Myanmar's Unfolding Reforms Highlight Strong Growth Potential

Moody's Investors Service finds that Myanmar's (unrated) strong growth prospects are supported by the beginning of economic reform which should enhance the country's limited institutional and technical capacity.


Nonetheless, the creation of a stable political environment will be crucial for the country to achieve its economic potential as it opens up after half a century of isolation.


Moody's conclusions are contained in a new report entitled "Myanmar's Economic Liberalization and Credit Profile Begin to Take Shape."


Following the first parliamentary elections in over two decades in 2010, Myanmar has embarked on a wave of reforms that mark the country's political and economic opening after 50 years of isolation from, and ostracized by, the global financial community.


In further illustration of the country's growing international engagement, the capital Naypyitaw plays host to finance ministers and central bank governors from the Association of Southeast Asian Nations this week.


At the cornerstone of Myanmar's initial wave of comprehensive economic reforms has been its rapid opening to foreign participation. Measures supporting this have included replacing an official exchange rate peg with a managed float and unifying a dual exchange rate regime.


In response to these steps, most large creditors have eased sanctions on Myanmar and cleared legacy arrears, which will improve the country's capacity to repay existing debts and pave the way for fresh funding.


Apart from signaling the government's commitment to a reform agenda, the liberalization of the investment regime will support Myanmar's external financing. The current account shifted to a deficit of 4.4% of GDP in the fiscal year ended March 2013 (FY2013), according to IMF projections, from a surplus of 0.4% in FY2008.


Moody's views Myanmar's reforms as credit positive developments that lend shape to the country's still-nascent credit profile.


Although economic development is still at an early stage, growth has been strong, rising to 7.3% in FY2013 from 5.9% the previous year, driven primarily by rising investment and an increase in natural gas production. A widening current account deficit is likely to be financed by higher foreign direct investment and capital inflows as the liberalization process continues.


Furthermore, the government is focusing on fiscal reforms to consolidate the country's deficit and reduce debt monetization by the central bank. To that end, granting autonomy to the Central Bank of Myanmar and plans to establish a Treasury function in the Ministry of Finance are key steps.


Nevertheless, as one of the poorest countries in the region, sustained high growth over the medium term is necessary for Myanmar to converge with the per capita incomes of its neighbors.


Moody's report draws parallels between Myanmar's economic liberalization and obstacles overcome by Vietnam (B2 stable) in the late 1980s under its 'Doi Moi' program. These include: opening the economy to trade and investment, seeking technical support from multilateral agencies, and re-engaging with bilateral creditors.


Eventually, Myanmar could also access the global bond markets. However, as in the case of Vietnam, the reform process may not be without its pitfalls, and the country's economic development path may have many twists and turns.


As investor interest increases, Myanmar could face challenges that confront many emerging economies, such as inflation, exchange-rate instability and credit bubbles. The country's under-developed institutional framework and nascent financial sector could make it more vulnerable to these risks, and could act as a brake on the liberalization process.


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