Myanmar, the new economic frontier, is expected to continue its brisk pace of expansion and liberalization this fiscal year. As a result, the country is attracting the interest of several foreign businesses keen on capitalizing on its growth opportunities, nearly nascent market, and significant natural resources. However, the increasingly open market presents several hurdles for investors. Not only do poor infrastructure and regulatory weakness pose challenges, there are also concerns over political stability and ethnic strife. Consequently, while some foreign companies have taken the first steps into the economy, others are adopting a wait-and-watch strategy.
Robust growth, but with sliding currency and price rise
Myanmar’s GDP grew an estimated 6.3–6.5 percent in the fiscal year ending March 2013 (FY 2012), and the pace is expected to quicken to 6.5–6.75 percent in FY 2013—the fastest in Southeast Asia.1 The growth is projected to be driven by a robust increase in domestic consumption and investment, as well as exports. Natural gas production, which accounts for nearly 41 percent of exports, will likely be the foremost growth driver. Gas exports to China and Thailand could rise significantly this fiscal year as two major offshore gas fields become operational. In addition, trade should get a boost with the duty- and quota-free access that Myanmar’s exports received from the European Union in July 2013. To receive similar access to the United States by the end of the year, Myanmar’s government is working to improve labor and intellectual property conditions in the country. Tourism is also trending sharply upward, with visitor numbers and revenue increasing 1.5 times in FY 2012 to exceed 500,000 and $500 million respectively.2 All this economic growth is expected to spur government revenue and keep the fiscal deficit close to the 5 percent target despite rising expenditure on health and education.
However, with imports on the uptick, the country’s current account deficit (CAD) is forecast to widen. Imports are rising due to trade liberalization and to support investment-driven capital goods demand. As a result, the CAD could reach 4.2 percent of GDP in FY 2013, from 4.0 percent in FY 2012 and 2.5 percent in FY 2011. The deteriorating CAD is also stoking currency depreciation, with the Burmese kyat expected to weaken 8.7 percent against the US dollar this fiscal year. The falling kyat is pushing up the fuel import bill, and Myanmar is also facing higher housing costs due to speculation in the real estate market. As a result, inflation will likely remain above 5 percent in FY 2013. Adding to the people’s challenges is double-digit unemployment in Myanmar, especially among young people.
Increasingly open market . . .
The liberalized economy of Myanmar is welcoming private (especially foreign) investment across sectors through several policy measures. Foreign companies can invest up to 100 percent in nonrestricted industries and benefit from five-year tax breaks. Even in restricted sectors, such as some forms of agriculture and extraction, up to 80 percent foreign investment is allowed. For instance, in deep-water offshore oil explorations, foreign companies are allowed to invest without local partnerships, and the interest from investors is evident. Nearly 60 bidders were shortlisted in July 2013 for 30 offshore oil exploration licenses to be awarded in early 2014.
Other sectors being opened include the telecommunication sector, where mobile phone network licenses were granted to Norwegian and Qatari firms in June 2013. The government is also considering opening the banking sector, although initially foreign banks may only operate through local joint ventures. Consumer goods majors from the United States and Europe are also keen on tapping the potential of Myanmar, and have committed to nearly $1 billion of investments over the next 10 years. The most ambitious effort of all appears to be the development of the 44,850-acre Dawei Special Economic Zone (SEZ), with a 75-year phased implementation plan unveiled in July 2013. The Myanmar government is partnering with Japan and Thailand to develop the SEZ, which will house not only a wide variety of industries but also a port, power plants, and a dam. Japanese companies, with their government’s backing, are also eager to participate in other infrastructure projects, such as a proposed rail link modernization worth more than $1 billion.
Overall, FY 2012 saw 94 foreign enterprises—the highest number in five years—receiving permits across sectors, especially manufacturing. This is in contrast to previous years’ trends of a small number of large mining, oil, or power investments. On the other hand, the absence of such megaprojects resulted in the quantum of foreign direct investment falling to $1.4 billion in FY 2012 from $4.7 billion in FY 2011 and $20 billion in FY 2010.
. . . But need to navigate with caution
However, it is not all smooth sailing for investors in Myanmar. Bureaucratic procedures for obtaining operating licenses, especially in extraction industries, appear cumbersome and opaque. Electricity, transport, and telecommunication infrastructure are weak. Furthermore, there are labor challenges: The latest investment laws mandate that all unskilled workers must be locals, and Myanmar nationals must constitute at least 75 percent of the skilled workforce of a company by the end of the sixth year of operation. Given the current shortage of skilled talent in the country, meeting these conditions may be tough and require substantial investments in training.
The current political situation is also a concern for investors. The military continues to hold significant power in the legislature and could come into conflict with entities seeking full democracy, blocking further political liberalization. Furthermore, religious strife and the government’s clashes with various rebel groups continue to make Myanmar a volatile region.
- Oxford Economics and Asian Development Bank, Asian development outlook supplement, July 2013.
- Myanmar Ministry of Hotels and TourMyanmar is likely to continue its brisk pace of expansion and liberalization this year, attracting foreign business; however, the increasingly open market presents several hurdles for investors.ism, Myanmar tourism statistics 2012.