Reforms continue to open the economy as GDP grows

After spending decades as one of the most isolated and least-developed countries in Asia, Myanmar is emerging as one of the world’s fastest-growing economies. Since a historic reform process began in 2010, foreign investment has been pouring in, driving annual growth to more than 8%, according to IMF estimates. Investment inflows and growing exports have also helped stabilise the currency and end a long period of high inflation. Deposits are flowing into traditionally under-utilised banks, and pressure is building on authorities to ease tight regulations that have stifled the development of bank lending and capital markets. With investment inflows accelerating and diversifying into a broadening range of economic sectors, growth is forecast to remain above 7% for the rest of the decade.

HISTORY: Myanmar is emerging from a troubled economic history. Traditional village farming, with techniques little changed by the modern era, continues to be the backbone of the economy. British colonial rule brought limited development of roads, onshore oil wells, ore mining and other raw materials exports. But the territory of Burma was administered as a satellite of British India, and most of its companies were either ruined during the Second World War or fled as the country gained its independence in 1948. The country’s new leaders were mostly military men, and they were divided into squabbling ideological and ethnic factions. The new democracy fell to a socialist military coup in 1962, ushering in a sweeping nationalisation and economic isolation. The country sank to join the ranks of the world’s poorest and least-developed countries during this era, with exports dropping by 50% in real terms from 1963 to 1987, according to World Bank data.

A turnaround began after a wave of popular protests in 1988, which led to a change of military leadership and a shift towards market reforms. Much of the economy of newly renamed Myanmar was privatised, mainly to friends of military figures, and foreign firms were invited to invest in offshore gas fields and mines. After a surge of foreign investment and trade, annual GDP per capita still came to only $165 in 1998, according to the IMF. New investment dropped off after the US imposed tough sanctions in 1997 and European countries followed suit. But growth remained strong as investments initiated during the 1990s came to fruition. Chief among these were offshore gas fields, the first of which began pumping in 2000. China also developed into a major investor, especially in hydropower and mining. By the 2010/11 fiscal year, when military leaders began a transition to civilian rule, GDP per capita had risen to $998, according to the IMF. Fiscal years run from April 1 of the same-numbered calendar year.

The growth came despite economic policy flaws, including central bank financing of large government deficits, which drove inflation to an average pace of 25% a year in 2001-08. Overly low regulated interest rates kept savings out of banks and led people to seek alternative investments, including a Ponzi scheme fad that triggered a 2003 banking crisis. Foreign trade and investment was complicated by a policy of officially overvaluing the kyat while making it nearly impossible to legally convert kyat to foreign currency. The official exchange rate ranged from 5.5 to 6 to the dollar in 2003-12, while the IMF estimates the kyat’s market value ranged between 700 and 1200 to the dollar.

ECONOMIC REFORMS: The government of President U Thein Sein pushed political reforms that led to most international sanctions being lifted in 2012. He also renewed economic reforms, which had stalled during the sanctions era. The kyat was allowed to trade at its real value from 2012, and legal reforms aimed at drawing in greater foreign investment were launched. The main initiatives span six sectors. In oil and gas, his government resolved an old marine border dispute with Bangladesh and awarded practically all of its available exploration blocks in three licensing rounds in 2011-13. Winners included supermajors Shell, Chevron and Total – the latter two already present as partners in an offshore gas field developed in the 1990s. In manufacturing, the government has launched plans to develop special economic zones (SEZs) that would simplify foreign investment, and drew Japanese backing for the first, the Thilawa SEZ near Yangon.

In mobile telecoms, licences were awarded to Norway’s Telenor and Qatar’s Ooredoo in January 2014. In banking, nine foreign banks from Japan, Singapore, Thailand, Malaysia, China and Australia were awarded limited licences in October 2014, allowing them to service foreign investors operating in Myanmar. In infrastructure, a concession to build a new international airport for Yangon was awarded, going to a Japanese-Singapore consortium in October 2014 after the initial South Korean winners pulled out. And a revised mining law that is expected in 2015 is likely to accelerate foreign exploration for metals and industrial minerals.

Japanese banks and companies have become the main force behind investment, including through financing of other countries’ firms (see analysis).

RECENT PERFORMANCE: A surge in foreign investment, together with solid domestic demand, helped Myanmar achieve a strong growth in 2014. However, the year also brought challenges, which contributed to a widening in the trade deficit as the country relies heavily on imports to support skyrocketing domestic demand. Official growth forecasts for FY 2014/15 stand at 9.1%, slightly higher than the IMF and the World Bank estimates of 8.5%, with foreign direct investment (FDI) for the same period on course to rise 70% year-on-year.

Data issued in mid-December 2014 by the Directorate of Investment and Companies Administration shows that foreign investment increased substantially in that year. About $3.8bn entered the economy during the first eight months of the 2014/15 fiscal term, almost matching the total secured for the previous financial year of $4.1bn, according to Reuters. The industrial sector took the lion’s share of investment, with $1.1bn, and hydrocarbons were second in line, attracting around $800m.

The rise in FDI was supported by Myanmar’s growing appeal as a new tourist destination in South-east Asia. Overseas firms invested $354m in hotel development during the April-to-November 2014 period, while visitor numbers and revenue from tourism rose sharply as well. Arrivals totalled 3.5m in 2014, up from 2m in 2013, with earnings breaking through the $1bn barrier to reach $1.14bn, a rise of more than 20% on the previous year, according to the latest data from the Ministry of Hotels and Tourism. Myanmar expects to receive 5m tourists in 2015.

GDP ESTIMATES: While all mainstream sources believe the economy is growing rapidly, activity is not well measured and all economic data should be taken as only a rough guide to what is going on. As of January 2015 the most recent available official count of GDP covered FY 2012/13, running from April 2012 to March 2013. Compiled by Myanmar’s Central Statistical Organisation (CSO) and published by the Asian Development Bank (ADB), it put GDP at MMK51.7trn ($51.7bn) in FY 2012/13, or $1205 per capita – a level comparable to Myanmar’s South Asian neighbours India and Bangladesh, where GDP per capita in 2013 came to $1510 and $1033, respectively, according to IMF data. Myanmar is also roughly comparable to two other less developed Southeast Asian countries, Laos and Cambodia, where GDP per capita in 2013 was $1594 and $1028, respectively. But Myanmar is well behind most of South-east Asia and its northern neighbour China. Myanmar’s two main trading partners, China and Thailand, had GDP per capita in 2013 of $6959 and $5676, respectively, according to IMF data.

However, there are good reasons to suspect that the country’s GDP numbers could be significantly understated. Most obviously, the jade industry’s total output appears to be dramatically understated in the official data, which show only $1bn of jade exports in FY 2013/14, even though $2.4bn of jade and gems were sold at a single precious stone auction that year (nearly all jade is exported). A US study estimated jade production at $7.9bn in 2011. Contributions from the real estate and government sectors to GDP also appear to be understated.

One stark demonstration of the uncertainty in Myanmar statistics was the results of a 2014 census, which led to a huge reduction of the country’s estimated population. Prior to publication of the results, the IMF had estimated Myanmar’s population at 66.2m as of March 2014, based on its own and the government’s estimations of population growth since the last census in 1983. The 2014 census, however, found only 51.4m people, or 22% fewer. The revision meant consumers have far more disposable income than had been believed, but it also reduced the perceived potential for long-run catchup growth. The revision also supported migration experts’ estimates that as many as 5m Myanmar citizens are temporarily working abroad, mostly in Thailand, and many more have permanently emigrated.

Myanmar’s pace of growth is also hard to estimate, but is believed to be among the fastest in the world. CSO data put GDP growth at 7.6% in FY 2012/13, up from 5.6% in FY 2011/12.

According to data published by the IMF in October 2014, GDP growth was estimated to have accelerated to 8.25% in FY 2013/14, and was forecast to reach 8.5% in FY 2014/15 and FY 2015/16 before slowing to 7.6% by FY 2019/20.

The IMF’s forecast of 8.1% average growth in Myanmar in FY 2014-FY 2019 was the second-highest for any Asian country in 2014-19 after Bhutan. By comparison, the ADB forecast in April 2014 that Myanmar’s GDP would grow by 7.8% in FY 2014/15 and FY 2015/16, while the Economist Intelligence Unit forecast a more conservative 6.4% growth in FY 2014/15 and an average 7.3% growth in FY 2015-FY 2019. The IMF expected GDP to reach $112bn in FY 2019/20, or about $2100 per capita, similar to that of Vietnam in 2013-14.

LEADING CONTRIBUTOR: Agriculture, fishing and forestry is the largest economic sector, though its weight has steadily shrunk from 60% of GDP in FY 1996/97 to 30.5% in FY 2012/13, according to CSO data published by the ADB. The sector’s gross value added came to MMK15.8trn ($15.8bn) in FY 2012/13, while real growth was a subpar 2%. The sector’s investment climate is weak, as land is state-owned, farmers have little capital and policy generally inhibits a transition from peasant farming to corporate farming. The main products are rice, beans, peas, fish, shrimp, teak and other lumber.

Nikolas Myint, senior social development specialist at the World Bank, told OBG the Myanmar government was working with international development organisations on rural electrification and addressing rural poverty, but there were concerns that rapid changes in the countryside could drive too many people to look for work in the cities at too early a stage in the country’s development. “If productivity were to increase in the agricultural sector, then you would expect to see migration to the cities. There needs to be a level of urban job growth in place to accommodate that,” Myint said.

SECTOR BY SECTOR: Manufacturing is the second-largest sector, accounting for MMK10.3trn ($10.3bn) of gross value-added in FY 2012/13 or 19.9% of GDP. The sector recorded 8.4% real growth in FY 2012/13, and it is expected to be one of the main growth drivers in the years ahead, driven by foreign investment in SEZs. The sector has been dominated by food, drink and apparel, with significant processing of metals, fuels, cement and other construction materials. Recent investment is going mainly into export-oriented apparel and fast-moving consumer goods for the domestic market.

Dr Wah Wah Maung, deputy director-general at the Foreign Economic Relations Department of the Ministry of National Planning and Economic Development (MNPED), told OBG the government was pushing for investment in automotive and other more sophisticated industries, citing a factory being built by Japan’s Koyo Radiator in the Thilawa SEZ as an early success. He said the government was working on technical training programmes for workers to support such investments.

According to U Khin Maung Win, the chairman of Myan Shwe Pyi Tractors, Myanmar is experiencing a talent crisis. “People are more than willing to do the job but the reality is the skill level and expertise are just not there. It is important for companies to have a solid training setup,” he told OBG.

Retail and wholesale trade accounted for MMK10trn ($10bn) of gross value-added in FY 2012/13, or 19.4% of GDP. The sector recorded 5% real growth in that fiscal year, but it appears to have grown at faster rates since then as foreign capital has poured into Yangon and enlivened consumer spending. The sector is dominated by micro-businesses and as of early 2015 remained mostly closed to foreign investment. Meanwhile, transport and communication accounted for MMK6.9trn ($6.9bn) of gross value-added in FY 2012/13, or 13.3% of GDP. The sector recorded a remarkable 22.9% real growth rate that year, reflecting expansion in tourism, trucking and use of telephones. This sector is likely to continue to grow very rapidly as investors have been making large-scale investments in expanding and developing mobile networks, and mobile phone use among the urban middle class is also surging.

The mining sector accounted for MMK3.2trn ($3.2bn) of gross value-added in FY 2012/13, or 6.1% of GDP according to CSO data, but the sector was depressed by fighting in Kachin State, the main jade mining area. Other data suggests the sector’s annual gross value-added must be at least $5bn and likely higher (see Mining chapter). The sector’s output is expected to surge with the recent completion of a Chinese ferronickel mine and the expected completion of a major copper mine, both operated by Chinese state industrial firms. Also, a wave of foreign exploration is likely after a new law regulating the sector is adopted, expected in 2015.

Construction accounted for MMK2.5trn ($2.5bn) of gross value-added in FY 2012/13, or 4.9% of GDP, growing 9.3% in real terms. The sector has accelerated since then as a number of new hotels, serviced apartments, office buildings and a large Vietnamese-backed mixed-use project have got under way. The real estate and other service sectors were included in an “other” category that accounted for MMK1.1trn ($1.1bn) in FY 2012/13, or 2.1% of GDP.

OTHER SEGMENTS: Other sectors in the breakdown are power and utilities, with 8.2% real growth and MMK611bn ($611m) of gross value-added in FY 2012/13, accounting for 1.2% of GDP; finance, with 40% real growth and MMK85bn ($85m) of gross value-added in FY 2012/13, accounting for 0.2% of GDP. Accelerating investment in the underdeveloped electric power and financial sectors are two of the most important challenges facing the country. Myanmar consumed 187 KWh of power per capita in FY 2013/14, according to CSO data, 8% of the level in Thailand. There were just 1.3 loans outstanding per 1000 Myanmar residents as of March 2013 according to IMF data, one of the lowest rates in the world.

According to the CSO data, public administration accounted for MML1.1trn ($1.1bn) of gross value added in FY 2012/13 and 2.1% of GDP. It is clear from those numbers that the CSO did not follow standard GDP methodology, which would have assigned greater value to public activities including education and the military. Standard GDP methods would also have assigned a higher value to residential real estate. The government has been working with the IMF and other development groups on projects to improve its economic statistics.

CAPITAL INFLOWS: There are no credible estimates of the trade balance or current account balance, as crucial underlying data is missing. Still, some key recent trends can be drawn: a big surge in exports and rising FDI inflows are funding a similar surge in imports, and are also helping to stabilise the kyat after a bout of depreciation in 2011-13.

FDI inflows are tracked by the UN Conference on Trade and Development (UNCTAD), which combines official data with its own internal data. UNCTAD counted $2.6bn of inward FDI in 2013, up from $2.2bn each year in 2012 and 2011. FDI has since been accelerating, with newly permitted FDI rising from $1.4bn in FY 2012/13 to $4.1bn in FY 2013/14 and another $4bn in the seven months from April to October 2014, according to the MNPED’s directorate of investment and company administration. FDI inflows tend to fall somewhat short of permissions and lag behind by a year or more.

While foreign investment is accelerating, there are ways in which it remains blocked. Some sectors such as retail trade were expected to be opened up, while the current government appeared reluctant to open up others such as agriculture, forestry, precious stone mining, retail banking and retail insurance. FDI accounts for nearly all investment inflows, due to the difficulty of securing cross-border loans and restrictions on other kinds of foreign investment. For example, the government was planning to open a new stock exchange in late 2015 but without foreign participation (see Financial Services chapter). Foreigners are not allowed to own shares in Myanmar firms except specially permitted joint ventures and fully foreign-owned companies.

Lau Sim Yee, director of the consultancy Myanmar Economic Resources International, told OBG the government’s reluctance to open up is more about nurturing a group of allies in the domestic business sector than about keeping foreigners out. He said, “Political leaders aren’t afraid of foreign companies. But they’re still very protective of a small group of business people. They’re afraid that if those people aren’t protected they could be outplayed.”

International merchandise trade flows are only partly tracked. Imports are well documented in other countries’ export data, which put Myanmar’s imports at a total of $18.7bn in 2013, up from $15.5bn in 2012 and $12.6bn in 2011, according to UN Comtrade. But exports are understated even in other countries’ import data, due to smuggling and understating of trade values. Other countries reported importing $10.8bn of goods from Myanmar in 2013, up from $8.4bn in 2012 and $8.5bn in 2011, according to UN Comtrade. But that data appears to missing several billion dollars a year of exports of jade, gems and illegal drugs, enough that 2013 exports were probably in the $15bn-$19bn range (see Trade and Investment chapter).

The central bank tracks trade in services and international income flows, which show substantial net outflows. Foreigners collected $4.1bn in 2013 in services sales to Myanmar and income from investments in Myanmar, up from $3.9bn in 2012 and $3.1bn in 2011, while Myanmar residents collected $1.3bn in services exports and foreign investment income in 2013, down from $1.4bn in 2012 and up from $0.9bn in 2011. The growth in outflows was largely driven by rising income payments to foreign investors in offshore gas fields as their output rose. Inward remittances from Myanmar citizens working abroad are believed to be substantial, but they are poorly tracked because most such workers use the informal hundi remittance network.

With up to 5m Myanmar citizens believed to be working abroad, mostly in Thailand, remittances could be up to $5bn a year, even if the average annual remittance is only $1000 per worker. That is about a quarter of the average annual remittance from temporary migrants to other South-east Asian countries, according to a World Bank study. Remittances via banks, tracked by the central bank and published by the ADB, came to $709m of inflows and $584m of net inflows in 2013.

SHORING UP THE KYAT: The trade and financial performance is leading to a positive inward flow, which has been reflected in a rapid accumulation of central bank foreign exchange reserves and a relatively stable currency. Reserves jumped to $4.5bn in March 2014 from $3.1bn in March 2013 and $0.9bn in March 2012, according to the IMF. An IMF report published in September 2014 projected reserves would grow to $8.8bn by March 2016.

During the sanctions era the kyat’s official exchange rate was fixed but the market value depreciated sharply due to the government’s policy of running large deficits funded by the central bank, which at the time was a department of the Ministry of Finance. The kyat’s market value fell from an average of 249 to the dollar in FY 1998/99 to an average of 1162 in FY 2006/97, according to the IMF. Growing gas exports and Chinese FDI reversed the trend, helping the kyat to strengthen to an average of 772 in FY 2011/12. It weakened again as U Thein Sein took power in 2011 and lifted some key restrictions, such as automobile imports. The kyat traded at 820 to the dollar when the exchange rate was freed in April 2012 and weakened into the 980s to the dollar by July 2013. U Thein Sein also introduced reforms to fiscal and monetary policies, bringing them closer to international standards, including the government’s bond sales and transforming the central bank into an autonomous institution.

Supported by investment inflows, the kyat stabilised around 980 to the dollar through September 2014. As energy prices fell and the dollar strengthened globally in late 2014, the kyat weakened slightly to a range around 1030 to the dollar as of January 2015. The fiscal reforms and inflows have also slowed inflation, although it was moderately high at 5.7% in FY 2013/14, according to the CSO. The IMF forecast inflation to rise to 6.6% in FY 2014/15 and remain at that level to FY 2016/17 and then taper to 5.8% by FY 2019/20.

OUTLOOK: With the pending launch of the Thilawa SEZ, the pace of new FDI permissions continuing to accelerate, older investments in mining and offshore gas ramping up to planned output levels, and additional economic sectors likely to be opened up to foreign investment in the future, there are good reasons to believe the economy will continue to enjoy exceptionally strong growth in the years ahead. While it will take many years of intensive foreign investment and rapid growth to catch up to other major South-east Asian countries, Myanmar has exceptional potential for a country in its income range and considerable hidden resources. In the near term, much will depend on the outcome and aftermath of national elections due in autumn 2015. Though the immediate outlook may be uncertain, there is a general consensus in business and society that the country has set itself on an irreversible course of market reforms and integration with the global economy.


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The Report: Myanmar 2015

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