Myanmar policy reforms friendlier to foreign trade and investment

Benefitting from a large population, an ideal geographic position and abundant natural resources, Myanmar’s trade and investment volumes hold enormous potential for future expansion, although the country is facing both domestic and external challenges. Foreign direct investment (FDI) inflows soared from 2011, when the country’s economic liberalisation and democratic transition began, although they have slumped in recent years in the wake of ongoing restrictions on foreign business activities, delayed legal reforms and rising international scrutiny of domestic conflicts.

Trade volumes have also expanded considerably since 2011, supported by strong agricultural output, energy exports and rapid expansion of the labour-intensive garment industry (see Industry & Retail chapter). However, imports continue to outpace exports, pushing the trade deficit to a record high in 2017, while the potential withdrawal of EU trade privileges has darkened the near-term outlook.

Addressing these challenges and expediting planned economic reforms will be critical priorities for stakeholders. The recent promulgation of a new Companies Law bodes well for future growth, while a recently released macroeconomic development agenda has emphasised private sector- and business-friendly reforms to support both trade and investment, which should lead to further reforms supporting improvements to the business climate.

Structure & Oversight

The Ministry of Commerce (MoC) is the primary government entity responsible for trade development and policy-making within Myanmar, with a mandate to encourage private sector participation in economic development, expand international trade activities and agreements, and write policy regarding foreign investors and companies. The MoC has established a set of five key trade policy objectives: free-market policy-making, deploying ICT-backed export promotion and trade enhancement measures, expanding trade activities through regional cooperation, improving the country’s trade environment and maintaining steady domestic supply of essential goods to support price stability.

Online Platform

Meanwhile, the Ministry of Planning and Finance (MPF) oversees Myanmar’s primary investment authority, the Directorate of Investment and Company Administration (DICA). Interested foreign investors must register their firms using a new digital platform, Myanmar Companies Online. Registration procedures were streamlined and digitised after the new Myanmar Companies Law (MCL) came into effect in August 2018 (see analysis). The law designates companies as local or foreign, with the latter referring to any company in which a foreign entity holds more than a 35% stake.

The Myanmar Investment Commission (MIC) is another important actor in the investment landscape, and holds responsibility for verifying and approving investment proposals, issuing notifications about sector-specific developments and assisting potential investors in acquiring permits for new projects. Investors use the DICA website to retrieve information on MIC permit requirements and submit their proposals to MIC, which decides within 15 days whether it will accept the proposal.

In November 2018 the ruling National League for Democracy (NLD) announced it had formed the Ministry of Investment and Foreign Economic Relations to deal with investment-related matters and appointed U Thaung Tun, who chairs the MIC and is a national security advisor, as the new ministry’s head.

Renegotiations

Myanmar participates in all intra-ASEAN agreements, as well as multilateral free trade agreements (FTAs) with Australia, New Zealand, China, India, Japan and South Korea. As an ASEAN member, Myanmar is set to join the Regional Comprehensive Economic Partnership, an FTA being negotiated between ASEAN, Japan, China, South Korea, New Zealand, Australia and India. The FTA would cover nearly half the world’s population and close to 30% of global GDP. Myanmar has also signed bilateral trade deals with Bangladesh, Sri Lanka, China, South Korea, Laos, Malaysia, the Philippines, Thailand and Vietnam, and has border trade deals with China, India, Bangladesh, Thailand and Laos.

In 2013 Myanmar signed a new trade and investment framework deal with the US, and the US restored Generalised System of Preference (GSP) trade privileges to Myanmar in September 2016, following the restoration of EU GSP privileges to Myanmar in July 2013. GSP privileges offer duty-free access for certain exports, which had previously been suspended since 1989.

Regulatory Framework

The Myanmar Investment Law (MIL) and the Myanmar Investment Rules (MIR) came into force in 2016 and 2017, respectively, and introduced several important measures meant to improve the business climate, incentivise FDI and streamline procedures to register businesses and approve investment proposals. While the reforms’ effects have been limited, owing to the friction associated with corruption – a 2016 World Bank enterprise survey found that 29.3% of Myanmar’s firms were asked to make bribery payments – and the inexperience of some government committees in carrying out such processes, there is hope that the MIL and the MIR will take hold in the coming years and pave the way for further reform.

Prior to the new MIL, any investment application made to MIC was for an MIC permit, which granted automatic tax privileges and the right to long-term leases of 50 years, extendable by two, 10-year periods. For special economic zones, 50-year leases with one, 25-year extension are permitted (see analysis). Foreigners cannot own land or property in Myanmar.

The MIL introduced a new type of MIC approval called an MIC endorsement. Any applications to the MIC that do not require an MIC permit must apply for an endorsement, either at MIC headquarters or, if the project is worth less than $5m, at a state or regional investment committee. The MIL and the MIR also introduced several important changes to the country’s income tax incentive regime. Prior to their enactment, any company receiving an MIC permit was granted an automatic five-year income tax holiday. Under the new legislation, tax holidays are determined by a project’s location.

Projects in less-developed Zone 1 can receive exemptions of up to seven years, against five years in moderately developed Zone 2 locations and three years in adequately developed Zone 3 regions. Other tax incentives are unchanged under the MIL, including exemptions on Customs duties for construction machinery, as well as duties and taxes on imported raw materials required to manufacture exports.

The MIR also established several new categories of investment projects that are now required to obtain an MIC permit, including investments that are considered strategic to Myanmar; large, capital-intensive projects; projects likely to make a significant impact on the environment and local community; and any investment the government determines should be subject to MIC licensing.

Strategic projects include any investment related to technology, transport infrastructure, energy infrastructure, urban development infrastructure, and extractive or natural-resource-oriented industries, as well as media investments and any investment that is valued at more than $20m. Capital-intensive projects are defined as any project that is valued at more than $100m.

Investment Opportunities

Another new requirement is that the country’s income tax holidays will only be granted to promoted businesses. Promoted businesses are split into 20 categories, which include, but are not limited to: agriculture, forestry plantation and conservation, livestock, fisheries, manufacturing (outside of alcohol and cigarettes), industrial zones, urban development, transport infrastructure, aircraft maintenance, power projects, health services, telecommunications, education, IT, hotels and tourism, and science and research and development businesses.

Under previous legislation, the MIC permit application could take as long as a year. The MIR includes a stipulation that if any application for an MIC permit is accepted, it must be processed within 70 working days, although the process can be suspended if the commission requires more information. The MIR also stipulate that MIC endorsement procedures should take no longer than 40 days, although stakeholders report that the MIC lacks the necessary resources to meet these new deadlines and often requires more information, meaning that delays are still possible.

Ease of Doing Business

MIL reforms were intended to improve the business climate. The government has announced its aim to improve its position in the World Bank’s annual “Doing Business” report, which measures economies’ investment attractiveness using 10 indices.

Myanmar aims to reach the top 100 by 2020, although it did not improve its ranking in the 2019 edition, remaining at 171st place out of the 190 economies surveyed. It tied with Iraq and was the lowest-ranked ASEAN member, ahead of Timor-Leste (178th) but behind Laos (154th), Cambodia (138th), the Philippines (124th), Indonesia (73rd), Vietnam (69th) and Thailand (27th).

The World Bank noted two positive developments supporting improvements in the “starting a business” and “getting electricity” indices: the country reduced business registration fees, and improved the monitoring and regulation of power outages, resulting in marginal improvements to its distance-to-frontier (DTF) score, which ranks a country’s performance on a scale of 1 to 100, with 100 being the best score. Myanmar’s doing business DTF score rose from 44.21 in 2018 to 44.72 in 2019, while its getting electricity score rose from 52.52 to 55.67. However, it continues to rank low in categories such as registering property (136th), trading across borders (168th) and enforcing contracts (188th).

Trading Activity

External headwinds as well as internal challenges have weighed on trade and investment growth in recent years, although the mid-term trend has been largely positive. The EU Commission (EUC) reports that total trade values have soared since 2011, rising by 34.5% y-o-y in 2011 to hit €12.16bn, and recording annual growth of 9.9%, 33.8%, and 17.9% in 2012, 2013 and 2014, respectively, to end 2014 at €21.08bn.

Trade values jumped by 25.6% in 2015 to €26.84bn, according to EUC statistics, although they have eased in the years since, contracting by 5.7% in 2016 to €24.98bn before rising by 3.6% in 2017 to end the year at €25.88bn. This was attributed to falling export volumes, which have weighed on the balance of payments and widened the trade deficit.

The EUC reports that total imports rose by 47.5%, 34.9%, and 24.6% in 2013, 2014, and 2015, respectively, before contracting by 6.9% in 2016, and rising again by 11.2% in 2017 to end the year at €16bn. Although export growth was also robust, it did not keep pace, rising by 21.9%, 0%, and 27% in 2013, 2014, and 2015, respectively. Exports contracted by 4% in 2016 and 6.7% in 2017 to end the year at €9.9bn, down from a peak of €11.04bn in 2015.

Energy Prices

This is likely a result of falling international oil and gas prices – petroleum products accounted for 40% of the country’s export receipts in 2016 – and currency depreciation, with the kyat losing more than 65% of its value against the US dollar in recent years, falling from 955 to the dollar in March 2014 to just under 1600 as of mid-November 2018 (see Economy chapter). According to EUC data, the country’s trade deficit widened from €494m in 2013 to €3.69bn in 2014, €4.4bn in 2015, €3.79bn in 2016 and a high of €6.1bn in 2017.

Although a recovery in the agriculture sector, rising gas prices and garment industry growth have contributed in helping to narrow the trade deficit, imports are likely to continue outpacing exports. The World Bank projects that Myanmar’s trade deficit will shrink from 9% of GDP in 2015/16 and 8.5% in 2016/17, to 8.3% in 2017/18, rising to 8.9% of GDP in 2018/19, before moderating to 8.5% of GDP in 2019/20 and 8.6% in 2020/21.

Myanmar’s largest trading partners in 2017 were China, with €8.6bn of bilateral trade, or 33.3% of total trade; Thailand, at €3.9bn, or 15.2%; Singapore, with €3bn and 11.7%; and Japan, at €1.6bn, or 6.2%. Myanmar ran a trade deficit with three of its top-four trading partners: imports from China stood at €5bn in 2017, imports from Singapore reached €2.4bn and imports from Japan were recorded at €960m, for deficits of €1.4bn, €1.8bn and €306m, respectively. Myanmar’s trade surplus with Thailand was €380m in the same year, while its trade surplus with the EU, which is a major purchaser of Myanmar-manufactured garments, was €468m.

FDI

FDI inflows have also dropped off in recent years. DICA reports that total approved FDI per annum rose from $4.1bn during FY 2013/14 to hit $8bn in FY 2014/15, peaked at $9.5bn in FY 2015/16 before contracting to $6.7bn in FY 2016/17. Approved FDI reached $4.1bn between April and September 2017, according to DICA, and in November 2018 the authority reported that realised FDI reached $2.2bn between April and September 2018, with the MIC approving $1.8bn of FDI inflows over the same period. In August 2018 the MIC announced that FDI inflows dropped off by $900m during FY 2017/18, falling from $6.7bn to $5.8bn. The MIC’s chairman, U Thaung Tun, told local media that Myanmar’s top investors in FY 2017/18 were China, the Netherlands, Japan, South Korea, the UK and the US.

Although DICA has not published a recent analysis of investment by sector, manufacturing accounted for the largest share of approved FDI between April and September 2017, at $1.5bn, followed by real estate ($1.1bn), other services ($776.4m), transport and communications ($423.9m), hotels and tourism ($154.4m), and agriculture ($130.2m). The World Bank reports that manufacturing FDI grew by over 65% y-o-y in FY 2017/18, accounting for roughly one-third of total FDI, against 17% in FY 2015/16. Power projects attracted $116.9m of approved investment over the same period, followed by livestock and fisheries ($16.41m) and industrial estates ($5.3m). The MIC reports that manufacturing accounted for 30.9% of FDI in FY 2017/18, followed in size as a share of the economy by real estate and services.

DICA estimates Myanmar will attract $5.8bn of FDI annually through to 2023, supported by rising investment in the oil and gas sector. However, investment from some markets has been waning in the wake of ongoing conflict in Rakhine, Shan and Kachin states, with Myanmar receiving increased international scrutiny. In response to a September 2018 UN report accusing the military of committing atrocities in Rakhine State, the EU announced it was considering withdrawing GSP privileges. GSP privileges have been a major growth driver for the country’s garment industry, with textiles accounting for 72.2% of all exports to the EU in 2017, supporting Myanmar’s largest bilateral trade surplus.

The Myanmar Garment Manufacturers Association reports that the country exported $2.7bn of garment products in 2017, nearly double the level recorded in 2015, with exports projected to remain at $2.7bn in 2018. The garment industry is also one of the most labour intensive in Myanmar, employing 450,000 people. This makes it a critical source of employment, and a crucial support mechanism for manufacturing and industrialisation growth. The loss of GSP privileges would almost certainly negatively affect exports and investment in 2019.

Trade Policy Plans

Declining FDI and exports are recognised as a challenge to economic growth, although the government is taking steps at the policy level to reduce Myanmar’s trade deficit and boost the country’s investment attractiveness. The Myanmar Sustainable Development Plan (MSDP) was published in August 2018, setting a long-term development agenda that emphasises private-sector participation and job creation as the third of five key goals for macroeconomic development.

The MPF has identified several important action plans for realising this goal, including Strategy 3.4, which aims to reform Myanmar’s trade sector, and strengthen regional and international cooperation and linkages. Strategy 3.3, meanwhile, seeks to provide a secure, investment-enabling environment which eases the cost of doing business, boosts investor confidence and increases efficiencies.

Other MSDP goals focus on liberalising sectors that have been closed to foreign investment. There have been several positive developments on this front, including opening the banking sector to allow foreign banks to provide export credit (see Banking overview), ongoing insurance sector liberalisation (see Insurance overview) and the new Companies Law, which is expected to open the Yangon Stock Exchange to foreign trading (see analysis).

In May 2018 the Ministry of Commerce also announced it had opened the retail and wholesale trading sectors to foreign companies and joint ventures under Directive No. 25 of 2018 (see Industry & Retail chapter). This allows companies to trade in any commodity manufactured domestically or imported from overseas. Previously, foreign firms had been restricted to selling agricultural inputs, hospital equipment and construction materials.

There are still several conditions in place for foreign companies, including a $5m minimum capital requirement for wholesalers and a $3m minimum capital requirement for retailers. Joint-venture wholesalers’ domestic partners must hold at least a 20% stake in the company and a minimum of $2m in capital, while joint-venture retailers must have at least $700,000. Foreign investors are also prohibited from owning convenience stores that are smaller than the designated 929 sq metres.

More recently, the MIC partnered with the Japan International Cooperation Agency to create an investment-promotion strategy aimed at attracting nearly $40bn of FDI over the next 20 years, from “responsible and quality businesses”.

Published in October 2018, the Myanmar Investment Promotion Plan 2018 (MIPP) highlights three strategies to boost FDI inflows, with the goal of attracting $8.1bn of FDI between 2016/17 and 2020/2021, $11.9bn between 2021/22 and 2025/26, $17.2bn between 2026/27 and 2030/31, and $24.7bn between 2031/32 and 2035/36. This will be achieved through “fundamental improvement of the business environment”, according to the plan, with an emphasis on creating a fair and transparent investment regime, institutional development for investment promotion, infrastructure development, supportive business-associated systems, and competitive industrial linkages and human resources. Stakeholders are targeting new investment from East Asia in particular as Western investor appetite has waned in most recent years.

Public-private Partnerships

The MSDP calls for a robust public-private partnership (PPP) programme to assist the country in developing infrastructure, with the aim of encouraging quality, transparent, competitive PPPs to improve public services. An important element of future development will be the MSDP’s planned project bank, which will identify priority infrastructure projects to be developed under a PPP model. Strategy 3.6.3 highlights the project bank of public investment programmes as a tool to accelerate development of priority infrastructure, while Strategy 3.6.2 calls for the promotion of PPP mechanisms to facilitate the development of commercially viable projects. Stakeholders anticipate the project bank will focus on energy and utilities at first, as these hold the highest potential for long-term commercial viability.

Outlook

Myanmar’s trade and investment activity will continue to face challenges in 2019 as the threat of EU GSP suspension weighs on investor sentiment and export growth, and external volatility and currency depreciation add to uncertainty. Despite these challenges, the country continues to offer considerable potential to future investors. A large and mostly untapped domestic market, ideal geographic positioning, and new policies aimed at accelerating reforms and attracting new FDI will help to address the most serious of these challenges, while the establishment of new financing models for infrastructure and ongoing sector liberalisation should keep its growth on a steady trajectory.

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The Report: Myanmar 2019

Trade & Investment chapter from The Report: Myanmar 2019

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