After its historic transition to civilian rule following years of incremental reforms, Myanmar is enjoying a period of exceptional growth. The country’s potential is being unlocked. Once an outlier in the region, Myanmar now has the fastest-growing economy in ASEAN, and is seen as a source of regional strength and a destination of opportunity. Further liberalisation is planned, international investment is expected to remain strong and the domestic economy is becoming increasingly efficient. Optimism reigns as the experiment in reform has proven durable. While many emerging economies struggle to maintain a high rate of expansion in the face of global uncertainty, Myanmar is set to remain on course.
Gdp Growth
According to the Asian Development Bank (ADB), Myanmar’s GDP grew by 7.2% in 2015, following 8.7% growth in 2014 and 8.4% in 2013. The rate is forecast at 8.4% in 2016. That compares favourably with neighbours and peers. The growth rates in Cambodia and Laos are both expected to be around 7% in 2016, and the Philippines and Vietnam are set to see growth of around 6%. Malaysia will expand by 4-5%, Thailand by less than 4% and Singapore by under 2%. Growth in Myanmar is expected to accelerate to 8.3% in 2017.
Challenges
The strong performance is being achieved despite a number of challenges. Flooding in 2015 – with intense rains and landslides in July and August – and in 2016 took a toll on growth as harvests were damaged and transportation impeded. An estimated 20% of cultivated land was devastated. Inflation is a persistent problem, with structural issues keeping it high, while the floods caused a spike. Debt is becoming a concern, given persistent government deficits, and foreign direct investment (FDI) slowed for a period in 2016.
Reforms that are being undertaken, which are important for growth, might become stalled as the country transitions to the new administration. Myanmar is also dealing with a protracted peace process, with State Counsellor Daw Aung San Suu Kyi noting that sustained growth is not possible until a deal is finalised. Myanmar may lack the capacity to effectively carry out all the changes that are needed in such a short period of time. “Growth is strong, though a more challenging external environment exposes the economy to risks,” said Habib Rab, senior country economist at the World Bank.
Exceptional Potential
Myanmar has great economic potential. It has reserves of natural resources, including gold, silver, platinum, coal, tin, tungsten, zinc, copper and gemstones, and it has a wide range of climatic conditions that allows for the growing of everything from tropical fruits to vegetables. Importantly, water is abundant.
Myanmar has a young population, with a median age of 27. A wave of workers will be entering the market at the right time, yielding a major demographic dividend. The situation is very different from that in countries struggling with ageing populations. With more than 50m people, the country has a sizeable domestic market. Myanmar is also well positioned geographically. Situated between China and India, and next to South-east Asia, it was a centre of commerce for two millennia.
In modern times Myanmar’s economic fortunes have ebbed and flowed. In the 19th century it was the region’s wealthiest country, and it was the largest exporter of rice in the world until 1948. The economy suffered during the Second World War as a result of invasion. While the country gained independence in 1948, it has faced insurgencies continuously through to recent times.
With the introduction of the Burmese Way to Socialism in 1962, industry was nationalised. The economy stagnated under centralised planning just as the rest of the region started flourishing on the implementation of liberal policies. Economic reform began in Myanmar in 1988, but progress was slow. Inflation and budget deficits persisted. Tax reforms were not implemented and state-owned enterprises were not privatised. Cosmetic changes were made, but the government continued to intervene heavily in the private sector.
US sanctions on Myanmar, initiated in the 1990s, greatly slowed economic development. Some US companies left and others were unable to enter the country, while business was held back by the lack of connectivity to the dollar banking networks. The EU has also had sanctions in place since the 1990s. Japan did not follow, though it did limit the assistance it provided to the country.
Comeback Of A Nation
Extensive reform, both political and economic, has been in the works for some time. The Roadmap to Democracy was initiated in 2003, a new constitution was written in 2008 and parliamentary elections, the first in 20 years, were held in 2010. Though the military maintained a firm hand on the government, the elections were a watershed event. Large-scale changes were initiated that took Myanmar towards a more liberal system. Market economics were affirmed as the dominant mode in the country, while nationalism as a core economic principle was abandoned. With the 2015 election, which included the participation of the opposition National League for Democracy (NLD), the path ahead was set.
Since 2010 major economic reforms have been initiated. A large number of laws were passed to normalise the legislative environment following years of military control (see analysis). Structural improvements were also made. The exchange rate was unified in 2012, new regulations on banks were introduced and foreign banks were licensed. Since 2013 the budgets of state-owned enterprises have been separated from the budget. Treasury bill auctions were introduced in January 2015.
The Framework for Economic and Social Reform, issued in 2013, set a number of priorities for Myanmar. Included in the list were tax and fiscal reform, trade liberalisation, investment liberalisation, financial reform, the development of governance and the promotion of transparency. The reforms undertaken since the country started to initiate changes in earnest have been credit positive, according to Moody’s. While Myanmar does not yet have a credit rating from any international agency, the central bank has been working with Citigroup and Standard Chartered Bank to get a credit rating. The moves made so far are seen as improving the business environment. Moody’s added that the right sort of liberalisations will boost the country’s current account position, thus supporting its rating when issued.
The country’s World Bank doing business ranking has already improved markedly. In 2015 Myanmar was 177th out of 189 countries; in 2016 it rose to 171st, and at the start of 2017 it was in 170th place. In the starting a business category it rose from 189th position in 2015 to 170th in 2016 and then to 146th in 2017. The first year in which Myanmar was ranked at all was 2014, when it was in 182nd place.
New Direction
The 2015 election and the choosing of Htin Kyaw as president in 2016 took the country to the next level. With the NLD participating and winning a majority of the votes cast, the transition to effective civilian administration was finally achieved. The new government quickly established a tone suggesting further reform, producing a 100-day plan and a 12-point programme.
The 12-point economic programme issued in July 2016 is the cornerstone of the new government’s agenda. Not only is it comprehensive, but it also suggests that policy will be implemented that favours liberalisation. The programme makes a formal commitment to the private sector, and doing business issues are set to be addressed. The government calls for more transparency on the budget, reform of state-owned enterprises, reform of the tax system, and an improvement in both the structure and the operations of Myanmar’s capital markets. The country’s mining sector will be revamped to make extractive industries more transparent. To this end, in 2014 Myanmar joined the Extractive Industries Transparency Initiative, which is a global standard for the open and accountable management of oil, gas and minerals resources (see Mining chapter). The government also intends to promote the building of more infrastructure, improve the agricultural sector, make FDI a high priority, and promote small and medium-sized enterprises.
Immediately following the NLD’s victory, sentiment quickly turned positive. The kyat rallied, strengthening from 1308 to the dollar in December 2015 to 1165 in May 2016. With liberal elements achieving a clear victory, it was widely believed that the country was beyond the point of no return and would not close back up. Japan in particular had been sitting on the sidelines, not making major commitments until the opposition came to power.
Zones
Special economic zones (SEZs) are seen as key to Myanmar’s development, and projects are under way or planned at Dawei, Thilawa and Kyaukphyu. Once the NLD won the election, confidence in the economy surged and Japan’s government signed on as a partner in Dawei SEZ.
Japanese commitment to the Dawei project had long been uncertain. The country has tended to favour the Thilawa project as it is seen as being more Myanmar-focused, viewing Dawei as more important for Thailand. Japan has taken its time in analysing, researching and discussing projects, but is starting to feel the pressure of China’s increasing presence in the region, and its commitment has put Dawei SEZ back on track. China, meanwhile, is leading the development of Kyaukphyu SEZ. Myanmar’s SEZs will provide platforms for investment that allow companies to enter the market quickly while the government works on more general, nationwide reform measures (see analysis).
Criticism
Despite expressing the right sentiments, the government has been the recipient of some criticism. Although a 100-day plan was announced, none was actually published. Some ministries issued their own outlines, but no comprehensive campaign has been introduced. The 12-point plan was seen by some as lacking in substance and being overly broad. Questions have thus been raised about how exactly the government hopes to reform the economy, especially when it comes to stateowned companies, of which there are 50.
Other concerns have been expressed. It has been noted that most of the recent legislative progress was made under the previous administration. The outgoing Parliament passed a series of laws, some of which were of fundamental importance, while much of what the new Parliament has done is the result of efforts undertaken in the years since 2010. The peace process appears to be distracting the new administration, while dramatic changes have been avoided for fear of creating tension with the bureaucracy. As for the bureaucrats themselves, they are somewhat cautious of making any moves without clear instruction from above.
Some points of intransigence have been identified. The new government has decided to keep Kyaw Kyaw Maung as chairman of the central bank. He is known for being very conservative, making him the target of complaints from the financial sector. However, keeping him on board ensures stability and continuity. Some observers also say that it is important to have someone in control with a memory of the banking crisis of 2003.
Myanmar Investment Commission
Most frustrating for businesses is the lack of action from the Myanmar Investment Commission, which is perceived to have been moving slowly since the government came to power. This contributed for a time to a steep decline in the amount of foreign investment entering the country. Some businesses have said that expansion plans have been put on hold due to a lack of direction, and the low level of interest from some larger countries has been a surprise. More inflows were expected from the US, the UK and Japan after the lifting of the sanctions, but most commitments have instead come from Thailand, Singapore, China, South Korea and Hong Kong. “Since April 2016 there has been a slowdown,” said Dr Marlar Myo Nyunt, director at the Ministry of Planning and Finance’s Directorate of Investment and Company Administration. “The new government wants to make sure everything is done correctly for the economy. But our rules and processes have not changed over the past five years.”
Questions have been raised about whether the government has the human resources and the skill base to implement the 12-point programme. As the opposition for so long, the NLD lacks experience, and years of working relatively isolated from the world may have left the country unprepared for the tasks at hand. Negotiating contracts, building financial markets, writing new laws, approving investment and enforcing taxation are just some areas where more capacity is needed.
Balanced Opening
Despite the choppy transition from old to new, the administration is still receiving favourable reviews from many quarters. The 12-point document touches on all the major points while establishing reasonable parameters for state participation. It calls for an economy that is led by the private sector, but contemplates the government being active in some selected areas. For example, investments beyond the capacity of the private sector will be undertaken by the state. “Some people were disappointed in the 12-point plan, but it is moving the country in a market-oriented direction. The importance of that policy statement is that it shows they want to move in the right direction and open up to investment,” Alyce Abdalla, economic unit chief at the US Embassy in Yangon, told OBG. Disconnects in the transition are understandable. Under military rule, the government was compelled to sign off on as much as possible. With the country isolated by sanctions, it had to take what it could get in terms of foreign investment and could not afford to be picky. The new administration must be more careful in evaluating investments. It must operate more normally, and in accordance with internationally accepted principles, which gives the impression that it is moving more slowly.
Some believe that too much has been made of the capacity issue. While it may seem as though not much is being done, public sector staff are busy, and many are capable and experienced. The civil service is better performing and deeper than commonly believed, they argue. “The 12 objectives set out sound policy priorities,” said Rab. “There is important policy and institutional reform progress on the ground to address emerging economic challenges.”
Forces beyond the government’s control are also at work. US sanctions were lifted, but some remained until the end of 2016. While US companies were generally able to do business before that point, confusion surrounding the policy resulted in some potential investors opting to wait. Compliance departments have tended to take a cautious approach when it comes to Myanmar.
A number of companies are also finding the land situation problematic. The lack of available space, the influx of foreign funds and speculation have caused prices to rise to levels that make doing business prohibitively expensive.
GDP per capita is $1200, making Myanmar a middle-lower-income country, a status reached in 2015. That compares with $5816 in Thailand, $1813 in Laos, $2111 in Vietnam and $2899 in the Philippines. Myanmar remains heavily dependent on basic industries. The agricultural sector is the source of 30% of GDP and as much as 60% of employment. Natural resources rents are 10.2% of GDP, which is high compared with other countries in the region. For Thailand the figure is 3.7%, for Malaysia 8.2% and for Vietnam 7.6%. The world average is 3.7%.
In its 2015 Article IV consultation, the IMF saw continued growth of 8% or higher until at least 2018. It said that Myanmar is doing well, and that it will continue to do so if structural reforms are carried out as planned and FDI is strong. The ADB believes that Myanmar’s long-term growth potential is around 8%, but cautioned that this will only happen if reforms that it has committed to are pursued. According to the bank, transparency, less bureaucracy and better education are essential.
Going Strong
While Myanmar has historically been dependent on natural resources and agriculture, the economy is now driven by activity across the board. Other sectors are developing rapidly, with the broader domestic economy – which includes construction, manufacturing and services – responding well to liberalisation. A few segments have been particularly strong. Tourist arrivals were up 19% in 2015 and up four-fold since 2011, with revenues of $2.1bn. Exports of garments rose by 28% in the same year as investments poured in.
Development of Myanmar’s traditional strengths is also seen as essential. It arguably has the best conditions for agriculture in Asia, but the land is not used productively; investment is low, farm policy is weak and agricultural profits are modest. According to the ADB, the upside is tremendous if the sector is better managed. Mining is in a similar position. Good policy can take the sector from one that functions poorly – due to land disputes, civil unrest and low levels of transparency – to one that is of prime interest to international investors.
According to the ADB, regional integration will be a significant factor in the encouragement of further growth. As the ASEAN Economic Community develops links will strengthen. The country’s fortunes will also depend on global conditions. The performance of countries to which Myanmar is tied has been mixed in recent years. The outlook is much the same. A weak West and an inconsistent China are being balanced somewhat by a strong India and recovery in South-east Asia. Growth in the Asian region is forecast at 5.7% in 2016 and 2017.
Debt Under Control
Myanmar has improved its key metrics. Its debt-to-GDP ratio fell from a high of more than 200% in 2001 to a low of less than 50% in 2015, while external debt is only 15.7% of GDP. Domestic public debt is forecast to remain steady at around 17% of GDP through to 2017/18.
In 2012 Japan reduced the amount owed by Myanmar, bringing the country to a position of low risk of debt distress. However, only 20% of the remaining debt is concessional. As such, Myanmar is vulnerable to slowing growth and lack of spending discipline. U Maung Maung Win, then-permanent secretary of the Ministry of Finance, told the local press in 2015 that Myanmar had MMK10.2trn ($8.3bn) of foreign obligations in total, but he added that the figure would be reduced to MMK9trn ($7.3bn) by early 2016 due to debt repayments.
Steps are currently being taken to improve controls. In August 2016 Parliament approved the country’s medium-term debt management strategy, while a new debt law was ratified in 2016 and a debt management office was created. The new law, crafted under the guidance of the ADB, works to consolidate the issuing of debt. Under the framework, only the Ministry of Finance is allowed to authorise new paper. Any other government entity seeking to borrow, including state-owned companies and localities, must go through the government or borrow directly from it. The law also calls for the promotion of the domestic bond market.
The new law replaces the 1920 Government Securities Act and to a degree clarifies practices already in existence. Under the Union Government Law 2010, only the national government had the power to issue debt. However, the new law states that local governments can conduct their own financing but only if fundraising is done with government consent.
Deficit
Government finances have been relatively stable. According to the World Bank, the fiscal stance in the five years prior to the recent election was “moderately prudent”, with the deficit at less than 5% of GDP. Yet the bank noted that the position was helped by one-offs, such as the sale of banking and telecoms licences, and payments related to gas contracts. Without them, the fiscal deficit would have been a few percentage points higher during some years. The long-term trend has been positive; the deficit was above 6% of GDP in 2000. However, higher spending, in part the result of the election, led to a higher deficit. The shortfall was around 4.8% of GDP in 2015, up from 2.9% in 2014. The IMF would like to see it come down to 4%. Total revenue is forecast to fall from 26.4% of GDP in FY 2014/15 to 20.8% of GDP by 2017/18, but a drop in expenditure is expected, from 29.3% of GDP to 25.3%. “To say that a budget deficit is a bad thing is simplistic. The question is how able or how quickly the country is to repay its debts responsibly and securely,” Serge Pun, chairman of Serge Pun and Associates, told OBG. Budget transparency and preparation are gradually improving. According to the World Bank, the Union Budget Law imposes annual borrowing limits, and the government has started to prepare debt strategies to ensure a sound borrowing mix. Historically, the government has relied on the monetisation of debt, selling Treasury bills to the central bank, which fuelled inflation. Reforms are now being made to improve funding. From 2010 states and regions started to set their own budgets, and sources of funding are being diversified. Domestically, Myanmar is shifting towards the sale of bills and shortterm bonds to local banks. The government is also starting to raise funds from international sources, some on a concessional basis. The 2016/17 budget was passed quickly by the previous Parliament and took aim at the deficit, setting future targets that should help achieve balance. In the longer term the government hopes to raise taxes, improve efficiency and address issues at state-owned enterprises.
Trade Imbalances
The trade deficit has been high, hitting $1.5bn in the first four months of FY 2015/16, and the IMF forecasts that it will remain above 10% of GDP through to 2018. The current account has been negative for over a decade, hitting 8.9% of GDP in 2015. The IMF is forecasting an overall positive balance, mainly due to financial inflows. Exports have been slowed by several factors. Commodity prices have fallen, causing the per unit value of overseas sales to decline, bans on the export of raw materials have been put in place to encourage domestic processing and floods have reduced agricultural production. However, as exports fell so did imports, leading to a decline in the trade deficit, which in the same period in 2014/15 hit $2.15bn. Imports had been heavy due to the purchase of capital goods, oil and consumer goods, but the weak kyat helped reduce demand.
FDI has been doing well, despite the dip in the first few months of FY 2016/17. Total FDI hit $9.4bn in the fiscal year ended March 2016, up from $8bn the year earlier and $4.1bn in the year ending March 2014. The government has set a target of $8bn for the year ending March 2017. Despite concerns about foreign investor interest in the country in the months after the election, the FDI situation seemed to improve after the administration was settled in.
FDI is a key part of Myanmar’s growth strategy. In addition to funding for agriculture and mining, the government would like to see investment in light industry, with the subsector, particularly garment manufacturing, seen as a growth driver.
Inflation
Inflation remains a concern. It peaked at 16.2% in October 2015, averaging 11% for the year. The country has faced periods of much more serious price increases in the past. In 2002 the consumer price index was up 42%, in 1989, 58% and in 1974, 57%. The recent spike was caused in part by the flooding. Monetary policy has also been cited, in addition to bottlenecks in the economy. Inflation will moderate as agricultural recovery from the floods brings down food prices, but it is forecast to have remained high at 9.5% in 2016.
While the country has been praised for the unification of the exchange rate, the management of currency remains a concern. According to the ADB, interventions have been costly and counterproductive. Following the unification of the rate, the kyat fell from 822 to a low of 1314 to the dollar in late 2015. Despite a strengthening after the election, it weakened again in 2016 and stood at 1365 to the dollar at the end of the year. The ADB said that growth can only be maintained if the monetary authorities are independent and the central bank has the tools to manage policy.
The financial sector is an area of focus for liberalisation. Reforms at the central bank level, where improved supervision and better prudential requirements are being emphasised, will help to stabilise growth and ensure it continues. The rise of private sector banking is also helping, according to the IMF.
Infrastructure
Emerging after decades of isolation, Myanmar is struggling with weak infrastructure. What exists has not been properly maintained, and what is needed is beyond Myanmar’s capacity to finance domestically. Only 40% of roads are paved, while many of the more developed areas suffer from heavy traffic. The lack of strong transport links is impacting the economy. It makes for long commutes, slow deliveries, increased logistics costs and difficult internal travel for international investors.
In the World Economic Forum’s “Global Competitiveness Report 2013-14”, Myanmar was ranked 139th of 148 countries, with infrastructure cited as a major problem. It was 131st in the 2015-16 report, ranking 138th in the infrastructure category. The country faces a $60bn transport infrastructure deficit up to 2030. To fund the gap, it will need the support of investment partners. In August 2016 Japan offered Myanmar $852m in loans for infrastructure. China’s commitment is uncertain given disagreements over existing projects, while India lacks the funding ability to sponsor the huge projects needed.
Power is another issue. Only 30% of the country is on the grid, and just 14% in rural areas. Power outages are still common, and the lack of reliable electricity supply is a bottleneck in development. The government has set a bold target of 100% electrification by 2030 (see Energy chapter).
Outlook
The international community has expressed great optimism about Myanmar. It recognises the challenges the country faces, but sees these as manageable. Investors, bankers, multilaterals and corporations note that while policy is still relatively undeveloped, so far the administration has done a good job of reforming the laws it inherited. However, the tasks that remain are significant. “Myanmar still ranks incredibly poorly according to the World Bank’s ease of doing business index,” Alexander Jaggard, Myanmar country representative at Mekong Economics, told OBG. “This demonstrates the scale of the task at hand in regards to the various reforms and rewriting of laws to encourage business and investment in the country.” Myanmar must now focus on specific problems, such as electricity supply, and monetary and fiscal policy. Efforts must also be made to improve other fundamental areas – including education and land policy – if long-term, sustainable growth is to be achieved.
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