Myanmar’s elusive prize preening
Despite hosting over one thousand delegates at a September Euromoney conference and stock exchange and government bond launch this year, Myanmar under Nobel laureate Aung San Suu Kyi’s leadership has disappointed investors with lackluster political and economic direction at odds with her visionary reputation. At the same time as the Yangon business summit, coinciding with passage of a long-promised investment law, she came under severe international criticism for passive handling of violence against the Muslim Rohingya minority after reported attacks on police posts. Peace talks with dozens of ethnic insurgent groups across the country are also at a standstill after a big August conclave where the army agreed on federation without surrendering seized lands. Foreign direct investment through the March 2017 fiscal year has come in at only half the US$6 billion target, 30% down from the 2016 period, despite the lifting of global trade sanctions. Singapore, China, Thailand and Japan top the source country list, with US and European companies awaiting further bilateral protections as well as banking and currency stability despite reform progress cited by an October IMF mission.
The Fund predicted 6.5% GDP growth for the full year, with slowing in the first half due to slumping construction and commodity prices. Inflation remains high at 9% and fiscal and current account deficits have also widened on “persistent macroeconomic imbalances,” it warned. The latest Article IV report recommended improved tax collection and reduced central bank budget financing, monetary tightening and exchange rate flexibility, and greater state-owned bank overhaul and regulation. Financial and private sector liberalization should be phased in, but the future enabling environment can be strengthened, it suggested.
The new foreign investment code, which will offer special tax incentives up to seven years, goes into effect in April 2017, with the goal of attracting US$150 billion through 2030, especially in agriculture, tourism, infrastructure and energy. So far this year, the telecoms industry accounted for half of inflows, followed by manufacturing and power. Consulting firm McKinsey estimates that technology, transport and sanitation networks need US$300 billion though the next decade for output to potentially triple and escape from poor-country status. At the Euromoney gathering foreign bankers lamented continued land ownership and collateral access restrictions, and called for an initial sovereign credit rating as a way of measuring comparative frontier market risk. They noted the startup stock exchange with three listed companies was rapidly catching up with Cambodia and Laos, but overseas participation and privatization offerings will be limited.
The currency regime and recent depreciation, with the kyat falling over 15% against the dollar since October, have been major roadblocks for both domestic and international business, and Myanmar’s Chamber of Commerce Federation in December urged immediate changes. Currently only US$1,000 is traded daily on the official market within a 0.8% fluctuation band, versus US$30 million on the parallel one. Bank foreign currency accounts are subject to weekly withdrawal caps, and the central bank has ordered citizens to fully declare overseas accounts in an effort to discourage speculation. Private banks complain of continued government institution dominance of foreign exchange services, and dollar hording favoring military interests. Aung San Suu Kyi’s team has maintained a strict “managed float,” abandoned by other ASEAN members after the 1990s financial crisis, against the development agency recommendation for increased market-determination.
Despite mounting reservations, alarm bells have not yet sounded as in next-door Cambodia with similar 7 percent growth and an infant US$100 million equity market with 5 listings, with individual investors responsible for over 80% of trading. Fortune magazine in the US described it as the world’s smallest, as officials finally move to ease capital gains and dividend taxes and introduce block trades demanded since the 2011 launch. The country was also singled out by the IMF in a November report for a runaway credit boom the past five years, with 25% annual loan increases for real estate in particular. Loan-to-deposit ratios have skyrocketed to 200 percent for some banks, with foreign borrowing an additional vulnerability, and new capital and liquidity requirements should apply quickly, according to the survey. Financial sector instability could spread from banks to microfinance providers and the stock exchange given commercial connections and lack of joint oversight, as the sub-region has yet to devise a prize-winning investor formula.