World Bank Update – Inwa Advisers

After slower growth in 2015/16, the World Bank expects growth to re-accelerate post the elections. Inflation and the current account deficit are expected to improve as the effects of the recent floods ease. The fiscal deficit is expected to hold fairly steady at around 3.5% of GDP. After experiencing something of a pause around the time of the elections, growth in FDI is expected to recover.

World Bank – Selected Economic Indicators, Projections
		2014	2015E	2016F	2017F	2018F
Real GDP Growth (% YoY)		8,5%	7,0%	7,8%	8,3%	8,4%
	Agriculture	5,6%	2,0%	4,5%	5,5%	5,5%
	Industry	8,8%	7,8%	7,9%	8,5%	9,0%
	Services	10,5%	10,2%	10,0%	10,1%	9,9%
CPI Inflation, Period Average		5,9%	11,3%	8,5%	6,3%	5,7%
Current Account Balance, % GDP		-6,3%	-7,9%	-7,0%	-5,6%	-5,4%
Fiscal Balance, % GDP		-1,8%	-3,1%	-3,3%	-3,7%	-3,5%
	Revenue	13,3%	13,1%	13,6%	14,0%	14,5%
	Expenditure	15,2%	16,2%	16,9%	17,6%	18,1%
Source: World Bank, Myanmar Economic Monitor (May 2016)

In the policy sections of its report, the World Bank has identified scope to improve the efficiency of budget spending, a need to reduce the monetizing of the fiscal deficit, and steps that could be taken to strengthen the mechanisms of the foreign exchange market. In addition, it cites evidence to suggest administrative action has been taken to discourage imports and suggests such action could be counterproductive.

Longer term, it sees a need to reform the pricing structures of the power and electricity markets in order to attract the substantial investment required, and advocates an overhaul of the State Owned Banks to strengthen sector stability and to reduce fiscal risks.

Recent Economic Developments

In 2015/16, economic growth in Myanmar slowed from the 8.5% rate of 2013 and 2014 to 7% YoY. The causes included the effects of flooding (agricultural growth slowed from 5.6% in the previous year to 2%), a slowdown in investment flows in an election year, and a more challenging external environment, including lower commodity prices.

Whilst the World Bank believes growth will recover, it cautions that the supply shock to agriculture has brought some short term vulnerabilities to the fore—high inflation and low productivity in the sector, which slows the recovery and creates extra pressure on rural-urban migration, and increased competition from international imports in food processing, which comprises as much as 70% of Myanmar’s light manufacturing and 40% of industrial output. Weak domestic supply chains, a lack of access to affordable finance and unofficial, untaxed imports of processed foods from neighbouring countries are other challenges for the processing sector.

It also highlights that institutional capacity to deal with these shocks has faced some challenges. Increased monetary financing of the deficit has tended to exacerbate inflation pressures and treasury bill auctions—which can help to absorb domestic liquidity—have been undersubscribed due to lower than expected discount rates.

Also, concerns over the growing trade deficit have prompted administrative measures—including red tape in foreign transfers and limits on imports of capital machinery—to attempt to contain the demand for foreign currency. The World Bank warns that such measures could be highly counterproductive—not least, by fuelling illicit border trade—and advises that foreign investors are likely to be less concerned about a strong currency than a stable one and transparent policies, which facilitate financial planning. (Those investing in export-oriented industries benefit from a weaker Kyat over the medium to longer-term.)

On a more positive note, the World Bank notes foreign investment commitments in manufacturing and processing have started to take off. 7 factories in the Thilawa SEZ have now started operations, 16 are in the process of setting up operations and a total of 60—equivalent to 80% occupancy and offering a possible 40,000 jobs—have reserved space. It has also detected a shift from residential towards infrastructure, commercial and industrial construction, albeit with constraints posed by access to long-term finance and power.

Economic Outlook

Looking forward, agriculture is expected to recover and private investment to pick up post the elections. The World Bank forecasts real GDP growth of 7.8% YoY in 2016/17 and 8.2% YoY in the medium term.

Inflationary pressures, are expected to ease in the coming year to an average of 8.5%, as a result of a recovery from last year’s agriculture supply shock, projected low international commodity prices and falling monetization of the deficit—the last factor being a risk to the downside, if the authorities fail to execute.

Although oil and gas receipts are expected to decline, income tax collections should rise and, with government revenue averaging 14% of GDP, the Union Budget deficit is projected to average 3.5% of GDP over the medium term.

The recent deterioration in the trade deficit has been a function mostly of a drop in the volume and value of exports and is seen, for the main part, as a cyclical phenomenon linked to commodities and the floods. That said, the current account deficit is likely to remain large over the medium-term due to slowing gas exports in the period before new fields come on stream, slowing demand in China and large investment-related import needs. However, the World Bank is not overly concerned that the size of the deficit poses immediate concerns for external sustainability; in the short term, it is expected to ease from 7% in 2015/16 to approximately 5.5% in 2016/17 and 2017/18, as cyclical pressures unwind. FDI—which depends on imports for building up productive capacity in the economy—is expected to pick up over the medium term.

Looking further ahead, the manufacturing and processing sectors hold strong promise as important drivers of inclusive growth. The garments sector (currently 7% of exports) is thought to be particularly promising, even though exports have recently been declining (-14% YoY at 9m 2015/16)—probably because of weaker external demand, currency devaluation pushing up the price of inputs and constraints on expanding production. As in garments, so elsewhere a structural transition to high value-added manufacturing will depend in big part on the growth in supporting infrastructure and services and, also, investment in skills.

Outside manufacturing, continued expansion in agriculture requires increases attention on enhancing productivity (seeds, technology, extension programmes). Services should be a major driver of growth. There are signs of increased investment in transportation, logistics, communications and investment technology and a solid foundation has been laid for growth in tourism. Power and ports are also receiving increased attention from private investors.

Policy Priorities The World Bank believes Myanmar’s prospects are strong but it emphasizes the need for sound economic policies and institutions to help manage emerging challenges:

balancing fiscal adjustment for stability with fiscal expansion for public services and growth
reversing and ultimately eliminating monetary financing of the fiscal deficit
continued strengthening of official FX market mechanisms and maintaining exchange rate flexibility

On fiscal adjustment, there is scope to improve the efficiency of capital spending by consolidating projects and reallocating them to areas that help relieve constraints to growth (eg. urban areas, especially emerging growth poles such as Yangon and Mandalay—which combined represented 40% of real GDP growth in 2014/15—transportation links, social services in poorer areas). The World Bank also supports reducing revenue leakage through limiting tax incentives to the private sector.

It advocates continued efforts to develop the debt market—including by allowing interest rates to reflect markets conditions better—and, supported by greater fiscal discipline, showing greater willingness to allow the currency to weaken to support external competitiveness and balance. Further development of monetary policy tools, such as deposit auctions, to help mop up liquidity should help offset the inflationary effects of a weaker Kyat.

Policy Watch

In this section of its report, the World Bank focuses on two areas; the need to reform tariff policies for gas supply to the power sector and for electricity distribution, and the need to reform the State Owned Banks (SOBs) to enhance the transparency, stability and competitiveness of the financial sector.

At present only one third of the population is connected to the national grid and lack of access to electricity is one of the most cited constraints to doing business in Myanmar. With per capita power consumption amongst the lowest of anywhere in the world, investments in the power generation are expected to be of the order of $2bn per annum for the next decade, to go alongside an additional $10bn of investment in transmission and distribution over fifteen years. In order to attract these investments, the World Bank suggests the government should consider lowering the cost of gas to power producers, which currently matches export prices. Doing so would reflect the benefits from economic value added of gas supply. At the same time, residential electricity tariffs are substantially (c. Kyat 300bn in 2015/16) below the cost of supply and should be adjusted upwards. It believes this should be possible as there appears to be no clear affordability concern for those connected to the grid or, indeed, for many rural households outside the poorer groups.

The SOBs in Myanmar still account for a slightly more than half of total banking sector assets. They compete against the private sector, but feature as vehicles for public policy, and have a distinct governance framework. None publish accurate financial data and, on the whole, they do not follow modern corporate governance practice. They can therefore benefit from accelerated reform with a view to reducing vulnerabilities and fiscal risks. The World Bank makes a number of suggestions for this, including proper definition of their public policy mandate and oversight mechanisms, the carrying out of a special financial audit to asses their true financial condition, clarifying the legal framework for their operations and improving disclosure and transparency.

Please use the following link to the World Bank’s website to read the full Myanmar Economic Monitor report:
http://www.worldbank.org/en/country/myanmar/publication/myanmar-economic-monitor-may-2016