2017/18 Review
Real GDP growth recovered to 6.8% YoY in 2017/18 (from 5.9% in 2016/17), driven by exports and a recovery in agriculture. The fiscal deficit reached about 2.7% of GDP, and central bank financing of it continued to decline. Headline inflation was a moderate 4% on average but rose to 8.3% YoY in November with higher fuel prices and a depreciating kyat.
The current account deficit widened marginally to 4.7% of GDP and was largely financed by strong FDI inflows (5.4% of GDP), which kept international reserves at around three months of imports. The real effective exchange rate depreciated by 5% from April 2018, helping to ease the trade deficit slightly.
Slowing economic momentum is evidenced by preliminary data for the transition budget period between April and September 2018, which were suggestive of the effects of government underspending, waning investor confidence and moderating global demand. Real GDP growth of around 6.2% is expected for this period.
Spill-over effects of the bank restructuring process
Credit growth has fallen from 34% in 2016/17 to 20% by September 2018, as banks reduced their exposures and placed more funds in risk-free securities (adjusting to the 2017 prudential regulations). At times, market interest rates fell below the retail deposit law which, combined with retail deposit growth and slow NPL recognition, is putting pressure on bank profitability and capital.
State-owned banks’ share of lending has fallen to 11%, reflecting a reduction in directed lending to agriculture. However, foreign-owned banks are expanding FX lending to exporters, as the restrictions on their activities have been eased.
Outlook
The key factors supporting a positive long-term outlook remain in place:
– Myanmar’s demographic dividend is just beginning to take off, with an expanding working age population expected to persist for longer than Myanmar’s neighbours.
– The country is well situated between the economic power houses of China and India, and several economic projects linking SE China to the Indian Ocean, including the Kyaukpyu deep water port and an oil-gas pipeline connecting Kyaukpyu and Kunming are envisaged. The Sittwe port has been upgraded with Indian assistance and will facilitate cargo transshipment along the India-Myanmar-Thailand trilateral highway under construction. Myanmar has also been benefiting from significant Japanese development assistance.
The near-term outlook has weakened, however:
– Real GDP growth of 6.4% YoY is expected for 2018/19. This is below the 7% to 8% potential rate, and it reflects weaker export demand, subdued private construction demand as banks and corporates deleverage in the face of weakening real estate prices. The slight pick-up in growth compared to 2017/18 reflects an assumption of some fiscal stimulus after the low levels of the transition budget.
– Inflation is expected to moderate as oil prices and the exchange rate stabilize, and as monetary financing reduces.
– Credit growth is expected to slow to a single digit rate although, compared to the experience of other countries in similar situations, credit and output are expected to be relatively strong as a result of structural factors. Domestic banks are expected to diversify their lending towards consumer credit as uncollateralized lending at higher rates is permitted and foreign banks are able to expand their lending to corporates that are otherwise constrained by single borrower limits.
The IMF has slightly lowered its expectation for the medium-term growth rate to close to 7%, as it has allowed for weaker FDI flows and the spill-over effects of bank restructuring.
Tax revenue is expected to rise gradually with the reforms, but consolidated government revenues are expected to feel the effects of a gradual depletion in natural gas reserves and SOE losses in the medium-term, before eventually recovering with higher hydrocarbon recoveries consequent to an increase in exploration activity.
