Myanmar still requires extensive reform
before investors will jump in with both feet, but noticeable progress is
underway.
Myanmar
is one of Southeast Asia’s poorest economies, with a per capita GDP of $868.
Despite its strategic location—sharing a border with India, Bangladesh, China,
Laos and Thailand—Myanmar was isolated from the rest of the world until 2011,
ruled by a military junta since 1962.
The
general election of 2010, a landmark event for the country, was Myanmar’s first
step toward the transition from military rule to a “civilian” democracy. But
the opposition party led by Aung San Suu Kyi boycotted the elections, citing
widespread electoral fraud. Moreover, a parliamentary committee in Myanmar
recently rejected a proposal to amend a constitutional clause that prevents the
pro-democracy leader from becoming president.
Still,
the quasi civilian government, led by reformist leader President Thein Sein,
has embarked on a slew of economic and policy reforms since coming
to power in 2011. Sanctions by the EU, U.S., Canada and Australia were
suspended as a response to the reform movement, after which international
investor interest grew, resulting in a surge of foreign direct investment.
Myanmar
is considered to be a resource rich country with huge economic potential, but
with a narrow base of growth primarily concentrated in the agricultural and
energy sectors. Industry, which accounts for 20 percent of the nation’s GDP, is
dominated by the electricity, oil and natural gas sectors, which together
account for 75 percent of total industry value.
On its
face, reform efforts in Myanmar have paid off.
Key
economic reforms in Myanmar concerning the easing and simplification of foreign
investment restrictions and procedures have moved ahead under the new Myanmar
Foreign Investment Law (MFIL) of 2012. The country moved toward a managed
floating of its currency, the kyat, which was earlier pegged to the U.S.
dollar. This has eased significant complexities faced by investors and traders
related to the multiplicity of exchange rates before. The authorities have also
shown commitment toward granting more autonomy to the central bank in monetary
policy decisions. Budgeted social spending on health and education has also
increased.
Apart
from these key reforms, the current government has been responsive in inviting
private sector participation in telecommunications, awarding two licenses: to
Telenor from Norway and Ooredoo from Qatar.
As a
result, most macroeconomic indicators have shown improvement in the post-reform
period. GDP growth has accelerated to an average of more than 7 percent year on
year (8.25 percent in 2013/14).
Private
sector credit has accelerated at a double digit pace as the government allowed
the licensing of new banks. Budget allocations for social sector spending were
increased from 0.9 percent of GDP to 3.0 percent of GDP. The fiscal deficit has
also remained below the authorities’ target of 5 percent of GDP (All indicators
are IMF/World Bank estimates as official data in Myanmar is considered to be
highly unreliable.)
Foreign
direct investment (FDI) has been growing. Total cumulative FDI into Myanmar
until 2013 stood at $44 billion, of which electricity, oil, and natural gas
accounted for 75 percent. China, Hong Kong, Thailand, Singapore, Korea and the
U.K. are the biggest investors.
Post-reform
inflows have surged, accounting for more than 5 percent of GDP per annum. This
reflects the eagerness of foreign investors to develop Myanmar’s natural
resources. However, core manufacturing investment has been very low. The IMF
remains optimistic about Myanmar’s long-term growth, given broad based reforms
continue. It expects real GDP growth to average around 8 percent over the
long-term.
Three
years of reforms have yielded mixed results. Even though the economy has made
progress, implementation of these reforms and further clarity of the law at a
broader level remains the government’s key focus before general elections in
2015. Foreign investors are still wary of political instability, policy
reversals, corruption (which Transparency International’s Corruption Perception
index ranked Myanmar 157 out of 177 in 2013), the problems of unskilled labor
and the country’s huge infrastructure deficit.
Apart
from large scale economic and policy reforms, Myanmar should work on three
major reform areas in order for it to sustain its growth in the long-term.
First,
it must address its internal ethnic conflict urgently, as this is a major
deterrent for long-term foreign investors. Myanmar is a multicultural state,
officially comprising 135 sub-groups in eight major ethnicities, namely Kachin,
Kaya, Kayin, Chin, Bamar, Mon, Rakhine and Shan. These ethnic groups occupy the peripheral mountainous areas of
Myanmar, which make up 60 percent of the land area, while the majority Bamar
ethnic group, which represent two thirds of the population, inhabits the
center.
Many of
Myanmar’s ethnic armed groups have signed individual ceasefire agreements with
the government, but the government is aggressively pushing for a “single
nationwide ceasefire agreement.”
The
government’s policy of laying down arms prior to political dialogue hasn’t
worked well with ethnic insurgent leaders. Their demands for the federal
government to increase its efforts are not getting an adequate response.
Stabilizing the periphery remains of the utmost importance to the government.
Second,
broad based business reforms are slow. The implementation of all laws, and more
clarity on the foreign investment law, will be crucial. Recognizing Myanmar’s
effort to reconnect with the global economy, the World Bank and World Economic
Forum (WEF) included Myanmar in the Ease of Doing Business and Global
Competitiveness Survey (respectively) for the first time. Even though Myanmar
ranked 182nd out of 189 countries in the Ease of Doing Business survey, the
report shows improvement in areas such as tax reforms.
However,
starting a business in Myanmar is more difficult than in any of the other
countries surveyed.
According
to the WEF, access to finance, corruption, political instability, a low skilled
workforce and insufficient innovation capacity are the major obstacles would-be
entrepreneurs face in Myanmar. Business reforms would be the next most crucial
area for the Thein Sein government.
Third,
investment in education is critical in addressing the problem of unskilled
labor in Myanmar. According to the Organisation for Economic Cooperation and
Development (OECD), Myanmar’s education sector has been severely neglected
under the military regime. Education spending is much lower compared to its
regional peers.
High
primary school drop-out rates and low enrolment rates at secondary schools are
the biggest challenges facing the government. Investment in education at this
stage is necessary, as demand for skilled labor will rise with massive
investment proposals in the pipeline. Sustaining an 8 percent GDP growth rate
will thus need adequate investment in the education sector going forward.
According
to McKinsey, the average productivity of a worker in Myanmar is 70 percent
below that of benchmark Asian countries, and the country will need to more than
double its labor productivity by 2030 to achieve 8 percent annual GDP growth.
Three
years of reform have brought visible change in the perception of the
international community toward Myanmar. However, international investors remain
cautiously optimistic about the country, and most of them prefer to “wait and
watch” until further clarity on policies and the business environment is
available.
Prachi
Priya
Prachi
Priya is an economist at a top corporate house. The views expressed here are
her own.
Business & Investment Opportunities
Saigon Business Corporation Pte Ltd (SBC) is incorporated
in Singapore since 1994.
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