1 Myanmar - looking to realise its full potential By Sajini Jesudason ...

Myanmar - looking to realise its full potential
By Sajini Jesudason, Wigram Capital Advisors
The world has been transfixed by Myanmar's sudden and dramatic opening over the past 24
months. The country has seen a number of vital breakthroughs in the political sphere – the first
general election in 20 years in 2010; the opening of the current parliament in January 2011; and
the participation of the opposition party National League for Democracy in the April 2012
by-elections (where the party won 43 of the 45 parliamentary seats contested). These political
reforms, combined with the release of political prisoners and the successful negotiations of
ceasefires between the Burmese military and ethnic groups, have been closely followed by the
easing of (or promises to ease) numerous foreign sanctions.
Paralleling these political reforms is the commitment to economic reform. Myanmar was once
one of Southeast Asia's richest nations, strategically situated on the crossroads bordering China
and India. Myanmar facilitated the movement of goods and people between smaller Asian
nations, India and China. Prior to the military coup of 1962, the country had a strong economy
coupled with a high level of education and an established legal system. Today, the country
struggles with a per capita income of less than US$750 (based on Asian Development Bank (ADB)
forecasts), one of the lowest in the region. Yet though Myanmar is a poor country, poverty is not
as crippling or degrading as in some parts of South Asia.
To support the political reforms already under way, priority must be given to economic changes
that quickly raise incomes and reduce poverty. While significant economic reforms are necessary,
the immediate priorities are the development of the non-gas sector – principally light
manufacturing and agriculture – price liberalization, and support of private enterprise. This will
go a long way towards delivering immediate gains for the wider population.
The reforms that will unlock the country's full natural resource potential will involve changes
over a longer term, including institutional reform, infrastructure spending and much technical
assistance to ensure the proper sequencing. The reforms required are extensive, and will need a
stronger institutional infrastructure and will be slower to implement. To rush the reform process
will risk political instability that the country can ill afford. The lesson from neighboring countries
is that economic reform and “opening up” is a challenging process that requires
multi-dimensional policies and astute navigation.
Myanmar’s current economic position is difficult to analyse because of the poor quality of official
statistical data, so many economic conclusions are at best tentative.
According to official gross domestic product data collated by the Myanmar Central Statistical
Organisation, Myanmar’s real GDP for the past 10 years is an unverifiable 9.7 percent. In some
years, the country's growth rate is shown to be above that of China and India – casting doubt on
the reliability of the data. More reliable are IMF staff estimates that use data commencing from
2007/8. This shows the real GDP growth rate averaging 5 percent since 2007 and forecast at 6
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percent for the 2012/2013 financial year. The International Monetary Fund (IMF), World Bank
and ADB all forecast growth at 6 percent or greater in 2013 based on ongoing reforms, higher gas
exports and increased foreign investment in the energy sector (hydro, gas and oil).
Much of Myanmar's current economic activity is based on energy and agriculture. The ADB
estimates the agricultural sector at close to 40 percent of GDP but some private sector analysts
estimate it to be closer to 70 percent. Much of the country's population is in the rural sector.
There has been little or no urbanisation since the 1960s.The gains of the natural resource sector
have not translated into reinvestment in poorer agriculture-based rural areas, with little
electrification or infrastructure investment. The financial sector is rudimentary, and the banking
sector both underdeveloped and constrained by severe institutional limitations.
Like the GDP data, official inflation data is also understated. Official data is based on 1986 prices
of a consumption basket covering only the capital, and was reset to zero in 2006 giving a current
CPI of 7 percent, a figure consistent with IMF and ADB estimates. However, underlying inflation
is undoubtedly higher, as money supply growth is persistently over 30 percent (IMF), reflecting
that the fiscal deficit is funded by printing money.
Myanmar is in need of the classic monetary reform, it is a transition economy and faces the
difficulty of building a monetary system from scratch. The Central Bank sits within the Ministry of
Finance and has the primary function of monitoring the fiscal position, funding government
spending (monetising the fiscal deficits). Legislation is under way to create a Central Bank Act
that will give the Central Bank much needed autonomy.
Currently the key instruments available to the Central Bank are interest rates and limited ability
to use reserve requirement ratio and open market operations. In April, the Central Bank
instituted a managed float of the kyat thus unifying the various private, government/official and
black market rates. This has allowed the currency to be bought and sold in a band either side of a
rate set by the Central Bank. The currency reform removed at a stroke major distortions that
were both micro and macro in nature. However, keeping the real exchange rate at a level that
supports the competitiveness of domestic producers may be difficult given the inflow of capital
designated for the resource sector.
East Asian countries have traditionally relied on an undervalued currency to create employment
and a competitive export sector. But the heavy capital inflows expected from foreign interest in
resources could lead to significant real currency appreciation. Myanmar must be prepared to run
a trade deficit to offset the capital inflow, something that carries its own risk given the
experience elsewhere in ASEAN during the Asian Crisis.
Due to sanctions, Myanmar's trading partners have been largely regional. The four most
significant are China, India, Thailand and Singapore. Because of distortions associated with the
previous exchange rate regime, the official trade data is unreliable. However, data for the top four
trading partners show a rapidly deteriorating external deficit not captured in official data. In
particular, Myanmar is running an increasingly large bilateral deficit with China. Based on the
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China trade data, Myanmar ran a deficit of US$3.5 billion in 2011. This appears set to widen in
2012.
A significant portion of Myanmar's exports are in power (natural gas, oil and mining) followed by
agricultural products – rice, corn and pulses. Total exports in 2010/11 were US$9 billion (IMF
estimates), which is minor compared with its ASEAN neighbours. Machinery, transport and,
increasingly, power are the key import products, but restrictive and rent seeking import/export
licensing arrangements significantly distort the sector. The buy-back of power from China and
Thailand costs less than independent generation of power.
Consumer durables from China are a significant component of goods imported in the unofficial
cross-border market. IMF estimates for 2010/2011 imports are US$8 billion. However, both
import and export figures fail to capture the unofficial trade that occurs along the borders with
various neighbours. The existence of significant border trade with China and Thailand suggests
import reform and removal of licensing is a reform priority as well.
Foreign exchange reserves have been sufficient to cover around six and a half months of imports,
but foreign debt is at US$9 billion, owed primarily to Japan. The ADB has recently returned for
dialogue with Myanmar after the non-service of loans since 1988. Restructuring the current
arrears is a matter of increasing urgency.
The key question is where then should reform begin? What is clear is that the government must
focus on reforms that generate quick wins, raise incomes and reduce poverty.
After a visit in early 2012, Joseph Stiglitz argued that the exchange rate and fiscal and financial
reform were key priorities, together with creating a competitive business environment and
infrastructure spending.
Vikram Nerhu refers to a similar five essential priorities – fiscal viability, development of private
enterprise, trade liberalisation, clearing of debt arrears and the development of natural
resources.
Stiglitz puts the most immediate importance on agriculture, arguing strongly for extensive
reforms in this sector. Given the dominance of agriculture in the economy, reforms in this sector
are vital for equitable growth. These include price reforms for farmers, land reform and
ownership and incentives for small-scale farming coupled with access to credit and technology.
However, Stiglitz does warn of the country’s limited institutional capacity to manage this reform.
China – the most successful development model in history – prioritised agricultural and price
reform as a fundamental first step, which quickly raised incomes and reduced poverty. But in
much of the East Asia/Southeast Asia model, low-cost manufacturing was the engine of
economic take-off. The current dominance of China makes the East Asian model harder for
Myanmar to copy competitively, so agriculture is even more important than previously imagined.
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Much of the risk lies in the weak institutional and technical capacity, which may slow the reform
process. Rushing reforms may set back the entire process. Ethnic conflicts currently have a
ceasefire, but years of broken trust may continue to cause flashpoints that could take years to
dissipate. Given the population’s rising expectations, if results do not come quickly or if economic
policies are difficult to execute, political shocks could result.
All views expressed in this report reflects the authors personal views.
References
Asian Development Bank. (2012). Asian Development Bank & Myanmar [Fact sheet]. Retrieved from
http://www.adb.org/sites/default/files/pub/2012/MYA.pdf
Larkin, S. (2012). Myanmar at the Crossroads: Rapid Industrial Development or De-industrialization.
Retrieved from Online
Burma/Myanmar Library. http://www.burmalibrary.org/docs12/Stuart_Larkin-Myanmar_at_the_Crossroads.pdf
Ministry of National Development and Economic Development, Myanmar. (2012). Selected Monthly Economic Indicators [Data
file]. Retrieved from Central Statistical Organization web site: http://www.csostat.gov.mm/sIndicators.asp
Nehru, V. (2012). Myanmar’s Five Economic Priorities [Commentary]. Retrieved May 1, 2012, from
http://carnegieendowment.org/2012/04/23/myanmar-s-five-economic-priorities/afrq
The International Monetary Fund (Executive Board). IMF Executive Board Concludes 2011 Article IV Consultation with Myanmar
[Public Information Notice]. Retrieved from http://www.imf.org/external/np/sec/pn/2012/pn1244.htm
The World Bank. (2012). Country Summary, Myanmar [Fact sheet]. Retrieved from
https://finances.worldbank.org/facet/countries/Myanmar
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%
14
Chart 1. Myanmar: GDP Growth
Official and IMF Staff Estimates
12
10
8
GDP - Official
Estimates
6
4
2
Source: Wigram Capital Advisors, IMF & CEIC
0
2007/08 2008/09 2009/10 2010/11 2011/12 2012/13
% of GDP
0
-1
-2
Chart 2. Myanmar - Fiscal Balance (% of GDP)
(IMF Estimates)
Fiscal balance -
% of GDP
-3
-4
-5
-6
Source: Wigram Capital Advisors & IMF
-7
2007/08 2008/09 2009/10 2010/11 2011/12 2012/13
YOY%
70
60
50
40
30
20
10
0
Chart 3. Myanmar - Annual Inflation (YOY%)
Source: Wigram Capital Advisors & CEIC
CPI - YOY% (1997
Index)
CPI - YOY% (2006
Index)
-10
1997/98 1999/00 2001/02 2003/04 2005/06 2007/08 2009/10 2011/12
5

USDm
1,500
1,000
Chart 4. Myanmar - Current account balance
(IMF estimates)
Current a/c
balance
500
0
-500
-1,000
Source: Wigram Capital Advisors, IMF & CEIC
-1,500
2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10
USDm
6,000
Chart 5. Myanmar - FX Reserves
5,000
4,000
FX reserves
3,000
2,000
1,000
Source: Wigram Capital Advisors, IMF & CEIC
0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Months
12
Chart 6. Myanmar - FX Reserves
(months of import cover)
10
8
Months of
import cover
6
4
2
Source: Wigram Capital Advisors, IMF & CEIC
0
2003 2004 2005 2006 2007 2008 2009 2010 2011
6

USDm
18,000
16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
Chart 7. Myanmar- Foreign Direct Investment (USDm)
Other
Power
Oil & Gas
Source: Wigram Capital Advisors & CEIC
2005 2006 2007 2008 2009 2010 2011
YOY%
80
70
60
50
40
30
20
10
Chart 8. Myanmar - Money Supply Growth
(Personal Savings Deposits YOY%)
Personal Savings
Deposits - YOY%
Source: Wigram Capital Advisors & CEIC
0
2006 2007 2008 2009 2010 2011
Thousand
450
Chart 9. Myanmar - Tourist Arrivals
400
350
Three mth annualised
12 mth total
300
250
Source: Wigram Capital Advisors & CEIC
200
2006 2007 2008 2009 2010 2011 2012
7

USDbn
12
Chart 10. Myanmar - Annual trade with top 4 trading partners
(Trade with China, Thailand, India and Singapore)
10
8
6
Exports (Imports from Myanmar)
Imports (Exports to Myanmar)
4
2
Source: Wigram Capital Advisors & CEIC
0
2004 2005 2006 2007 2008 2009 2010 2011 2012
USDbn
3
2
1
0
-1
-2
-3
-4
-5
-6
Chart 11. Myanmar - Trade balance with top 4 trading partners
(Trade balance with China, Thailand, India and Singapore)
3 mth annualised
12 mth total
Source: Wigram Capital Advisors & CEIC
-7
2004 2005 2006 2007 2008 2009 2010 2011 2012
USDbn
0
Chart 12. Myanmar - Trade Balance with China
(Chinese Trade Data)
-1
-2
Myanmar Trade
Deficit with China
-3
-4
Source: Wigram Capital Advisors & CEIC
-5
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
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