YANGON - This month marks a watershed for
Myanmar's transitional economy, one of Asia's
poorest and historically most mismanaged.
Expectations run high that Western sanctions will
soon be lifted after last weekend's democratic
by-elections capped a series of recent political
and economic reforms under President Thein Sein's
quasi-civilian government.
None have been
bigger economically than this week's experimental
move to float the local currency, the kyat, and
abandon an overvalued official fixed exchange rate
maintained for the past 35 years at 6.4 kyat to
the US dollar. The realignment valued the kyat at
818 per US dollar, consistent with the prevailing
and more widely used black market rate.
Officials have said they hope the
harmonization of rates under a managed float
regime will give the central bank greater control
over the currency. Lack
of control has made the kyat one of the region's
most volatile currencies. The previous black
market rate ran as high as 1,200 to the dollar in
2009 but appreciated to around 750 per greenback
last year.
Chief government economic
adviser U Myint notes the kyat's unofficial rate
appreciated 25% last year, making it Asia's best
performing currency. He says this was driven by
privatization of state assets and that it was now
"essential that timely and firm action is taken to
deal with the [appreciation] problem so that the
situation does not get out of hand".
The
International Monetary Fund (IMF) had earlier
advised that "reforming the complex exchange rate
system is a priority to eliminate constraints on
economic growth." But as many hopeful observers
and investors herald a new economic dawn, could
unregulated fast change and a volatile currency
give rise to new market-driven troubles?
The dual exchange rate has been like "a
chronic disease that has inflicted this country
for 20 odd years," says Thiha Saw, economist and
editor of the Yangon-based Myanmar Thana magazine.
He said Western firms see Myanmar as "virgin"
territory, noting that the opening to foreigners
comes at a time when corporate profits at Western
multinational companies are high but investment
opportunities at home low.
For many
Western companies, the fact that their Asian
rivals are invested or exploring opportunities in
Myanmar is enough to make preliminary plans for
entering the market. This, by some estimates, is
driving a sort of herd behavior hysteria where
firms try to outmaneuver each other for first
mover advantages.
Even though Myanmar
lacks a stock market, influential equity investors
are trumpeting the market's potential.
Singapore-based US investor Jim Rogers, co-founder
of the Quantum Fund with George Soros and creator
of the Rogers International Commodities Index,
told Bloomberg Television on February 22 that he
would put all his money in Myanmar if he could.
Despite a recent bilateral warming trend,
US companies are still barred from making new
investments in Myanmar due to sanctions maintained
for decades against the country in punitive
response to its abysmal rights record. Washington
is expected to gradually lift those restrictions,
including curbs on development aid, to encourage
sustained reform.
The European Union is
expected to move more quickly. A meeting of EU
foreign ministers on April 23 will weigh the
grouping's common position on Myanmar, though any
lifting of sanctions will require the ratification
of all member states. Western countries outside of
the EU, including Norway and Australia, have
already lifted many of their investment
restrictions. Norway's main telecom company,
Telenor, is known to be seeking opportunities in
Myanmar's fledgling telecom sector.
Myanmar's government has encouraged the
lifting of sanctions with a new foreign investment
law that offers foreign companies a five-year tax
exemption, among other incentives the Economist
Intelligence Unit (EIU) has described as
"generous". Official statistics show a 600%
increase in foreign direct investment (FDI)
approvals in the 2010-2011 fiscal year,
skyrocketing from $302 million to $20 billion year
on year.
The EIU notes that in November
2011 alone $4.4 billion worth of investment in two
projects was approved. A senior United Nations
official in Yangon, meanwhile, notes that the
stream of Western businesspeople has been
"constant" and "not just in the extractive
sectors" such as oil and gas that traditionally
have been the main source of foreign investment in
the country.
Too much, too
fast The inrush of foreign capital raises
questions about the underdeveloped economy's
absorptive capacity and the central bank's ability
to maintain macroeconomic stability amid rising
inflationary threats.
"If more and more
foreign investment flows in our kyat will
appreciate more," notes Yangon-based economist and
editor Khin Maung Nyo. Economist Thiha Saw argues
that with US sanctions on financial transactions
still in place the kyat is still effectively
inconvertible, meaning there are still substantial
exchange rate-driven distortions in the economy's
pricing.
Under the previous official
exchange rate, Yangon's underground currency
traders often bought pulses and beans to sell to
Indian traders in exchange for US dollars. Those
dollars were then exchanged to an alternative
currency such as the euro to get around the US
financial sanctions when conducting foreign
business transactions. The time-consuming and
costly process added around 4% to all foreign
currency-denominated transactions under the old
exchange rate regime, according to Thiha Saw. He
believes it will take time for this system to
change. Khin Maung Nyo argues that even with a
floating kyat the government will have trouble
keeping the kyat stable. If so, volatility will
cause problems for exporters, including the pulse
and bean traders who have historically played the
role of de facto currency traders. Analysts warn
it will take time before the mechanisms, including
modern banking facilities, are in place to
facilitate full convertibility of the kyat.
The rapid inflow of foreign capital is
already putting inflationary pressure on domestic
prices. Hotel prices across Yangon are
skyrocketing as the country's tourism sector
strains to accommodate the inrush of foreign
visitors. Economists predict that could impact
ordinary citizens soon as foreign-driven higher
prices are transmitted through to higher
transportation and food prices.
If
mismanaged, inflation could make a bad economic
situation worse. Electricity shortages have caused
new rounds of rolling blackouts in the commercial
capital of Yangon. Since April 2, residences have
been forced to go without electricity for six
hours every day, coinciding with the height of the
hot season. The power shortages are expected to
last at least through July, according to local
residents.
The inability of Myanmar's
government to deliver basic utilities is
indicative of its poor economic management.
Myanmar still owes billions of dollars to
multilateral financial institutions like the Asian
Development Bank, to which it stopped servicing
its debt in the late 1980s. Inefficient
state-owned enterprises, outsized military
expenditures, rampant corruption and a minuscule
tax base have all hampered the country's economic
development.
These same factors could
quickly complicate the kyat's float. Much of the
poorly paid civil service survives through some
sort of corruption, including skimming off the
spread of the past dual exchange rate system. Shwe
Mann, speaker of the lower house, has recently
pushed for a rise in civil servants' pay. Some
have read the legislative push as acknowledgement
that foreign capital driven inflationary pressures
could soon hit the grass roots population.
The capacity of the government to manage
these pressures will be limited by human resource
constraints. Economist Khin Maung Nyo argues that
the government should view cautiously offers of
foreign aid, which he argues will exacerbate the
inflationary problems already being driven by the
appreciation of the kyat. Instead he believes the
government should prioritize capacity building to
better equip economic and financial managers with
the fast changing situation.
The notion
that the economy is "moving too fast" is now a
popular refrain after decades of stagnant growth.
But for Ko Ko Hlaing, President Thein Sein's chief
political adviser, the government has little
choice but to embrace change.
"You can
consider this too rapid but we don't have much
time. In 2015, there will be an ASEAN Economic
Community so we have to open our markets and our
investment sector to all the regional competitors.
So we have to prepare our field to be a level
playing field and with the economy it is survival
of the fittest.
"There may be some local
business who do not have the ability to compete.
They may suffer but what we need is to encourage
them and fulfill them with technology and capital
through joint ventures or any means. So we need a
lot of reforms in the economic sectors."
Sean Turnell, an expert on Myanmar's
economy at Australia's Macquarie University,
agrees on the need for deep-reaching structural
reforms.
"The best solution I think is
just to get the fundamentals right. Make sure the
economy is genuinely open and thus allow demand
for imported goods to offset some of the inward
[capital] flows," said Turnell. "Likewise, get the
fiscal environment right, leaving domestic
accumulated capital for the private sector rather
than the state."
"But in the event such
fundamentals are not in place, the [meltdown]
scenario is all too likely I fear."
One
danger is that a strong kyat could curb the
country's attractiveness to foreign-invested,
labor intensive export industries - though the
lack of basic infrastructure is also a major
constraint. Depending on future currency
volatility and the quality of economic management,
some warn the capital that is rushing in now could
flee just as quickly. Many of Myanmar's ASEAN
neighbors suffered such a fate in the late 1990's,
driving experts such as former World Bank head
Joseph Stiglitz to the conclusion that footloose
Western capital ultimately did more damage than
good to the region's budding economies.
Previous less ambitious efforts to open
Myanmar's economy faltered because foreign capital
flows in mainly extractive industries failed to
trickle down to the grass roots. The new wave of
Western-led investment promises to impact more on
domestic services and impact on the economy's
local pricing. Whether Myanmar's economic and
financial technocrats are up to the challenge of
balancing fast growth and stability will now be
reflected in a floating exchange rate and rising
domestic expectations of more widespread
prosperity.
Joseph Allchin is a
freelance journalist and analyst who specializes
in Myanmar and Southeast Asia. Follow him on
twitter @J_allchin.
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