Growing economy following higher foreign investment and improved public spending in Myanmar

Occupying a strategic position at the crossroads of India, China and Thailand, and now in its seventh year of sweeping economic liberalisation and political transition, Myanmar remains one of the fastest-growing economies in South-east Asia. Although recent GDP growth has moderated from the double-digit highs of the early 2000s, it has remained above 5% for more than 25 years, supported by robust natural resource exports, steady foreign direct investment (FDI), rising incomes and private consumption, and rapid expansion of the industrial and services sectors.

However, external headwinds and internal conflict have dampened the near-term outlook. Natural gas prices and exports have slumped, and both the fiscal and trade deficits have widened, with rising imports pushing inflation into the double digits. Although many economic reforms have been rolled out in the years since 2011, the investment reforms the country introduced in 2012 failed to significantly augment FDI inflows, and Myanmar’s economy remains resource dependent, with billions of dollars of transportation and infrastructure investment required to meet ambitious industrialisation and electrification targets.

The government is making an effort to shore up its reserves, moving towards fiscal rationalisation and rolling out legal reforms to improve tax collection and the ease of doing business. Alternative financing mechanisms, including sovereign bond issuance, public private partnerships (PPPs) and concessional loans, should also help to keep the country’s ambitious infrastructure agenda on track, brightening the mid- and long-term outlook, even as internal conflict in Rakhine State clouds more immediate growth forecasts.

Liberalisation History

Under British colonial rule, Myanmar was the wealthiest country in Southeast Asia, as well as the world’s largest rice exporter. With the formation of a parliamentary government in 1948, Prime Minister U Nu rolled out nationalisation policies, adopting central-planning measures that reversed decades of economic gains. Rice and mineral exports plummeted during the 1950s, and spending was financed by printing money, with inflation sky-rocketing as a result. Following a coup in 1962, the new military government adopted an economic development scheme called the Burmese Way to Socialism, which nationalised all industries except agriculture; its implementation saw Myanmar become one of the world’s poorest countries, with the UN classifying it as a least-developed country in 1987.

Moderate liberalisation began in 1988 when the military government abandoned totalitarian socialism, and permitted foreign investment in sectors such as oil and gas. In 2008 the ruling State Peace and Development Council unveiled a new constitution as part of a planned transition to democracy.

Opening Up

The 2010 elections that followed saw the military-backed Union Solidarity and Development Party take power, and in 2011 then-President Thein Sein began a sweeping economic and political reform process which included rolling out anti-corruption legislation, permitting foreign investment in a broader array of businesses and sectors, and introducing a currency exchange rate and taxation.

The Asian Development Bank (ADB) was one of the first major international lenders to formally re-engage with the country in January 2013, providing a $512m loan to improve banking services, infrastructure and education. In the same month, the government reached deals with the World Bank, the creditors of the so-called Paris Club, and the governments of Norway and Japan to cancel or refinance around $6bn, more than 60% of the country’s total debt.

The EU removed the majority of its economic sanctions on the country later in 2013, and the US government followed suit in 2016, with cumulative approved FDI rising from $719.7m during FY 2006/07, which ran from April 1 to March 31, reach $6.65bn in 2016/17, and $4.48bn during the first half of 2017/18 alone.

Rising Incomes

Myanmar’s annual GDP growth is among the highest in South-east Asia accelerating markedly over the previous two decades, peaking at an all-time high of 13.84% in 2003, according to the IMF. GDP growth has not fallen below 5% since 1991. GDP per capita has also risen sharply since the early 2000s, jumping from $220 in 2003 to $644 in 2008, $1169 in 2013 and a high of $1275 in 2016. Poverty has eased as a result, and the World Bank reports that poverty rates fell from 32.1% in FY 2004/05 to 19.4% in 2015. In November 2015 the government announced it hoped to lose its least-developed country status with the UN. One criteria for losing the classification is attaining a GNI per capita of at least $1242. By this metric, Myanmar has succeeded, with a GNI per capita that rose to $5070 in 2015 from $1160 in 2001. Its population increased by 12.4% over the same period, reaching 52.4m in 2015 and 52.9m in 2016. As a result, private consumption has become a major economic growth driver, with the World Bank’s “East Asia Pacific Economic Update: Balancing Act” from October 2017 reporting that it currently accounts for 50% of GDP.

GDP By Sector

Today, Myanmar’s economy is dominated by the services sector, which accounted for nearly half of GDP in 2016, followed by industry with 27.5% and agriculture with 26.3%.

The World Bank reports that industry has recorded the fastest expansion in recent years, growing by 12.1% in 2014, 8.7% in 2015 and an estimated 8% in 2016. Services followed with 9.1% growth in 2014, 8.4% growth in 2015 and an estimated 7% growth rate in 2016. Affected by severe flooding in 2016, the agriculture sector has recorded more moderate growth, rising by 2.8% in 2014 and 3.4% in 2015, but contracting by an estimated 0.4% in 2016.

The bank forecasts industry will continue to be the fastest-growing sector of the economy, with growth of 8%, 8.3%, and 8.4% in 2017, 2018 and 2019, respectively. The services sector is expected to grow by 7.2%, 7.3% and 7.4% over the same period, while agriculture is forecast to grow by 3.5%, 4% and 4.1%.

Recent Growth

Although it has moderated from earlier double-digit highs, GDP growth has remained robust in recent years, falling from 5.3% in 2010 to 5.6% in 2011, 7.3% in 2012, 8.4% in 2013 and 8% in 2014. Growth dropped off slightly since 2015, reaching 7% that year and 6.1% in 2016, according to the IMF. In its latest Article IV Consultation for Myanmar, which concluded in November 2017, the IMF reported that the country’s economy stabilised during FY 2016/17.

GDP growth came in lower than expected at 5.9% in 2016/17, on the back of weaker agricultural production, falling exports and the temporary suspension of some construction projects in Yangon. The country’s near-term growth trajectory is expected to be weaker than previously forecast, owing to subdued domestic investment and uncertainties regarding internal conflict in Rakhine State, particularly within tourism.

Long-Term Prospects

However, the country’s long-term economic outlook remains positive, with rising investment in transport and power infrastructure expected to drive GDP and industrial growth, and supporting a sharp increase in both personal income and consumer spending. In September 2014 the ADB forecast GDP growth could reach as high as 9-10% by 2030, with GDP per capita rising six-fold to range between $4333 and $5201 per person under a highgrowth scenario; this would potentially see Myanmar catch up with China and Thailand to become an upper-middle-income economy.

In 2013 McKinsey Global Institute forecast the economy could quadruple from 2010 levels of $45bn to $200bn in 2030, supported by robust industrialisation, with the manufacturing industry set to grow from $9.8bn to $69.4bn over the same period. The population of consumers with discretionary spending power is also set to soar over the next 20 years, rising from 2.5m in March 2013 to 19m in 2030, which would see annual consumer spending triple from $35bn to $100bn. McKinsey noted, however, that the country will need to maintain political stability and source significant investment in infrastructure and human resources to realise its full potential.

The ADB, for its part, notes that boosting agricultural productivity, reducing electricity costs and attracting significant levels of FDI will be critical longterm priorities for the country.

12-Point Plan

In November 2015 the National League for Democracy (NLD), led by Nobel-laureate Daw Aung San Suu Kyi, won the national elections in a landslide victory. In July 2016 the new administration released a 12-point economic policy, the first major economic development strategy to be rolled out under a democratically elected government.

Although the three-page document was criticised by some as vague, it provides important clues to the future of economic policy development in Myanmar. National reconciliation and inclusive growth are the plan’s primary objectives, with an emphasis on foreign investment and private sector participation in economic development, improved public financial management and transparency, and industrialisation and job creation, in particular throughout the manufacturing and services sectors.

Financial Management

The third point of the 12-point plan aims to strengthen public financial management, fiscal prudence and macroeconomic stability, including improving the efficiency of public spending, budget transparency and the privatisation of “appropriate” state-owned enterprises.

Although economic growth remained strong for more than 20 years, the World Bank reported in October 2017 that public investment declined from 6.2% of GDP in 2015/16 to 5% in 2016/17, largely in response to growing fiscal constraints, with falling exports and lower government revenues and tax collection weighing on the country’s fiscal balance in recent years.

The government moved to rationalise spending in the FY 2017/18 budget, although revisions will likely see the deficit remain stubbornly high in 2018. Stakeholders are now looking to improved tax collection, reduced central bank borrowing and new financing mechanisms, including bond issuance, concessional loans and PPPs, to deliver major planned projects.

Budget Cuts

In March 2017 the Myanmar Parliament approved a MMK20.59trn ($15.7bn) budget for FY 2017/18, lower than an earlier draft budget of MMK20.89trn ($16bn), after agreeing to cut the budgets of 17 ministries and 12 union-level organisations, including the suspension of 130 existing and future projects planned by the Ministry of Industry under the 2017/18 National Planning Bill.

Budget cuts, which amounted to more than MMK300bn ($229.1m), were not applied to the ministries of defence, tourism or information, or to the Constitutional Court, according to a local press report. Out of total planned spending, the Ministry of National Planning received the largest share, approximately 22% of total spending, followed by the Ministry of Electricity and Energy, which was allocated 20%. Education and health received a combined 13%, slightly less than the Ministry of Defence, which is forecast to receive MMK2.9trn ($2.2bn), or 14%.

Revisions

Although the fiscal deficit has shrunk in recent years, it remains significant. The IMF reports that Myanmar’s fiscal deficit fell from 4.5% of GDP in 2015 to 3% of GDP during FY 2016/17, while the World Bank reports that a gradual reprioritisation of public investment, government revenue reforms and concessional loan disbursements should help ease fiscal constraints, forecasting Myanmar’s public deficit will moderate to 4.3% of GDP in 2018.

In October 2017 President U Htin Kyaw announced a MMK4trn ($3.1bn) budget deficit for FY 2017/18 equivalent to 4.38% of GDP, after revisions brought spending up to MMK22trn ($16.8bn). The deficit was originally estimated at MMK3.6trn ($2.7bn). With the deficit approaching the government’s limit of 5% of GDP, the vice-president, U Myint Swe, told media the government was planning to focus on essential expenditure, including re-development of townships and infrastructure construction along the border between Rakhine State and Bangladesh.

With the country’s financial year set to move from April 1-March 30 to October 1-September 30, changes to the country’s budget year will necessitate further revisions. In December 2017 the Ministry of Planning and Finance (MPF) announced that an interim budget of MMK212bn ($161.9m) had been proposed for Yangon for the period between April 2018 and September 2018. The MPF reports that the budget will be used for road and bridge construction, electricity network extensions and drinking-water distribution projects.

Inflation

Inflation moderated to 6.8% in FY 2016/17, down from 10% during FY 2015/16. In October 2017 the World Bank noted that while food price inflation moderated throughout FY 2016/17, it spiked in late 2016 following a sharp depreciation in the kyat; the country’s real effective exchange rate depreciated by 9% between August 2016 and March 2017. With inflation dropping off, annual growth in money stock moderated to 19% in FY 2016/17, compared with 26% in FY 2015/16, thanks in part to a continuing policy limiting central bank financing of the budget.

Central Bank Lending

Room for improvement in this regard nonetheless remains. In October 2017 local media reported that the government had requested a MMK1trn ($763.8bn) loan from the Central Bank of Myanmar (CBM) in order to finance its projected FY 2017/18 budget deficit, with newspapers reporting that the country requires MMK5.2trn ($4bn) to finance its current deficit, of which 66% is expected to be borrowed from domestic sources.

The CBM had commonly funded the domestic deficit in the years to 2015, but given the effect this has had on inflation, the country is increasingly moving towards bond issuance to finance its spending needs. According to local media reports, out of the MMK3.4trn ($2.6bn) in domestic borrowing required to finance the FY 2017/18 budget, the government hopes to cover 70%, or MMK2trn ($1.5bn), through bond and Treasury bill sales.

In September 2016 the government issued its first bond, a MMK1.2trn ($916.8m) instrument with a coupon rate ranging from 8.6% to 9.6%, although it was not fully subscribed (see Financial Services chapter). However, as fiscal management and the stability of the financial services sector improve, bond issuance is expected to reduce the CBM-funded portion of the deficit from 40% in 2016/17 to 30% in FY 2017/18 and 20% in FY 2018/19, with the bank set to halt budget lending the following financial year.

Tax Shortfall

The 12-point plan’s third point also aims to streamline the tax system to boost public revenue. Improved tax collection will be critical for future spending plans, with international press reporting in November 2017 that at just 7.5% of GDP, Myanmar’s tax collection rate is the lowest in South-east Asia, and one of the lowest globally. Although this is an improvement over 2011 levels, which were less than 4% of GDP, international media reports that tax collection realisation in Thailand and Cambodia currently stands at 16% and 14%, respectively, indicating that there is significant scope for improvement in Myanmar.

The country’s military history plays a role in low tax collection rates; under the previous regime, ruling generals earned most of their income from jade, narcotics and construction, and taxes were seldom levied, with municipal services reflecting low levels of funding. Even today, the official municipal charge for garbage collection is MMK600 ($0.46), although the international media reports that citizens still pay informal street cleaners MMK200 ($0.15) per bag in order to have their waste taken away. The complicated nature of the tax system compounds the problem. Property taxes are levied based on inconsistent criteria, such as the number of storeys in a building, or the materials used to build it, with no efforts to account for inflation, and no digital record-keeping.

Implementing Tax Reforms

The government has already moved to undertake a series of tax reforms aimed at augmenting public revenue and tax collection. A specific goods tax (SGT), which is similar to an excise tax, was implemented in 2016, imposing additional tax on items considered hazardous to the consumer’s health, or to the environment, including tobacco and alcohol. The SGT changes annually with the promulgation of the Union Tax Law (UTL), which is enacted by the Union Parliament. On March 1, 2017 the UTL implemented major changes to SGT rates, as well as goods subject to commercial tax.

Although no new goods were added to the commercial tax base in 2017, legal consortium VDB Loi reported that SGT rates were increased for most tobacco, liquor and wine products, while SGT rates for motor vehicles are now based on engine power. Cigarette taxes rose from between MMK3 ($0.0023) and MMK5 ($0.0038) previously, to MMK4 ($0.0031) to MMK6 ($0.0046), while wine taxes rose from between MMK50 ($0.04) and MMK3375 ($2.58) per litre, to MMK81 ($0.06) to MMK5254 ($4.01).

At the same time, vehicle taxes, which had previously been set at 25%, now range from 20% to 50% depending on the size of the engine. VDB Loi reports that 2017’s UTL tax collection target was set at $500m, a 15% increase over the target in 2016.

Infrastructure

While this should help offset flagging exports and government revenue, the administration’s ambitious infrastructure development agenda will also require increased deployment of PPPs, as well as concessional loans from international lenders and development partners. Critically, the 12-point economic plan’s fourth point focuses on infrastructure development, with policymakers reporting that the government is currently drafting an infrastructure policy focused on producing and distributing electricity, building and maintaining rural roads, and improving the country’s under developed port facilities.

Development and implementation of the infrastructure policy presents numerous opportunities for private sector investors. The ADB, for example, estimates that the country will require $60bn of investment between 2016 and 2030 to close its transport infrastructure gap, while the Myanmar Energy Master Plan projects the country will need between $30bn and $40bn of new investment to upgrade the national grid and meet rising electricity demand. Private sector participation is already set to play an important role in future power plant development (see Energy chapter).

Although Myanmar has yet to pass dedicated PPP legislation, PPPs have already been deployed in a number of instances throughout the country’s power, energy and telecommunications sectors. According to the “Reference Guide” put together by the World Bank’s PPP Knowledge Lab, $1.98bn worth of PPPs have reached financial close in Myanmar since 1991, the majority of which were for new power plants.

Concessional Loans

Concessional loans are also expected to play a much larger role in boosting infrastructure development, with the IMF reporting in December 2016 that reliance on external concessional financing is forecast to increase over the medium term, as lenders like the ADB and World Bank gradually step up their activities in the country.

In June 2016, for example, the ADB announced that it plans to provide $1.75bn in financing to the country between 2017 and 2022. However, internal conflict in Rakhine State could weigh on such lending activities; the World Bank announced in October 2017 that it is suspending a planned $200m loan to Myanmar, on the grounds that it is “deeply concerned by the violence, destruction and forced displacement”.

Japan and China remain the largest lenders to Myanmar, with $1.98bn and $1.52bn respective of loans on the books during FY 2015/16, representing a combined 14.1% of total public debt, according to the IMF. External debt commitments to multilaterals and other concessional lenders are expected to increase, although the fund anticipates lags in disbursement owing to weak project implementation. In the longer term, non-concessional borrowing should improve as Myanmar’s development enables better access to international financial markets.

Trade & Investment

The 12-point economic development plan’s sixth, seventh, eighth and 10th points present new opportunities for private sector participation in Myanmar’s efforts to bolster the economy. The sixth point aims to boost job creation and reduce domestic poverty, emphasising development of three special economic zones (SEZs) in Thilawa, Dawei and Kyaukphyu, while the seventh places an emphasis on promoting foreign investment.

Although an earlier investment law was promulgated in 2012, the World Bank reports that it did not help FDI inflows sustain momentum. The new Investment Law, which took effect in April 2017, will offer considerable incentives to investors in priority sectors and SEZs in support of the 12-point plan’s target. “Regarding the sectors that offer the best investment opportunities, I believe we can describe infrastructure as the immediate low-hanging fruit. Myanmar needs to upgrade its infrastructure to attract more investment,” Melvyn Pun, CEO of Yoma Strategic Holdings, told OBG. “In addition, there are two other sectors that offer interesting growth prospects for investors: one is the technology sector, particularly in areas such as e-commerce and financial technology; and the other would be consumer business and retail,” he added. Attracting further FDI is an important consideration given the country’s recent struggles to rein in its trade deficit (see Trade & Investment chapter).

The World Bank reported in December 2016 that Myanmar’s trade deficit rose from 5.1% of GDP in 2013/14 to 6.3% in 2014/15, 8.6% in 2015/16 and 10.2% in 2016/17, while the Ministry of Commerce (MoC) noted that the country’s $100m trade surplus, recorded in 2011/12, fell to a $91.1m deficit in 2012/13, owing in large part to rising vehicle and refined petroleum imports, before ballooning to $2.56bn in 2013/14, $4.1bn in 2014/15 with a high of $5.44bn in 2015/16 and back down to $5.29bn in 2016/17. According to the MoC, the deficit eased down to $1.87bn in the first half of 2017/18 in comparison to $1.74bn in the first half of 2016/17.

Export Base

Although manufacturing has become the leading sector in attracting approved FDI since the global oil markets crashed in mid-2014, the export base remains heavily concentrated in the raw exports of gas and agriculture, with sluggish performance for both products expected to weigh on growth throughout 2018. Exports could additionally be impacted by the release of the Export Negative List in March 2018, which requires export licences for over 3000 goods, including some agricultural and forestry products.

The development of SEZs and the expansion of value-added manufacturing and agro-processing activities is a key priority for the government. Indeed, recovery in the agriculture sector, which accounts for 29% of value-added output, had been slow following severe flooding in 2015. The World Bank expects the sector to grow by around 4% in FY 2016/17, compared with 3% in FY 2015/16. Crop production, which accounts for 72% of agricultural output, began to pick up by the end of 2016, with the country’s three primary crops – paddy, beans and pulses, and oilseed – showing promise as the crops continue to recover.

However, the sector will face significant challenges in 2017, after India moved to impose a quota on bean and pulse imports from Myanmar (see Trade & Investment chapter). The problem is exacerbated by productivity constraints, which have slowed the paddy segment’s recovery from the 2015 floods. High prices and strong demand for rice from China during the first half of FY 2016/17 have not yet been enough to offset these challenges (see Agriculture & Forestry chapter).

Labour Force

Tying into the sixth and seventh points, the eighth point of the 12-point economic policy commits to developing a skilled workforce to boost the manufacturing and services sectors, targeting improvements in health care, labour rights, and academic and vocational education.

The World Bank reports that Myanmar’s workforce stood at 15.7m workers aged 15 and older in 2014, with a labour participation rate of 63% in 2015, close to the South-east Asian average of 64%. With 56% of the labour market working in the primary sectors of agriculture, forestry, fisheries and mining, however, there are reports that labour participation varies over the year, due to seasonal demand for agricultural workers. The secondary sector employs around 12% of the workforce, with manufacturing accounting for a majority of that figure, or 7% of the total labour market, followed by 5% in the construction sector. A further 32% is employed in the tertiary sector, with the World Bank reporting no major shifts between primary, secondary and tertiary employment numbers between 2009 and 2014, indicating limited reallocation of labour to higher-productivity sectors.

Credit Growth

The ninth point of the 12-point plan emphasises improvements to financial services, an important consideration given that Myanmar ranked 177th out of 190 economies in ease of accessing credit in the World Bank’s “Doing Business 2018” report. The ninth point outlines a plan to bolster monetary and fiscal stability through the creation of a robust financial system capable of providing financing to businesses, farmers and households.

The plan calls for sweeping banking sector liberalisation and the adoption of new financial service channels such as mobile banking, with improved credit access and liberalisation expected to help the country obtain a sovereign credit rating. Banking sector liberalisation has accelerated sharply in recent years, although rapid credit growth has worried stakeholders. According to the World Bank, private sector credit grew by 53% in FY 2013/14, before relaxing to 36% in FY 2014/15, 34% in FY 2015/16 and 33% in FY 2016/17. While rapid credit growth can be an indication of emerging banking sector risks, particularly when concentrated in certain sectors and segments, it is difficult to accurately assess the health of the banking system due to data-based constraints.

In February 2017 the IMF warned that Myanmar’s banking sector is undercapitalised compared to the continuing risks it is facing, which include concentration and interrelated lending risks, weak accounting and auditing practices, and underdeveloped prudential supervision and regulation. Overdrafts comprise 70% or more of total loans, which are rolled over indefinitely, meaning many companies are operating despite being effectively bankrupt. However, legal reforms are gradually being implemented, and in July 2017 the CBM issued new regulations requiring banks to clear overdraft loans annually, after which they will be classified as non-performing loans. Following complaints from banks that the January 2018 deadline for these changes was too short, in November 2017 the CBM extended the deadline from six months to three years, which should help the financial services sector achieve and maintain stability in 2018.

Outlook

Although external headwinds, internal conflict and delayed implementation of some key reform policies will undoubtedly continue to weigh on macroeconomic growth, Myanmar’s economic forecast remains broadly positive.

The World Bank projects economic growth will recover to 6.4% in FY 2017/18, and average 6.9% over the medium term, while the IMF forecasts GDP growth of 6.7% in FY 2017/18, picking up to between 7% and 7.5% in the medium term, bolstered by continued FDI inflows, in addition to promised improvements in public investment, spending and efficiency.

While both trade and fiscal deficits will continue to challenge Myanmar’s public sector stakeholders, increased private sector participation in economic development promises to help the country mitigate declining natural gas revenues, as both ongoing tax reforms and fiscal rationalisation help the country maintain financial and economic stability into 2019.