Saturday, August 19, 2017

Why the Myanmar economy is slowing, and how it could bounce back

Economic growth in Myanmar has slowed and the country’s fiscal and current account deficits have swelled over the past 2 years under the National League for Democracy government. But things are stabilising and the long term prospects look good, Sean Turnell, Senior Economic Advisor to the government, said at the Myanmar Banking & Payments Conference in Yangon on July 24.

Shoppers at Bogyoke Market. Economic growth in Myanmar has slowed, but things are stabilising and the long term prospects look good. Photo: The Myanmar TimesShoppers at Bogyoke Market. Economic growth in Myanmar has slowed, but things are stabilising and the long term prospects look good. Photo: The Myanmar Times

While growth in the short term will continue to be inhibited, over the longer term, a slew of reforms spearheaded by the NLD government should “bring stability into the macro environment within which the financial sector can thrive,” Turnell said.

Twin deficits

Myanmar’s fiscal deficit has ballooned to 4.8 percent of GDP in 2016-17 from 3.2 pc in 2015-16. The fiscal deficit was 1.2pc of GDP in 2014-15 under the former Union Solidarity and Development Party government.

“According to the International Monetary Fund, a country’s fiscal deficit should not go beyond 5pc of GDP and Myanmar would like to achieve that as well,” Turnell said.

That’s left the current government with a very narrow margin to increase spending and implement reforms in the education, healthcare and infrastructure sectors.

Meanwhile, the current account deficit, or trade deficit, has also swelled on the back of lagging exports compared to imports, as well as the depreciation of the kyat.

In 2016-17, Myanmar’s trade deficit stood at around US$5.5 billion, with exports lagging behind imports at US$11.6 billion and US$17.2 billion, respectively, data from the Ministry of Commerce showed.

In comparison, the trade deficit stood was US$5.4 billion in 2015-16 and US$4.9 billion in 2014-15, according to the statistics released by the Central Statistical Organisation.

One reason for the growing trade deficit is the falling value of the local currency. Myanmar’s government has traditionally borrowed from the central bank to fund its fiscal deficits. At its peak under the previous government, up to 90pc of the fiscal deficit was funded by central bank borrowing.

But as the central bank printed more money, and as US interest rates rise, the value of the kyat has plummeted. At the close on July 24, the kyat was trading at 1,364 against the US dollar, compared to 1,009 in Jan 1, 2015. Meanwhile, inflation soared to double digits.

Foreign direct investments (FDI) under the NLD government have also fallen. In 2016-17, FDI totaled some US$7 billion, down from more than US$9 billion in the previous year.

 Turnell: Myanmar’s story now is one of stabilisation and slower growth, but it is bringing in reforms that in the long term will bear good dividends. Photo: SuppliedTurnell: Myanmar’s story now is one of stabilisation and slower growth, but it is bringing in reforms that in the long term will bear good dividends. Photo: Supplied

Reform ahead

Despite the declining data, Turnell reckons the economy is at the cusp of change. “The new government has issued a letter laying down a new policy with respect to central bank financing,” he said.

According to the policy, just 40pc of the fiscal deficit in 2016-17 will be funded by borrowing from the central bank. That will decrease to 20pc in 2018-19 and from 2019-20, “the plan is that no recurrent government spending will be funded by the central bank,” said Turnell.

To achieve its target, “Myanmar must develop its bond market and build a proper bond auction system to fund the fiscal deficit,” said Turnell. The first Myanmar government bond action was held last Sept. The issue, which offered yields of between 8.6pc and 9.6pc, was not fully subscribed.

Meanwhile, the government is also working on widening its taxation net. Over the shorter term, it will raise collection efforts on commercial taxes. Currently, it collects the least amount of taxes in ASEAN, just under 8pc of GDP compared to its neighbours, where tax revenues amount to over 10pc of GDP.

Other reforms are in place to stabilise the trade deficit. Among them are efforts to float the kyat, which has been under a managed float regime since 2013. “Bringing about market determination of the value of the kyat is critically important,” said Turnell.

“Current accounts are hard to control but one way to manage a deficit is by floating the currency to encourage local businesses to be more competitive and productive on trade.”

It will also encourage more foreign participation in the local economy just as the new Myanmar Companies Bill comes into effect.

Under the new law, which was submitted to the Amyotha Hluttaw for approval on July 20, foreign banks and companies will be allowed to invest more freely in the local economy, bringing about much needed technological know-how and productivity.

Of course, reforms don’t happen overnight and growth may well remain lackluster in the meantime. But Turnell believes things have stabilised. “From a macro perspective, inflation is down from double digits. The fiscal deficit has stopped increasing and we hope to begin taking on healthy debt to drive growth. The current account deficit has also stabilised,” he said.

“Myanmar’s story now is one of stabilisation and slower growth, but it is bringing in reforms that in the long term will bear good dividends.”