doing business in myanmar – what you need to know as a singaporean
Despite rising costs, teething problems as a result of economic reforms and a slower flow of foreign capital into the country, government officials and institutions like the World Bank and International Monetary Fund have issued lofty growth forecasts for Myanmar in the year ahead.
Among the most bullish of these institutions is the ASEAN+3 Macroeconomic Research Office (AMRO), which is expecting Myanmar’s GDP growthto increase from 6.8 percent in fiscal 2018-19 to 7.1 pc in fiscal 2019-20.
At those levels, Myanmar is forecast to be one of the fastest growing economies in Southeast Asia, ahead of even Vietnam, which is expected to grow by 6.8pc in 2020, according to its Prime Minister, Nguyen Xuan Phuc. In comparison, China’s economy is projected to grow at around 6pc in 2020, according to officials in Beijing.
Over the past year though, Myanmar Times has interviewed numerous businesses across the Myanmar economy, the majority of which claim financial and regulatory conditions need to be more conducive for growth. They said more should be done to foster an environment that encourages business innovation and expansion and that government officials should be more attuned to technological disruption.
Where then is growth is coming from? Are there opportunities for SMEs? What are the risks for investors? We spoke to AMRO lead economist Jae Young Lee and economist Xianguo (Jerry) Huang for answers:
A file photo of a man selling bananas in a Yangon market. Small businesses such as this make up a large portion of the informal economy in the country. Photo: EPA
A file photo of a man selling bananas in a Yangon market. Small businesses such as this make up a large portion of the informal economy in the country. Photo: EPA
AMRO’s forecast is for Myanmar to grow by 7.1pc this fiscal year. If we break it down into the individual components of GDP (consumption, investments, fiscal spending, and net exports), where would most of the growth come from?
On the production side, electricity, construction, and financial services—driven by public spending and liberalisation—will provide support to economic growth, while the overall manufacturing will continue to expand as suggested by the recent positive readings in Purchase Manufacturing Index. On the expenditure side, growth will be broad-based, largely supported by resilient domestic consumption and strong public spending, and increased contribution from net exports.
What are the key risks to the Myanmar economy in 2020?
Risks to growth stem mainly from continued ethnic tensions in the Rakhine State and uncertainties in the global economy related to trade protectionism, geopolitical risks, and energy prices. The protracted ethnic tensions in Rakhine State will continue to have a dampening effect on investor sentiment, in particular, of Western investors. It may also pose political difficulties for the authorities in maintaining preferential trade arrangements with the EU and sustaining access to Official Development Aid funding. Myanmar’s economy could also suffer from weaker demand from China as a result of the US-China trade conflict and a slowdown in China’s economy. Domestically, the weak banking system is a key vulnerability in the economy, as it is still transitioning to a more stringent banking regulatory framework.
For SMEs, costs are rising and banks are not lending, which inhibits this part of the economy from expanding. How big of a concern is this for Myanmar? How does SME financing tie in with rising inflation and high-interest rates?
The difficulty in SME financing is a universal problem that affects not only for developing countries but also for developed countries. In Myanmar, the bulk of bank credit is concentrated in a few sectors, and the bank credit to SME lending has been limited. One of the key barriers is a lack of reliable information to assess the credit worthiness of SMEs, making it difficult for banks to price loans to SMEs correctly, especially in an environment with floor on deposit and ceiling on lending interest rates. As a result, banks require SMEs to provide collaterals for loans, which is a problem for most SMEs. In particular, when faced with high inflation and less room to adjust interest margins, such credit expansion to SME could be further discouraged.
Part of the reason why SMEs are now facing difficulties borrowing are constraints in the existing financial system. How does this link back to the ongoing reform of the banks in the country?
Overall, state-owned banks have been playing a key role as financial service providers to the government while performing some socio-economic functions. In recent years, they have also been lending more to private enterprises and individuals and extending seasonal loans. However, due to these banks’ limited staff capabilities, outdated banking infrastructure, and weak corporate governance, the lending has also been accompanied by a build-up in financial vulnerability.
The on-going reforms of both state and private banks aim to enable them to better match the economy’s saving and investment needs with higher efficiency and greater prudence, hence, supporting sustainable economic development. In light of this, the constraint on SME financing could be reduced as the credit could be extended more to this part of the economy.
Myanmar’s informal economy is bigger than its formal economy. What efforts are the government taking to fix this and how can these efforts be seen in the formal economy?
The informal economy is very common in most developing countries, and the size varies depending on the definition of “informal economy”. For instance, according to a study by the Bank of Thailand, the informal sector of Thailand is estimated to account for almost half of the country’s total employment.
Although there is no conclusive answer for how big the informal economy in Myanmar is, it would not be surprising that it is larger than the formal economy. The informal sector is largely associated with small businesses with low capital and productivity. A large informal economy can lead to various problems such as low productivity, low tax collection, and weak social protection. It could also distort official economic statistics, leading to inappropriate policy developments. Growing the formal economy is the best way to reduce the informal economy in the long run. To this end, the government has taken measures to promote industrialiwation and the establishment of companies by the private sector in order to create more employment in the formal sector and also investing in education and training.
What are the industries expected to benefit from government spending and FDI in 2020?
According to the new government budget, more public spending will be directed toward infrastructure, education and social services, which would improve the overall business environment. With regard to foreign investment, it could be broad-based in terms of sectors, as the Myanmar economy is expected to gradually return to its strong medium-term growth rate of around 7 pc. It will continue to flow into manufacturing and services activities targeting the growing domestic market as well as burgeoning export industries. Meanwhile, the growing retail market, liberalization of financial services, the needs for better education and health services, will continue to attract more foreign investments into these sectors. In the medium term, sectors related to enhancing connectivity — building more and better railways and roads, as well as upgrading telecommunication — could also experience more business opportunities.
How much of Myanmar’s growth is tied to the ongoing trade war between U.S. and China as well as the BRI?
The direct impact of the US-China trade conflicts on Myanmar’s economy is very limited, as Myanmar economy is not deeply integrated into the global value chain. However, if the US-China trade conflicts cause further slowdown of China’s and global economy, Myanmar could be negatively affected due to slower external demand. On the positive side, trade conflicts have also cause trade diversion and investment relocation from China. While Myanmar has not benefited much from this trend, it could benefit more from the increase in manufacturing relocation, especially labor-intensive industries. To this end, Myanmar should improve its doing-business environment to reap this opportunity.
The BRI projects such as China-Myanmar Railway project and Kyaukpyu deep-sea port would contribute to improving transportation efficiency and reduce logistics costs in Myanmar. As a result, the business and investment environment will be further improved. Having said that, it is important to ensure the overall fiscal sustainability in the medium term.
Source : Myanmar Times
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