Should Your Company Take a Look at Myanmar?

  • Myanmar is at a crossroads in its political and economic destiny after almost five decades of isolation from the global economy.
 
 
  • As United Nations Secretary-General Ban Ki-moon has said, recent political developments in Myanmar have given “a strong sense of hope and expectation for the international community to see more and greater development in Myanmar.”
 
  • The United States government has announced that it had begun the process of restoring full diplomatic relations with Myanmar, in recognition of the on-going progress made by the Myanmar government with political reforms.
 
  • If the US and EU gradually lift some economic sanctions as reforms continue, this could boost the pace of Myanmar’s economic growth.
 
Investor Buzz
There is growing excitement among multinationals about the trade and investment opportunities in Myanmar.
 
In the last 20 years I must have given thousands of economic briefings and presentations to senior executives from US, European, and Asian multinationals. In all that time, nobody ever asked me about the Myanmar economy.
 
Suddenly, since late 2011, there are questions about Myanmar at every meeting. Wherever I go across East Asia, Asian companies mention recent visits to Myanmar, often as part of business delegations led by their trade ministers. Some Asian multinationals are opening offices in Yangon, or boosting their commercial presence in the country.
 
Myanmar has strong competitive advantages that make a compelling case for a dynamic economic performance if it continues to show commitment to the reform process.
 
A fundamental underpinning for the reform process is Myanmar’s membership in the Association of Southeast Asian Nations (ASEAN), with Myanmar selected by ASEAN leaders to be the ASEAN chair in 2014. Myanmar, like other ASEAN countries, has agreed to the tariff liberalisation timetable under the ASEAN Free Trade Area Agreement.
 
From an economic perspective, Myanmar’s reforms and tariff liberalisation will be important to ASEAN’s objective of creating a single market for trade in goods by 2015.
 
On-Going Reforms
Asia’s companies, particularly those in ASEAN, should closely follow developments in the following areas.
 
Oil and Gas: The oil and gas resources of Myanmar have significant potential for future development, with the country currently producing oil, condensate and natural gas.
 
There is on-going exploration and development onshore and offshore, with an oil pipeline and a natural gas pipeline under construction from Myanmar’s Arakan coast to southern China, at a total cost of US$2.5 billion. These pipelines are expected to be operational in 2013 and should significantly boost Myanmar’s export earnings.
 
A number of international oil companies, including many from Asian countries, are currently exploring for oil and gas in Myanmar. Ten onshore oil and gas blocks were granted in January 2012 to eight international companies for exploration after a tender process. Another tender for nine more blocks is under way.
 
Recent government estimates of natural gas reserves stand at 22.5 trillion cubic feet, indicating substantial future development potential.
 
Foreign Investment: The draft investment bill being considered by the Myanmar parliament could accelerate investment if implemented, with provisions for a five-year tax holiday for foreign investors, 100% profit repatriation allowances, and government guarantees against nationalisation.
 
Important features of the proposed law include the right for foreigners to lease land from the state or from private citizens. In addition, foreigners will no longer need a local partner to set up businesses, and JVs could also be set up with at least 35% foreign capital participation.
 
With regards to employing labour, the unskilled labour hired by foreign companies would have to be 100% local, and domestic skilled workers would have to make up at least 25% of a firm’s operations after the first five years, 50% after 10 years, and 75% after 15 years.
 
Exchange Rate Unification: A key macroeconomic reform will be the implementation of a unified exchange rate from 1 April 2012, as Myanmar moves to a managed float that will help to reduce market distortions and boost export competitiveness.
 
Agriculture: The agricultural sector has considerable potential for further development. There is the prospect of Myanmar significantly improving rice export earnings over the medium term through agricultural technology such as improving rice yields and better cropping techniques, as well as through market liberalisation measures.
 
Future Manufacturing Hub: With a large population and relatively low average incomes, Myanmar also has potential to become a hub for low-cost manufacturing over the medium term, for domestic demand as well as export markets. However this will require sustained market reforms as well as improved infrastructure.
 
Myanmar currently remains heavily dependent on imported manufactures from China. If economic reforms continue, growth in domestic demand together with increased foreign investment could encourage the growth of the low-value added manufacturing sector, helped by relatively low wage costs.
 
With Myanmar’s population being the fourth largest in ASEAN, at around 50 million people, the opening up of the Myanmar economy could create a fast-growing new consumer market in Southeast Asia.
 
Tourism: Tourism flows have already picked up strongly due to surging international interest in Myanmar, with total tourist visits rising by 30% in 2011, to reach 816,000. Business-related foreign visits have increased sharply due to heightened investor interest.
 
There will be significant new opportunities in tourism-related infrastructure investment if the sector continues to be liberalised.
 
Economic Prospects
Myanmar’s GDP growth rate is projected to be around 6% per year until 2020, when the GDP is forecast to double to US$124 billion, according to IHS Global Insight figures. The domestic consumer market is consequently expected to grow rapidly, creating a fast-growing market for exports of goods and services from other ASEAN countries.
 
However, a more rapid growth trajectory driven by rapid economic reforms could result in a significant acceleration of the pace of Myanmar’s growth, pushing it well above the 6% mark.
 
A key risk to this accelerated growth path would be rising inflationary pressures, as rapid growth and investment create supply bottlenecks and wages pressures. The inflation rate is already estimated to have averaged around 9% in 2011, and is forecast to average around 10% in 2012.  
 
Reform Challenges
As with other frontier markets, among the key challenges facing the Myanmar economy over the medium term will be the need to significantly improve the business climate. Progress will be required in the reform of state-owned enterprises, development of the financial sector, and introduction of standards for improving corporate governance and anti-corruption initiatives.
 
The problems of transition towards a more market-driven economy will also present major challenges over the medium term, as other East Asian countries such as Vietnam have experienced.
 
A key priority is the need to accelerate the development of the financial sector in order to provide intermediation for economic development. This will require substantial liberalisation of the financial sector in order to allow foreign financial institutions to rapidly play a role in providing financial services for the economic development of Myanmar.
 
Equally important will be closer cooperation with the IMF, World Bank, and the Asian Development Bank in Myanmar’s economic development planning. There are positive signs in this area, following the state’s co-operation with the IMF on its exchange rate reform process.
 
ASEAN membership can also be a valuable avenue of policy support and technical assistance from other ASEAN members with strong financial systems – notably Singapore and Malaysia – will aid financial-sector reforms.
 
Conclusion
Despite the political and economic challenges, Myanmar could emerge as the next ASEAN tiger economy if the government continues to pursue its reform agenda. This will be a significant positive boost to the ASEAN region and to realising the long-term objectives of the ASEAN Economic Community.
 
After decades of economic isolation, the reforms being introduced by the Myanmar government are set to bring significant improvements in living standards as long as the reform agenda is sustained. With GDP per person forecast to double by 2020 in USD terms, Myanmar has the opportunity to become Asia’s newest tiger economy.
 
About the Author

Rajiv Biswas is Chief Asia-Pacific Economist at US-listed global information company IHS Global Insight. This article was re-edited for clarity and conciseness.  

 

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