Long-term liberalisation, growth and regional integration for Myanmar

With a newly elected government in power and with nearly five years of growth in foreign trade and inward investment under its belt, Myanmar is widely expected to become increasingly integrated into the regional and global economy in the coming years. In the fiscal year (FY) through to April 2015, the nation reported total foreign trade receipts of $29.16bn, up from $18.17bn in the same period in 2011/12. Foreign direct investment (FDI), meanwhile, quadrupled from $1.9bn in FY 2011/12 to $8.1bn in 2014/15.

“Liberalisation is a key word here right now,” said U Aung Naing Oo, secretary of the Myanmar Investment Commission (MIC) and director-general of the Directorate of Investment and Company Administration (DICA), both of which fall under the Ministry of National Planning and Economic Development. “We have opened up rapidly in recent years, and we expect to see increased economic activity for the foreseeable future,” he added.

Room For Improvement

The nation faces considerable challenges on both the trade and investment fronts. Though the regulatory framework for investment has improved dramatically, doing business in Myanmar remains challenging, particularly for foreigners. A key hurdle here is the nascent domestic banking sector, which as of late 2015, lacked the capacity to be of much use to local and foreign corporates alike. Additionally, decades of underinvestment have left the nation’s transport and electricity infrastructure and commercial real estate supply in a poor state of repair, which has contributed to the tough business environment.

The nation’s exports continue to be heavily concentrated in raw materials – natural gas, gems and other minerals – and much of the incoming investment has gone to these areas in recent years, despite the government’s support for value-added activities. Finally, as of late November 2015 the Myanmar kyat had lost 30% of its value against the US dollar since January, due in large part to the nation’s widening current account deficit. This has presented challenges for foreign firms operating in Myanmar.

Still, by all accounts Myanmar’s trade performance and ability to attract FDI, particularly from its neighbours in East and South Asia, has been impressive. “There seems to be some impatience among outside analysts and observers about the pace of development here, particularly in terms of investment regulations,” Alexander Jaggard, the Myanmar country representative at Mekong Economics, a Vietnam-based consulting firm, told OBG in late 2015. “But you have to remember that the changes we have seen over the past four years have been immense, and there is such a thing as developing too quickly.”

Indeed, the country’s GDP expanded by 8.5% in 2014/15, according to data from the Asian Development Bank (ADB), up from 7.8% the previous year. Forecasts by the government put 2015/16 GDP growth at 9-10%, with ADB and World Bank projections a few percentage points lower, due mainly to mid-2015 flooding, which is expected to hit agricultural exports. Meanwhile, the MIC’s official forecasts for 2015/16 put FDI for the year at $6bn, though given Myanmar’s trajectory and recent history, most market observers – including some government entities – expect the country to pull in at least $8bn, and perhaps closer to $10bn over the course of the year.

Origin Story

Since Myanmar gained independence in 1948, the country has seen a series of dramatic changes in government policy and practice. In the early 1960s a military coup resulted in the installation of a socialist government under General Ne Win’s Burma Socialist Programme Party, which promptly nationalised the economy, setting the stage for nearly 50 years of international isolation and slow growth. Over the following 25 years almost no foreign investment entered Myanmar and the country engaged in very little international trade. Widespread pro-democracy protests in 1988 resulted in a reorganisation of the leadership of the Tatmadaw (the Myanmar armed forces), and a new focus on economic growth and regional connectivity.

In the years that followed, socialism was set aside and some sectors benefitted from foreign investment streams and new trade ties. Much of this activity was in the extractive industries, including the establishment of a copper mine by Ivanhoe Mines, a Canadian firm, and offshore gas field developments by a handful of foreign oil majors.

Growing concerns among the international community about Myanmar’s leadership and direction during this period eventually resulted in the introduction of US government sanctions in 2007, which banned new investments in the nation by US firms. A year later the EU and Canada instituted similar rules, followed by a trade embargo, which pushed the country back into economic seclusion as most western players shuttered their Myanmar business.

Beginning in the early 2000s, however, China’s booming economy and increasingly expansive outlook resulted in a raft of Chinese investments in Myanmar. A majority of this activity took place in the energy and mining industries. A variety of old initiatives were rejuvenated during this period, including the copper mining project previously launched by Ivanhoe, which was taken over by the China North Industries Corporation. Additionally, Chinese private and state-owned and companies set up a substantial number of new projects. These included natural gas pipelines, developed by the China National Petroleum Company; a ferronickel mine; and a variety of hydro-power and other electricity projects, including the 6000-MW Myitsone dam. The dam project, which is being jointly developed by the state-owned China Power Investment Corporation, Myanmar’s Ministry of Electric Power and a Myanmar-based industrial conglomerate, was formally suspended by Myanmar’s government in 2011, though the long-term results of this action are as yet unclear (see Energy chapter).

Increased activity by China and a handful of investors from other Asian countries pushed Myanmar’s FDI to $329.6m in 2009/10. The following year a government reshuffling resulted in the beginning of the current period of political re-engagement and economic liberalisation. In terms of investment, this had an immediate and enormous impact, with DICA allowing foreign investments worth a massive $20bn in FY 2010/11, including $14bn in Chinese spending on mining, gas and hydropower projects.

Loosening Restrictions

Through the first decade of the 2000s, foreign investment in Myanmar was predominantly export-oriented, with most firms striking deals with DICA and related entities to export as much as 90% of their domestic production, with the remainder given to the government. Almost all of the power and gas produced by China’s hydropower and drilling projects, for example, was exported to China to meet that country’s huge energy demands. With the dramatic thawing of Myanmar’s political situation in 2011, however, this all began to change. Outgoing president U Thein Sein, who was elected by the nation’s legislature in March 2011, has adopted a decidedly reformist stance, releasing opposite leader Daw Aung San Suu Kyi from house arrest, deregulating some media activities and halting work on the controversial Chinese-led Myitsone dam project.

A year later, in April 2012, Daw Aung San Suu Kyi’s political party, the National League for Democracy (NLD), won 41 out of 44 parliamentary seats being contested in by-elections, including one for “The Lady”, as she is known colloquially. Soon after, the government ended its strict capital control regime, and the kyat was allowed to trade at market value.

By 2013 most foreign sanctions on the country had been dropped, and interest in the country as a destination for investment and a potential trade partner was growing exponentially from Asian and western firms alike. “The economy has opened up so rapidly, and demand has been so great in recent years that there have understandably been emerging pressures on institutions of economic management,” Habib Rab, a senior country economist at the World Bank’s Myanmar office, told OBG. “Considering the many challenges they still face, from our perspective they have been doing a very good job.”

In Figures

This view is borne out by the data. In FY 2014/15 the value of Myanmar’s exports reached $12.52bn, up from $11.2bn the previous year and $8.98bn in 2012/13, for total export growth from 2012 through 2015 of nearly 40%, according to data from Myanmar Customs and AHK (the Delegation of German Industry and Commerce in Myanmar). Over the same period imports grew from $9.07bn in FY 2012/13 to $13.76bn the following year and to $16.63bn in 2014/15, for total growth of 83% in just three years. Overall trade volume has increased dramatically in recent years, from $18.17bn in 2011/12 to $29.16bn in 2014/15, according to Customs and AHK reports. As these figures suggest, Myanmar has experienced a widening current account deficit in recent years, due primarily to steadily expanding FDI-related inward capital flows. In 2014/15 the current account deficit reached 6.3% of GDP, up from 5.6% a year earlier, while the nation’s trade deficit rose from 4.5% to 8.3% of GDP in the same period.

Investment Process

Most FDI must be approved by the MIC, which has instituted a variety of reforms in recent years aimed at streamlining this process. Nonetheless, under the 2012 Foreign Investment Law, the commission has up to 90 days to go over investment applications. “FDI can bring both good and bad results,” the MIC’s U Aung Naing Oo told OBG. “We want to minimise the latter kind. We are interested in attracting high-quality investments that are environmentally and ethically responsible, in line with international best practice in terms of labour and human rights, and that do not encourage corruption.” In order to meet these high standards, the MIC has been greatly empowered in recent years. In the past the commission served largely as a middleman between potential investors and the government. “We have been greatly empowered to make decisions since 2011,” said U Aung Naing Oo. “We run a one-stop shop. Here investors can sort out Customs, internal revenue, labour, environmental and other approvals at the same time, and with quick turnaround times.”

From FY 2011/12 through August 2015 the MIC approved total FDI in Myanmar worth $21.1bn, as compared to a total of $36.1bn over the preceding 23 years, since the nation first opened up to limited foreign investment in 1988, according to MIC data. More than half of the 2011-15 period total is made up of inflows from just the past two years. After FDI reached $4.1bn in 2013/14, the government set a target of another $4bn for the following year. Actual investment surpassed this goal after six months, and went on to reach $8.1bn for the year.

Key Sectors

In terms of FDI, Myanmar has seen considerable sector diversification recently, though perhaps not as quickly as the government might like. From 1988 through 2011, more than 40% of all approved foreign investment in the nation went to power projects, and primarily large, Chinese-built hydroelectric initiatives. Another 38% went to the oil and gas sector, while mining accounted for around 8% of the 23-year total. Rounding out the top five were the manufacturing sector, with around 5%, and the hotel and tourism industry, with 3%.

From 2011 through August 2015, however, the oil and gas industry and power projects have attracted 28% and 23%, respectively, of the total FDI for the period, while manufacturing received 20% and transport and communications brought in around 14%, followed by real estate, at around 7%, and tourism and hotels, at 5%, according to MIC data. Recent World Bank data confirms the country’s longer-term shift to higher value-added industrial activity suggested by the MIC statistics. For the period March 2014 through February 2015 manufacturing attracted $1.7bn in FDI, compared to $3.2bn for oil and gas, $1.96bn for transport and telecommunications and $1.05bn for hotels and tourism, for example.

In terms of trade, Myanmar remains mainly a primary resource exporter. In FY 2014/15 gas accounted for more than 41% of the nation’s exports by volume, by far the single largest export item. This was followed by pulses and beans, with 9.1% of total exports, and garments, which accounted for 8.2% of the total and are the only manufactured item in the top 10. Jade, with 8.1% of exports by volume, is in fourth place, followed by rice, maize, seafood, sesame seeds, raw rubber and timber, according to Customs and AHK data. Agricultural products made up around a quarter of the county’s exports in 2014/15, though the real total is likely considerably higher given that an estimated 50% of Myanmar’s annual rice crop is sold unofficially to China each year, according to the World Bank.

Growth in Myanmar’s imports, meanwhile, have been driven by steadily increasing industrial activities throughout the country in recent years. In FY 2014/15 mechanical machinery and transport equipment accounted for 25% of imports into the country, followed by refined oil (primarily vehicle fuels), at around 14% and base metals, at just over 9%. Rounding out the top-five import categories for the year were electrical machinery, with around 4% of the total, and edible oils, at 3%.

Major Partners

Due to the various sanctions enacted on Myanmar over the years, the country’s economic partnerships – both in terms of trade and, to a lesser extent, investment – are heavily concentrated in South and East Asia. Nearly three-quarters of the nation’s exports go to China and Thailand, for example, and a majority of imports come from China and Singapore. China is the top export destination for Myanmar products, taking 37.3% of the total in 2014/15, according to data from Myanmar Customs and AHK. Exports to China are made up primarily of natural gas, which is piped over the two nations’ shared border in a number of areas.

Thailand accounted for 32.2% of Myanmar’s exports in 2014/15, including natural gas and agricultural products. According to the Ministry of Energy, gas exports earn Myanmar more than $170m per month, which is equal to around 40% of the nation’s income. The bulk of this goes to China and Thailand, which together take 1.6bn cu feet of natural gas per day from Myanmar. Other top export destinations for Myanmar goods include Singapore, with 6.1% of the total, India, with 6%, and Japan, with 4.4%.

In terms of FDI, in FY 2014/15 around $5bn came from Singapore-registered firms, which was equal to well over half of the total $8.1bn that Myanmar attracted. The bulk of this total likely came from firms that are based outside of Singapore, however, given that nation’s popularity as a registration destination for foreign firms looking to operate in ASEAN member states. Other key sources of FDI into Myanmar include China, Thailand, South Korea, the UK, Hong Kong, Japan and the Netherlands, among others. “Since sanctions were reduced in 2010 Japanese investment has been growing rapidly here,” Fumikazu Gocho, a senior advisor at the Japanese government-linked Japan External Trade Organisation’s Myanmar offices, told OBG. “Japanese companies and state-affiliated entities have been key investment partners in Myanmar’s special economic zones, in particular.”

In the year leading up to the election in November 2015, some data suggest a slight drop in Myanmar-focused investment activities from EU and US companies, though the MIC is quick to point out that a record-breaking amount of investment has been approved for the 2015/16 period.

“There is clearly a great amount of interest from Western companies at the moment,” Timothy Duckett, deputy director at the Myanmar office of UK Trade & Investment, told OBG in October 2015, less than a month before the country went to the polls. “But we have observed that people are holding back on actual investments at the moment, due to uncertainty surrounding the election.” Forecasts expected the NLD win to result in an uptick in economic activity by Western corporates.

Oversight & Regulation

Beginning in 2011 the government implemented significant reforms to the country’s trade and investment regulatory framework. “Under the 1988 investment law, a few sectors were opened up, while the rest were closed still,” said the MIC’s U Aung Naing Oo. “But the 2012 Foreign Investment Law flipped this around, so now a few sectors are closed off while all the rest are open.”

One industry with relatively strict foreign investment rules is banking, plus a number of other financial services segments. The Central Bank of Myanmar has issued licences to foreign players in recent years, but they allow only for extremely limited banking activities in the country. Restrictions by other government entities have kept foreign insurance underwriters on a similarly tight leash.

Additionally, under the 2012 law, no foreign investment is allowed in the gemstone mining segment or in agricultural concerns dealing with staple crops. Other areas also closed to outsider involvement include care centres for the elderly, private specialist hospitals, traditional food production, small and medium-scale mining, arms and ammunition trade, and native-language newspapers and magazines, among others.

Under the 1989 State-Owned Economic Enterprises Law, which is still in effect today, state-owned enterprises are technically the only firms allowed to operate in a variety of sectors, including the teak industry and the cultivation of forest plantations; activities relating to natural gas and petroleum; the mining of metals; and electricity generating services. However, the MIC has the power to grant exceptions to this law, and has done so extensively in a handful of key export-oriented segments over the years.

Draft Investment Law

In February 2015 the government released a draft of the Myanmar Investment Law, which has been in the works since 2014 and is expected to be ratified by Parliament in early 2016. The new law will replace the 2012 Foreign Investment Law and the Myanmar Citizens Investment Law of 2013 with comprehensive legislation aimed at bringing all investment regulations under one framework. Perhaps the key change in the new law is a partial devolution of the MIC’s authority to approve foreign investment, with the body set to share this power with both state and regional governmental entities.

New Zoning

Over the past few years a growing percentage of inward investment has gone towards Myanmar’s new special economic zones (SEZs). Currently three SEZs are in development, though a number of others are planned. In September 2015 the first phase of Thilawa SEZ, which is located around 25 km south-east of Yangon, formally launched. As of the late-2015 launch date, 48 firms had signed contracts to set up operations in Thilawa, including a considerable number of companies involved in garment manufacturing. Dawei SEZ, which is situated in southern Myanmar, and Kyaukphyu SEZ, in Arakan State, are still in development, though both projects have begun to attract interest from foreign corporates.

Under the Special Economic Zones Law of 2011, investors who set up shop in an SEZ apply directly to the SEZ administration, thereby circumventing the MIC altogether. SEZ investors also benefit from additional incentives, including 5-7 years of tax exemption, 75-year land leases and various Customs import duty exemptions (see Industry & Retail chapter).

Neighbourhood Ties

Even as a steadily increasing number of Western firms eye Myanmar, in the coming years the country’s trade base is expected to remain firmly rooted in ASEAN member states plus China, Japan and South Korea, a grouping known as the ASEAN+3 nations. The formal establishment of the AEC in November 2015 has the potential to enable Myanmar to become more closely integrated with its neighbours in the coming years. The AEC, which seeks to unite ASEAN economies into a single unified market and economic area, has been on the cards since the early 1990s. Under the AEC, ASEAN countries have agreed to allow for the free flow of investment, goods, services and skilled labourers. Deloitte, among other ASEAN observers, expects that it will take at least another 15 years to fully implement the programme. Nonetheless, according to Malaysian government forecasts, ASEAN has the potential to post 5% annual GDP growth over the next decade, compared to 2% by the EU, for example (see analysis).

Challenges

Despite the interest from investors, a number of issues remain to be addressed. The reforms enacted in recent years, and particularly the establishment of a one-stop shop for registering new businesses at the MIC, have helped Myanmar move up the ranks of the World Bank’s “Doing Business 2016” report, which measures business regulations in 189 economies. However, the country was still given a relatively low ranking of 167th in overall ease of doing business in 2016, up 10 spots from 177th in 2015. The jump in the rankings was driven in large part by improvements to regulations, costs and procedures related to establishing a new venture. Indeed, in the 2016 report Myanmar ranked 160th in terms of starting a business, up 29 spots from 189th in 2015, due to the country’s streamlining of incorporation procedures and the elimination of minimum capital requirements for local firms. In the same period the country posted improvements in terms of dealing with construction permits and getting electricity.

According to U Maung Nanda Aung, the executive director of Heritage Capital Investment, the lack of skilled labour is also a huge challenge. “Good engineers are hard to find, and the level of education is significantly lower compared to the rest of the world.”

Outlook

As the country’s relatively low overall ranking suggests, doing business in Myanmar remains challenging, for a whole range of reasons. As mentioned earlier, the falling value of the Myanmar kyat against the US dollar; a lack of high-quality transport and electricity infrastructure; restrictive investment and trade regulations; and a relatively underdeveloped legal framework are all real issues that will require considerable attention. However, based on the past five years of liberalisation, the country’s leaders appear to be serious about continuing to open up the economy, attract increased amounts of FDI and boost trade. “We are currently working on a 20-year plan to boost investment into Myanmar,” the MIC’s U Aung Naing Oo told OBG. “The government’s outlook is not short-sighted – quite the opposite, in fact.”

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The Report: Myanmar 2016

Trade & Investment chapter from The Report: Myanmar 2016

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