Myanmar’s ability to transform economic promise into reality will depend on institution building, infrastructure development, and political stability. Without these, investors will remain cautious.
Myanmar faces a challenging journey in its quest for economic prosperity. Aided by strong reforms, the country looks set to benefit from its hydrocarbon resources and strategic location between two emerging economy giants, China and India. However, Myanmar’s ability to transform promise into reality will depend on institution building, infrastructure development, and political stability. Without these, investors will remain cautious, thereby denting the country’s ability to generate growth, raise incomes, and eradicate poverty.
GDP growth set to increase
The economy is set to accelerate in the medium term, boosted by growth in investments, especially foreign inflows. One of the most lucrative sectors for foreign direct investment (FDI) is oil and gas. Myanmar has 50 million barrels of known crude oil reserves, while the corresponding figure for gas is 280 billion cubic meters. The figures are set to rise as offshore exploration starts. In the coming years, overall investment will also benefit from the government’s efforts at developing infrastructure, which is in a poor state due to years of economic isolation. All these are likely to push gross fixed investment growth to 12–16 percent over FY 2014–18, which in turn will be a key driver of overall GDP growth—to 6.5–7.5 percent—during that period. Post that, the pace of growth will depend on further reforms, infrastructure development, and institution building.
As investments in oil and gas rise, exports from the sector will increase, although the impact will be offset by higher imports of capital goods. This is likely to push the current account deficit into double digits over the next five years. Meanwhile, consumption will stay strong as economic liberalization raises incomes and opens up employment opportunities. However, the process will not be smooth given the expected rise in inflation and difficulties in managing a relatively more open economy.
Foreign inflows picking up in FY 2014
FDI in the first five months of FY 2013–14 amounted to $1.6 billion, up from $1.4 billion in the whole of the previous fiscal year. However, inflows remain below the levels witnessed during FY 2010–12 ($12 billion annually), as investors await further economic and political changes and their impact. Also, the sources of FDI appear to be changing. Before economic liberalization, China, South Korea, and Thailand dominated the FDI scene. Now they are losing share to developed- and emerging-economy peers. Already, energy-hungry India is increasing its presence in Myanmar with a view to importing Burmese gas, while countries such as Vietnam, the United Kingdom, Singapore, and Japan are pouring funds into different sectors.
Investors looking beyond oil and gas
There is a tangible shift in the sectors where FDI is headed. For example, so far in FY 2013–14, manufacturing and hospitality have dominated inflows. This is a far cry from previous years: In FY 2011–12, mining and energy accounted for 94 percent of FDI. In manufacturing (especially textiles), firms already present in Southeast Asia are looking for cheaper options in Myanmar. Foreign firms are not only eager to tap the market in Myanmar but also to service the country’s two large neighbors, China and India. Meanwhile, tourism is set to flourish as Myanmar’s political isolation ends. Given its rich culture, history, flora, and fauna, Myanmar will be an attractive destination for tourists flocking to Asia.
Interestingly, manufacturing and hospitality will offer greater employment opportunities than investments in large energy projects. If investments in these sectors are coupled with efforts to improve skills and raise productivity, Myanmar can effectively tackle poverty and reduce unemployment. Currently, more than a quarter of the population lives below the poverty line, while more than one-third of the labor force is unemployed.
Interestingly, manufacturing and hospitality will offer greater employment opportunities than investments in large energy projects.
Multiple challenges for central bank
The Central Bank of Myanmar (CBM) faces multiple worries. Inflation has been edging up (7.3 percent in August 2013) due to rising aggregate demand and infrastructure bottlenecks. Liquidity is also high, with broad money (M2) growth above 30 percent in the first half of 2013. Meanwhile, expected deterioration in the current account is likely to put pressure on the Burmese kyat, with currency volatility likely to rise due to the economy opening up. Although the CBM can respond by tightening monetary policy, such a move is not likely as it will push up the government’s debt-servicing costs. The CBM also has to reckon with its past practice of monetizing the government’s deficit. Despite a new law to increase the CBM’s independence, the CBM is likely to continue funding the government until public revenues rise. In such a scenario of limited central bank intervention and higher growth, inflation is expected to move up to 7–9 percent in the next five fiscal years with strong upside risks. However, as infrastructure develops and economic management improves, inflation will likely come down.
Reforms to continue, though radical changes not likely
The reforms agenda in Myanmar is expected to continue, albeit with checks given the army’s veto-wielding presence in the legislature and control of key economic sectors. The prospects for any change in the 2008 constitution as demanded by the National League for Democracy are mixed. While some clauses—such as the one that prevents Aung San Suu Kyi from becoming president—are likely to be revised, others that preserve the powerful role of the military will be retained. Also, the army is expected to continue pushing for a powerful centralized governing structure despite calls for greater federalism by regional ethnic groups. Further, any such move will depend on the course of peace talks with different rebel groups.
Inclusion in the World Bank’s rankings just a start
Myanmar recently turned a corner by appearing in the World Bank’s latest Doing Business rankings. However, its rank of 182 out of 189 indicates that the country has a long way to go. Encouragingly, the country has tied up with international partners to build regulatory structures, improve the judiciary, enhance financial intermediation, and develop credible official statistics. While a movement along these lines will attract investors, the country also needs to develop transparency and political stability. Without them, gains from liberalization would be limited, and the country will fall short of its economic potential.