In our previous article, we covered the Top 5 Reasons Investors Should Consider Investing in Myanmar Now. Companies need to adequately assess the prospects, both positive and negative, for expanding in Myanmar.
Overall, political structure in Myanmar has changed significantly over the past seven years. Myanmar's democratically elected Government is stable, but there are still some elements of the past embedded in the current structure such as continued military influence in the country. This poses some problems for Myanmar's economic reform efforts because opaque and massive army-controlled companies like the Myanmar Economic Corporation, and Myanmar Economic Holdings Ltd (which is the army’s de facto pension fund) account for a disproportionate share of the economy. With so much at stake in their economic empires, the military may have no interest in speedy reform.
The Government intends to make a structural shift from agriculture to manufacturing and service, and increase labour productivity. Earnings have increased rapidly, but the structure of employment has not. Poverty rate has decreased primarily due to higher agricultural production and earnings, from 48.2% of population in 2004/05 to 32% in 2015. But only 3% of jobs in the market are classified as “higher skilled” and are dominated by those with a high school education or above. A strong and sustained commitment from policy makers will be necessary to see Myanmar continue with its structural reform for economic growth.
On-going ethnic tensions in the country
Global attention is focused on Myanmar's complex web of ethnic tensions. Major ethnic conflicts are taking place in Kachin, Kayah, Kayin, Rakhine and Shan State.
Ethnic tension is especially heated up in the Rakhine state (formerly Arakan state) located at Western Myanmar. The Rakhine crisis has been long standing due to the status of stateless Rohingya.
The Rohingya Muslims during World War II were allied with the British and was promised a Muslim state in return. They fought against local Rakhine Buddhists, who were allied with the Japanese. When Myanmar gained independence from the British in 1948, it formed a union Government of predominantly Buddhist country. Shortly after independence, the Union Citizenship Act was passed defining which ethnicities could gain citizenship. Rohingya were not included. The Act however, did allow those whose families had lived in Myanmar for at least two generations to apply for identity cards. Rohingya were given such identification or even citizenship under the generational provision. After the 1962 military coup in Myanmar, the Rohingya were only given foreign identity cards. In 1982, a new citizenship law was passed, effectively rendering the Rohingya stateless.
Tensions escalated in 2017 when ethnic Rakhine insurgents attacked police stations, provoking a military counteroffensive. Since then, around 400,000 Rohingya Muslims have been displaced from their homes and were forced to flee from the country mainly into Bangladesh and Thailand. Recently in January and March this year, insurgent attacks happened again resulting in another retaliation by the military.
There has been widespread condemnation on the military's actions. The Government is under fire from the international community, leading to concerns over reputational risks for Western firms who do business in Myanmar. The UN Security Council has appealed to stop the violence and the US has appealed to respect the 'rule of law'. There are fears that there will be over-reliance from China for investment, if Myanmar continues to be unable to attract investment from other countries. Tensions are not likely to resolve anytime soon.
Additionally, ethnic insurgencies continue in several states such as in Kachin, a resource rich state. There are attacks on commercial assets, such as oil and gas pipelines and mining operations. Resources accounts for largest proportion of Myanmar's export and pays for majority of budget. Disruption to resources will affect Myanmar's development.
Fluctuating value of kyat and inflation
Myanmar's local currency is kyat. Following a period of relative currency stability in 2017, the value of kyat against the US dollar has taken a tumble (see chart below). Although the kyat’s depreciation might be expected to increase the competitiveness of its exports, the benefits to export producers have been limited as most manufacturing in Myanmar is dependent on raw commodity imports. Fall in value of kyat also sparked import-driven inflation. Cost increase from raw commodity imports is passed on to consumers, and this has had the knock-on effect of reduced domestic demand.
Since the tumble, the Central Bank of Myanmar has been taking steps to stabilise the currency by infusing dollars into the market. In our view, these efforts are however short term solutions. With a high trade deficit, the Government may not be able to sustain infusing dollars into the market. In the long term, the Government must promote domestic production and exports as well as encourage import substitution to stabilise the value of kyat. The high trade deficit leads to a weakness in its currency. Myanmar's trade deficit reached US$ 3.97Bn for its fiscal year 2017/18 between Oct 2017 to September 2018. Myanmar must continue building the manufacturing supply chain for import substitution.
Items with highest import value currently are petroleum products, vehicles and machineries. Myanmar imports petroleum products due to lack of refining capacity, although it is rich in oil and gas. There are two existing state-owned oil and gas refineries in Myanmar, but one plant is dormant and the other is unable to produce at a consistent quality. There has been minimum maintenance and upgrades since the plants were built in the 1950s and 1960s.
Plan for a new refinery was announced in April 2018. The new refinery is expected to take 3 to 5 years to complete. It is therefore unlikely until then, Myanmar's trade deficit can reduce significantly, as it will highly require import of petroleum products.
However, in terms of automotive imports, there is a potential to reduce import and consequently, reduce trade deficit. There are more international automotive manufacturers setting up facilities locally in Myanmar. Myanmar should look to encourage setting up of an automotive supply chain to reduce reliance on import of production input.
There are some risks in terms of external shocks. Myanmar’s export remains dominated by raw resources. Myanmar is also heavily reliant on China for its exports. This makes Myanmar vulnerable to China's economic condition. Myanmar needs to diversify its export destinations and export items to reduce reliance.
In the final quarter of 2018, there is a fall in capital goods import which reflects there is less demand and activity in the industrial and construction sectors, according to World Bank. Due to lower value of kyat, there is a slowdown in the broader economy.
Underdeveloped financial sector
The main problem Myanmar businesses face is the lack of access to capital to expand and to fund establishment of new businesses. This is with the exception of well connected locals.
In order to develop sustainably, the economy needs both domestic investments and foreign direct investments ("FDI"). There is no doubt that FDI can do a lot of good: it can add to an economy’s productive capacity and import not just capital but technology, production skills and better management. But domestic investment is as important for Myanmar to have a sustainable growth over the long term as it will increase income of its people.
Financial sector in Myanmar has been highly restrictive on foreign participation, but has slowly opened up. Foreign banks are still prevented from offering retail banking services to locals, but are allowed to provide export financing services. Regulations have laxed a little, foreign banks are now allowed to hold stakes up to 35% in domestic banks. This is part of reforms to boost capital levels and activity in the financial sector.
Myanmar is not without risks, but we think things are moving in the right direction in terms of economic reforms. Laws to support foreign investment have developed in Myanmar, but more can be done to reduce unnecessary red tape and speed up approvals. There are also issues of high taxes which the Government needs to further look into to attract and keep foreign direct investment in the country. There is also low utilisation of technology in the country and there are needs to adjust the supply of skills to meet future demand.
Can Myanmar overcome its challenges and become the next frontier of ASEAN? Let us know your thoughts and leave us a comment. Subscribe to our newsletter for regular feeds. If you require more information on Myanmar market, contact us. We assist companies to enter the Myanmar market by providing data and insights, as well as developing strategy.
References
Al Jazeera, Who are the Rohingya?, https://www.aljazeera.com/indepth/features/2017/08/rohingya-muslims-170831065142812.html, published 18 April 2018
Charlton Myanmar, Myanmar Government announces plans to construct oil refinery in the Magne region, https://www.charltonsmyanmar.com/myanmar-government-announces-plans-to-construct-oil-refinery-in-the-magne-region/, published 18 April 2018
International Crisis Group, A New Dimension of Violence in Myanmar's Rakhine State, https://www.crisisgroup.org/asia/south-east-asia/myanmar/b154-new-dimension-violence-myanmars-rakhine-state, published 24 January 2019
South Asian Monitor, Myanmar’s economy could go into a tailspin as currency woes deepen, https://southasianmonitor.com/2018/10/13/myanmars-economy-could-go-into-a-tailspin-as-currency-woes-deepen/, published 13 October 2018