Risk drivers and outlook

Since the military junta chose to open up the country both politically and economically in 2011, progress has been broad and very impressive. After a 50-year military rule and a historic opposition victory in democratic elections in November 2015, Myanmar is now run by Aung San Suu Kyi and her NLD party. Yet, the military maintains an active political role with the aim of defending its privileges and could hinder political reforms. Putting an end to enduring ethnic conflicts and meeting the people’s high expectations are great challenges for the inexperienced civil government. Still, the latter benefits from an optimal context, being supported diplomatically and financially by the international community – with remaining US economic sanctions lifted – and located between India and China. In the medium to long term (MLT), Myanmar’s diversified economy should continue to enjoy a boom driven by FDI, commodities, manufacturing and tourism. Therefore, fast political, economic and regulatory achievements recorded in the last few years, the country’s huge economic potential and continued government commitment to reforms have motivated Credendo Group to open cover of MLT political risk in Myanmar by upgrading its rating from 7/7 to 6/7 last November. In addition, earlier last month, the short-term political risk rating was upgraded from 5/7 to 4/7 on the back of a stabilised political environment which benefits investor and consumer confidence and allows Myanmar’s economic boom to continue.

Despite this symbolic and notable move, which highlights optimism, caution is definitely required. Besides future political uncertainty, Myanmar’s outlook is indeed clouded by external vulnerabilities, especially weaker commodity prices – with Myanmar being a net fuel exporter – and Chinese demand, and by domestic challenges such as maintaining macroeconomic stability in a fast-growing economy. It’s worth stressing in particular that Myanmar’s economy remains in transition and has to make substantial progress, particularly regarding the restructuring of SOEs and expanding the underdeveloped financial and banking sector. Also, the difficult business environment, translated into Credendo Group’s highest systemic commercial risk rating (C), still has a long way to go before enjoying sharp improvement amid weak institutional capacity and the military’s vested interests.

Facts & figures

Pros

  • Low external/public debt
  • Wealth of natural resources
  • Competitive labour costs and young workforce
  • Located between India and China

Cons

  • Political uncertainty given the challenging political mandate and persisting military junta
  • Long-lasting conflicts in multi-ethnic Myanmar
  • Weak institutional capacity
  • Difficult business environment, transition economy

President and Head of government

  • Mr Htin Kyaw (NLD)

Presidential and legislative elections (5-year cycle)

  • Presidential election (by an electoral college): latest in March 2016
  • Legislative election: latest in November 2015

Population

  • 53.9 m

Income per capita

  • USD 1,280

Income group

  • Low income

Main export products

  • Gas (25.7% of total current account earnings), private transfers (10.5%), tourism (9.6%), garments (8.9%), timber (5.5%)

Country risk assessment

Rapid democratic transition…

Myanmar’s democratic transition is moving forward after it successfully passed its biggest political test since the military coup in 1962. In November 2015, the opposition National League for Democracy (NLD) peacefully won landmark democratic general elections – the first openly contested elections since 1990 – by a landslide. This was the culmination of a period of unexpected political opening (political prisoners freed, media censorship relaxed, by-elections won by the NLD, and so on) triggered by ex-President and ex-USDP (military-led and currently the main opposition party) chairman Thein Sein since 2011. In just a few years, Myanmar has made giant steps, if only by moving out of decades-long international isolation, as the country was a pariah state under the military dictatorship. A symbolic return to the international community was highlighted in 2013 by the significant easing of international economic sanctions (introduced in 1988 and later tightened) with a full lifting on the EU side and a relaxed sanction regime on the US side.

…though the military is holding on to its privileges

Though she is constitutionally barred from presidency, Aung San Suu Kyi, the historic opposition leader and daughter of Burma’s independence hero Aung San, is the country’s de facto leader as she is Secretary General of the NLD and very close to current President Kyaw. The NLD’s absolute majority in Parliament gives it strong powers to continue Thein Sein’s political transition. Still, though the 2015 elections represent a milestone in Myanmar’s democratic evolution, the military junta has not handed over full powers to the NLD. On the contrary, in compliance with its 2008 Constitution, the military junta retains 25% of seats in Parliament, forming a blocking minority with regard to changes to the Constitution, with the aim of protecting the army’s privileges. Moreover, the junta maintains an active and important political role as it runs three key ministries (Defence, Home Affairs and Border Affairs) and has the power to suspend or overthrow the NLD-led government on grounds of national security and domestic stability. In such an environment, constitutional and economic reforms could be hindered, feed frictions between both camps and slow the transition process. As a result, the government formed last March will tread carefully so as not to threaten the military’s vested interests if it wants to move forward with its agenda. Until now, cooperation has been constructive.

A challenging government agenda welcomes the lifting of remaining US sanctions

As Minister of Foreign Affairs, Aung San Suu Kyi has already made high-profile visits to China and the USA as a sign of normalising relations and a way of promoting future trade and investments. The democracy dividend and obviously also investment prospects have led the USA to announce the lifting of remaining sanctions (except the arms embargo), and an upcoming extension of their Generalised System of Preferences (GSP), thereby following the EU’s lead, albeit three years later. This is the first tangible outcome for an NLD government with a very challenging agenda. The main medium-term risk lies in the people’s huge expectations being disappointed, starting with socioeconomic improvement and poverty reduction, especially given the complex macroeconomic management required of an inexperienced government. With a mostly poor population not benefiting from the economic boom, swift economic development is accompanied by rising social protests, as observed in the last few years, mainly fuelled by environmental degradation and contentious land acquisitions for industrial projects in a still massively rural country.

Security harmed by endless ethnic conflicts

Putting an end to enduring ethnic conflicts is another priority for the government. Myanmar is one of the world’s most ethnically diverse countries and has consequently always been a complex country to administer. Hence Myanmar’s history is characterised by multiple conflicts between minority ethnic groups and the army in contested territories, mostly in border areas. Following the junta’s numerous failed attempts at a lasting ceasefire, the government recently began the Panglong peace process involving all armed ethnic groups. The NLD’s pledge to create a federal state to ensure national reconciliation meets ethnic groups’ demands for greater autonomy and equal rights. In the short term, this positive initiative might bring some stability, although it is fragile, as shown by the latest armed confrontations in the north.

Reaching a long-term sustainable comprehensive national peace deal is still a very distant prospect. The end of decades-long armed conflict, disarmament and a change of political system, if they ever happen, might indeed take up to a decade, thereby preserving risks of unrest in remote areas. Another source of instability is rising Buddhist nationalism, which is materialising in violent attacks against Muslims, particularly the Rohingya minority, which is also a contentious issue with some foreign partners.

Boom for a promising and attractive economy

Myanmar has been experiencing speedy economic transformation since ex-General Thein Sein allowed economic opening in 2011. Progressive normalisation with external creditors and reintegration in the global economy have helped lift average GDP growth in 2012-2015 to 7.9%, which is Asia’s second highest rate – albeit from a low base – with a forecast of 7.7% for the next five years.

These strong performances in a diversified economy are driven by rising FDI, infrastructure development, robust manufacturing and booming tourism. Many factors should boost Myanmar’s high investor attractiveness and exports in the future. It is indeed rich in natural resources (timber, mining…), particularly gas, thereby making it a net fuel exporter, while there is high potential for hydropower and agriculture as well as offshore oil. Enduring lower hydrocarbon prices could nonetheless harm many oil & gas investment projects that are in the pipeline.

Another strength comes from the young, cheap workforce for a manufacturing sector faring positively compared with regional competitors, especially the rapidly expanding garment industry, which should turn the country into a top destination for regional relocations. Moreover, long isolation means that much has to be done, from developing battered infrastructures to expanding a largely untapped consumer market. As a consequence, FDI is on a rapid upward trend (first in energy, followed by telecoms and manufacturing), boosted by several special economic zones, a new FDI law and an upbeat momentum under the new government (e.g. remaining US sanctions lifted). FDI also benefits from the country’s ideal location between China and India. Therefore, it should be enough to finance the large (but forecast to decrease) current account deficit – expected to reach 33.5% of export receipts in 2016 – as of 2018.

Public finances are moderate with low public debt at 34.2% of GDP in 2016, especially after the external share was nearly halved in 2013/14 (cfr infra), and expected to be around 35% of GDP in the medium term. However, the budget deficit is expected to stay above 4% of GDP by 2021 as public spending is on the rise and revenues are hit by weaker energy prices.

Optimism clouded by external vulnerabilities…

Despite this overall positive picture on the back of strong support from the international community, structural risks mitigate the optimistic stance. Although there has been impressive economic progress, Myanmar still presents many risks that should persist for quite some time and are likely to hinder the country’s future economic development. The proportion of gas in total exports (25.7%) means vulnerability in a lower-for-longer price scenario that hits export and government revenues. This is exacerbated by a weaker demand from its first export of goods market, China (35% of Myanmar’s exports in 2014, mainly commodities). Myanmar is also reliant on external aid, which is less of a problem today, though, given the positive political momentum, but the military’s open and cooperative stance is not taken for granted. Moreover, the country is prone to a broad range of natural disasters (cyclones, floods and earthquakes), which affect agriculture and public finances.

…and a long economic transition process

In one of the least-developed countries in Asia, the difficult business environment is often considered one of the biggest obstacles to Myanmar’s development, from infrastructure bottlenecks to a huge shortage of electricity, skill mismatches, an uncertain rule of law and wide-spread corruption. It is a reminder that Myanmar’s transition to a market-based economy, begun in 1988, is still ongoing and makes pursuing economic reforms essential in combatting business impediments.

Since 2011, the authorities have conducted flash structural reforms related to the economic system, including a reform of the exchange rate regime (towards a unified and managed floating exchange rate for the kyat) and liberalisation of the trade sector, as well as at regulatory level with an impressively high number of new laws. From 2014, the reforms slowed down significantly in the run-up to the elections, possibly to favour a more gradual path. Restructuring State-owned enterprises (SOEs) and developing the banking and financial sector are among the government’s economic priorities. The former has started with privatisation of several SOEs, notably in the manufacturing industry, but might be slow – as seen in communist countries like Laos and Vietnam – as the military are expected to defend vested interests in many economic sectors. Looking forward, any substantial progress will be fundamental to compete with the bulk of foreign investors.

Further developing a small banking sector key to supporting Myanmar’s growth potential

As for the banking sector, it is small in a cash-dominated economy and underdeveloped to meet financing needs generated by Myanmar’s strongly growing economy. The State dominance keeps declining, with a few large State-owned banks now owning less than half of total bank assets, to the benefit of three main private banks alongside a high number of smaller entities. All in all, progress is rapid as highlighted by the substantial regulatory development, the Central Bank’s legal autonomy (although it is still partially dependent on the Ministry of Finance in practice), the launch of the Yangon Stock Exchange and a dozen (licensed) operating foreign banks. Their presence is likely to ease capital availability in the medium to long term (MLT).

Meanwhile, their business scope is restricted (e.g. they are barred from lending to local companies) by the Central Bank’s regulations. Moreover, all banks have to cope with the Central Bank’s limit of loans to one-year maturities in line with the tenor for fixed-term deposits. In practice, though, the former are usually rolled over to allow longer maturities. In the MLT, monetary authorities will continue reforms of the financial and banking sector but their challenging task might be hindered by a lack of institutional capacity.

Lack of experience and weak institutional capacity will hinder government plans

Institutional weakness is reflected by weak data quality and public accounts statistics which need enhancement but also less opacity. In future, the government capacity will also be tested on maintaining macroeconomic stability ahead of rising FDI, stabilising the kyat, which faces depreciating pressures (having lost more than 25% against the USD since April 2015), and reining in high inflation (around 10% since 2015). Consumer price inflation has been fuelled by excessive (above 45%) average credit expansion to the private sector since 2011, although the latter is now slowly decreasing.

A modest financial risk since the 2013/14 debt relief

Myanmar presents a weak financial risk. External debt ratios are low at an expected 53.7% of exports and barely 13.9% of GDP in 2016, and are forecast to remain stable in the coming years thanks to strong economic activity. This favourable picture partly results from the significant external debt relief that was granted in 2013-2014 by the Paris Club, its largest creditor, in recognition of political reforms and the successful IMF SMP that was underway. The Paris Club wrote off 50% of external debt arrears, i.e. USD 6 bn, and rescheduled the other half until 2028 with a seven-year grace period. In addition, a Japanese bridge loan allowed finance clearance of USD 1 bn in arrears to the World Bank and Asian Development Bank. All in all, Myanmar’s total external debt fell from USD 15.3 bn in 2011 to USD 8.8 bn in 2014. Importantly, the debt relief paved the way for normalised relations with multilateral and bilateral creditors and thus for new foreign loans.

External liquidity is not too worrying with a weak short-term debt (3.9% of export receipts at the end of 2015) and foreign exchange reserves largely enough (nine times) to cover a modest debt service (3.2% of exports expected this year). Those reserves, which were hit by weaker gas exports and soaring imports in 2015, are currently equivalent to 2.6 months of import cover, i.e. below the adequate level of 3 months. Strong economic forecasts and a positive FDI outlook may nevertheless gradually improve this situation.