total FDI, in the period between FY 1988/89 and the end of 2018. Second was the power sector, with $21.08bn (26.85%); and third was manufacturing, with $10.4bn (13.22%). Other major beneficiaries of FDI included the transport and communications sectors, with $9.8bn, and real estate, with $5.26bn of the total.

Incentives

The MIL provides a wide range of tax and non-tax incentives that are administered by the MIC for investments made in promoted sectors and locations. The sectors are listed by the MIC, while the locations are graded as zones 1-3, from least to most developed townships. In a zone 1 location, for example, a promoted sector investment receives a seven-year income tax exemption, while a zone 3 location receives just a three-year tax exemption.

The MIC, currently headed by chairman U Thaung Tun – who is also the minister of investment and foreign economic relations – brings a variety of state ministries together. The Ministry of Planning, Finance and Industry, the Ministry of Natural Resources and Environmental Conservation, the MoC and other key bodies are also represented at the commission. The Directorate of Investment and Company Registration (DICA), an agency within the Ministry of Investment and Foreign Economic Relations (MIFER), acts as the secretariat of the MIC, and is the regulator for investment and company registration, approving bilateral investment promotion and facilitating foreign investment. DICA acts as the focal point for investment related to ASEAN.

A second key law is the Myanmar Special Economic Zone (SEZ) Law, which was enacted in 2014 and implemented the following year. Three SEZs are currently operational or in development: the Thilawa SEZ, near Yangon; the Dawei SEZ, further south in the Tanintharyi Region near the Thai border; and the Kyaukphyu SEZ, in central Rakhine State. SEZs bring a number of benefits to operators, such as exemption from income tax for the first seven years of operation, followed by a fiveyear 50% relief on income tax. Profits that are reinvested as a reserve fund after that also receive a 50% tax reduction. In addition, there is complete exemption from commercial tax and value-added tax, while Customs duties and other taxes on the importation of raw materials, production and construction machinery, and spare parts are waived as well. Furthermore, the import of trading goods, consignment goods and related items also receive Customs and other fee exemptions.

Promotion zones, which are located within SEZs, focus on specific sectors – such as manufacturing, housing, retail, banking, insurance, schools, hospitals and places of recreation – that are different to the activities of the SEZ. Promotion zones feature similar benefits to SEZs, but with five-year rather than seven-year limits and may have reduced exemptions for Customs and excise taxes, or no exemptions.

SEZ Performance

Of the three SEZs, Thilawa has so far attracted the most investment. It is operated by Myanmar Japan Thilawa Development and receives support from the Japan International Cooperation Agency. In September 2019 SEZ officials announced that 113 projects, with a total investment of $1.85bn, had been approved since the zone opened in 2015, and that around half of the 5.83m-sq-metre site was occupied.

The 196-sq-km Dawei SEZ, meanwhile, has recently been attracting interest, particularly from Chinese and Thai investors. Dawei is closer to Bangkok than Yangon, and would provide Thailand with a route to the Indian Ocean via its deepwater anchorage. Myanmar and Thailand thus set up Dawei SEZ Development Company as a special vehicle to push forward with port and SEZ development. In November 2019 Thailand’s National Economic and Social Development Council announced plans to accelerate the development of the link between Dawei and Thailand’s Central Plains and Eastern Economic Corridor projects, which will create an east-west route to the Indian Ocean.

The Kyaukphyu SEZ, meanwhile, is on a 16-sq-km site, adjacent to the oil and gas terminal and pipelines from the offshore Shwe field. The SEZ will house the country’s first deepwater port and form an important link in China’s Belt and Road Initiative. This global project has seen the world’s second-largest economy invest heavily in infrastructure in Myanmar, with the China-Myanmar Economic Corridor the principal vehicle. The corridor will connect the Chinese border province of Yunan to Kyaukphyu, with plans for railways and roads to link the deepwater port, the SEZ and the oil and gas facilities. Furthermore, China has signed memoranda of understanding with Myanmar for the future development of three economic cooperation zones along the border, in the states of Kachin and Shan. However, these and other Chinese investments have not been without controversy, placing China amid a series of local security and political issues. In addition, some observers have expressed concern over Myanmar being too economically dependent on Chinese investment.

Partnerships

Myanmar benefits from membership of the Generalised Scheme of Preferences (GSP) arrangement with the EU, called GSP+, and the GSP programme with the US. In 2018 trade between Myanmar and the EU totalled €2.9bn, with €2.29bn in exports and €592m in imports. GSP+ gives Myanmar, as a less developed country, preferential access to the EU market. Almost all of its exports to the EU in 2018 were duty-free, including approximately €1.7bn in textiles, €130m in precious stones and €120m in footwear. Similarly, the GSP with the US has enabled Myanmar to boost its exports to the country. Bilateral trade volumes jumped from $200m in 2015-16 to $690m in 2016-17, the year the GSP was implemented.

Now, however, due to fallout from ongoing unrest in Rakhine State, both the EU and US are under pressure to end these privileges. In addition, a September 2019 UN report on Rakhine recommended member states to adopt a programme of sanctions against individuals and companies associated with the Myanmar military, the Tatmadaw. While this issue could impinge on Myanmar’s trading position with Western countries, it could affect relations with Muslim countries as well; The Gambia lodged a case against Myanmar with the International Court of Justice (ICJ) on behalf of the Organisation of Islamic Conference in November 2019. The Myanmar government strenuously denies the veracity of the allegations made by various countries and organisations. In December 2019 leader Daw Aung San Suu Kyi defended the military during proceedings at the ICJ, saying the situation is complex and misrepresented.

While its impact on global trade may be negative, the ongoing US-China trade dispute is having a beneficial effect on some of Myanmar’s trade and investment projects, though this may also be impacted by EU and US moves on GSP. With the US imposing tariffs on certain goods from China, manufacturers based in China have been looking to host production in new locations in order to skirt the tariffs. In November 2019 the MIFER told local media that it aimed to boost the year’s FDI to $5.8bn, as Myanmar is able to offer Chinese manufacturing companies GSP access to the EU and US markets. Chinese investment in projects in the country increased by around $585m in FY 2018/19, with the US-China trade war a likely driver of this.

In addition, China has been able to turn to Myanmar for certain imports that previously came from the US. There is currently a high Chinese tariff on imports of beans and pulses from the US, for example, leading to a boost in Chinese imports of these from Myanmar. US bean farmers have been looking at Myanmar as a new market, replacing China as demand there slumps. The US Grains Council predicts that total feed demand in Myanmar could reach 4.5m tonnes by 2020, up 315% on 2010. “Some US companies are now considering Myanmar as a destination as they look to diversify their manufacturing in the Asia-Pacific region,” Zara Dang, executive director at the American Chamber of Commerce in Myanmar, told OBG.

Regional Trade

ASEAN member states have become much more significant trading partners in recent years. In the period from September 2018 to August 2019, trade with Thailand totalled $4.99bn; trade with Singapore was $3.25bn; and trade with Indonesia reached $953m – around double the $472.7m seen in FY 2011/12. Trade with Malaysia stood at $906.7m, which was also twice as much as the FY 2011/12 figure; trade with Vietnam stood at approximately $785m, five times the total recorded in FY 2011/12; and trade with the Philippines hit $175.9m, over three times the $48.9m traded seven years before. Although on a smaller scale, Myanmar’s trade with other regional countries has also increased. In the period from September 2018 to August 2019 trade with Cambodia totalled $12.8m, up from $1.47m in FY 2011/12, while trade with Laos hit $1.65m, compared to $0.03m. Total trade with other ASEAN member states stood at $11.07bn during this period, a notable increase from $8.7bn in FY 2011/12.

As part of its membership in ASEAN, Myanmar is also a party to the ASEAN-Australia-New Zealand Free Trade Agreement (FTA), in addition to the ASEAN FTAs with China, India, Japan, South Korea and Hong Kong. In 2015 ASEAN launched the ASEAN Economic Community, which is working towards removing the remaining tariff and non-tariff barriers within the bloc. In the future ASEAN membership will allow the country to be a part of even larger trading blocs. For example, the Regional Economic Comprehensive Partnership (RCEP) aims to further facilitate trade between ASEAN members and the countries with which it has FTAs by enabling investment and improving dispute settlement, among a host of other items. While India decided to opt out of this arrangement in November 2019, other signatories have indicated that they are ready to sign the RCEP agreement as early as February 2020.

Outlook

In the year ahead much will depend on external factors, notably the US-China trade war, persisting global economic sluggishness, oil and gas prices, and potential sanctions and other measures as a result of the ongoing unrest in Rakhine State. Nevertheless, domestic reforms will be taking place with an eye on elections, which are expected to be held in November 2020. With 2019 seeing further opening of the financial sector, as well as continued economic growth and demand in infrastructure, energy and other key areas, Myanmar’s appetite for FDI and imports will continue unabated. In addition, Myanmar’s exporters are likely to continue leveraging the advantages of the country’s geostrategic location, low costs and growing intraAsian trade in order to boost their balance sheets.

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The Report: Myanmar 2020

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