Asian Development Outlook

ADB’s Latest Expectations for the Myanmar Economy

The ADB has published a new edition of its regular “Asia Development Outlook” report, which contains an update on the performance and outlook for the Myanmar economy.

Growth in real GDP in FY 2015-16 is thought to have slowed to 7.2% YoY, the chief reason being the economic effects of the heavy monsoon rains, which are thought to have cost $1.5bn, or a full 3% of GDP. With these behind it, the economy is expected to re-accelerate to 8.4% in FY 2016-17 and to 8.3% in FY 2017-18.

FY 2015-16 in Review

Key areas of strength in the year just ended have been tourism (revenues +19% YoY to $2.1bn) and garment exports (revenues +28% to an estimated $2bn). Natural gas export volumes rose by 2.9%, although revenues fell by about 18% to $3.5bn.

Business confidence appears robust, with new business registrations holding steady and FDI approvals of $4.9bn in the 9 months to December. This last represents a 26% decline on the figure for the same period a year earlier but since the ADB’s report was published, FDI has strengthened, and local media has been reporting a figure for the full year of $9.4bn, up from $8.1bn in FY 2015–16.

Higher food prices, consequent to the storms, a depreciating currency (reflecting the deterioration in the current account) and strong growth in the money supply (private sector credit + 45% YoY, monetary base +17.9%) caused inflation to spike to 16.2% by October 2015 before settling back. Average inflation for FY 2015–16 was 11%.

An increase in government spending ahead of the election caused the fiscal deficit to rise from 2.9% of GDP in FY 2014-15 to an estimated 4.8% of GDP in 2015–16. The ADB has welcomed the introduction of T-bill auctions from January 2015, which it hopes will reduce the monetization of the deficit, although they have not yet been successful in raising the amounts targeted. Changes to the tax laws will help the government to raise revenues above the current low level of 8% of GDP.

There has been a sharp increase in the trade deficit as strong domestic demand caused imports of consumer goods and capital goods to rise, even as the value of exports of oil and gas and gems fell and the floods impacted exports of rice. The ADB is forecasting a current account deficit of 8.9% of GDP for FY 2015-16, with official FX reserves falling to 2.5 months of imports.

External debt is estimated at $9.7bn, equivalent to 14.7% of GDP. Both the World Bank and the IMF see the risk of debt distress as low, although the government is being encouraged to make efforts to broaden the base of economic growth and to expand the fiscal space.

Economic Prospects

Growth is expected to recover to 8.4% in FY 2016–17 and to hold at a similar level in the following year, as agriculture recovers post the floods and FDI accelerates following the successful elections. Per capita GDP is expected to grow by 7.6% in FY 2016–17 and by a similar amount in the following year.

The new government has committed itself to continuing the reform process—seen as essential if Myanmar is to achieve its growth potential, estimated at 8% annually. The ADB expects policy to focus on increasing transparency, further deregulation, improved education and better government services. A particular objective will be to create demand for jobs in rural areas through the expansion of manufacturing.

Slower growth in China and lower commodity prices will act as a check on growth, although the ADB expects increased integration with neighbours India and Thailand to offset this to a degree.

The fiscal deficit is expected to improve somewhat as the new government seeks to raise tax revenues, make spending more efficient and restructure SOEs.

Inflation should ease somewhat with a moderation in food prices, but it is nevertheless expected to remain elevated at 9.5% in FY 2016-17 and at 8.5% in the following year. The ADB is supportive of efforts by the central bank to improve bank supervision and prudential controls (as reflected in the new Financial Institutions Law) and to provide better benchmarks for short-term lending rates. It urges flexibility in the management of the currency, noting that efforts to halt its depreciation in the last year were counterproductive and led to an unwelcome depletion in FX reserves.

Lower prices for imported oil should take some pressure off the current account deficit, although demand for imports is expected to remain strong. Agricultural exports should recover and exports for manufactured goods should continue to grow. The current account deficit is forecast to drop to 8.3% of GDP in FY 2016–17 and to 7.7% of GDP in FY 2017-18.

The twin fiscal and current account deficits speak for stronger efforts to build up FX reserves. However, although external debt is expected to rise further to 15.7% of GDP in FY 2016–17, the risk of debt distress should remain low, as most external debt is on concessionary terms and the government has been reducing commercial borrowing.

Longer Term Challenges

Despite the progress recently made with reforms, the government faces “daunting” challenges. Three in particular stand out:

the difficulty of maintaining stability in the economy and in the regions affected by conflict
the need to deal with deficits in infrastructure and in human resources and capacity
combating poverty and income inequality, the last of which seems to be worsening

The economy is narrowly dependent on the planks of tourism, construction and exports of natural resources. There is a need to intensify reforms to support business, to improve access to finance and to facilitate trade and investment.

Risks to the economy come from thin fiscal and trade buffers, ethnic tensions, the capacity of the new government to maintain reform and Myanmar’s vulnerability to the weather.

There is also a need to improve economic and social data, which is badly needed to inform better policy formulation and planning.

In a concluding note on the need to upgrade transport infrastructure, the ADB estimates that investment of $60bn is required to bring things to the standard of other countries at Myanmar’s stage of development. This would mean investment rising from the 1% of GDP in recent years to the level of 3% to 4% of GDP.

To achieve the implementation of the government’s National Transport Master Plan, Myanmar will need to mobilise private resources through the restructuring of toll road concessions, the competitive outsourcing of civil works, and the corporatising or privatising of SOEs that operate in competitive markets. It thinks the formation of a single transport ministry will help to co-ordinate policy planning and implementation.

Please use the following link to access the ADB’s full report on the Asian Development Outlook. The specific section on Myanmar is on pages 216-219http://www.adb.org/sites/default/files/publication/182221/ado2016_0.pdf