The Political and Economic Outlook for #Myanmar—An Economist Intelligence Unit Webinar


The Political and Economic Outlook for #Myanmar—An Economist Intelligence Unit Webinar

On February 21st, 2013, the Economist Intelligence Unit (EIU) presented a webinar on the Political and Economic Outlook for Myanmar. It was presented from Hong Kong by Jake Hamstra, the Editor on the Asia Forecasting Team for EIU, and my summary of the webinar is contained in the blog post below.   This post also includes the question and answer session at the end of the presentation, based on questions submitted to Mr. Hamstra by the attendees.

1. Introduction

It is now the 2nd anniversary of the civilian government in Myanmar after 50 years of a military dictatorship, and it that time it has gone from being a pariah state like North Korea to being a “donor’s darling”, being a prime destination both for investments and grants. It went from being an embargoed economy that was cut off from the global system to a market that is now an exciting frontier. The webinar covers the economic and political outlook in Myanmar discussing first the positive developments and then the challenging issues that the country faces on its road from transformation from dictatorship to democracy.

2. Politics—Positive Developments

There were elections in April 2012 that were judged to be fair by international standards and in them, the opposition gained seats in parliament. It is now a fairly well-functioning parliamentary system, with the opposition playing a prominent role in legislation and policymaking, although the military still has a majority stake in the government.

There is broad-based support for the reform process. There has been a steady expansion of civil and political rights, with steady releases of political prisoners, the lifting of bans on public gatherings and curbing of restrictions on the media.

The iconic figure of the opposition, Aung San Suu Kyi, has a positive relationship with the president of Myanmar, Thein Sein. Reform is being supported within the parliament not just by pro-democracy forces, but even some pro-government and even military MPs.

3. Politics—Challenges

The military is entrenched, and remains the overwhelmingly dominant force. Jake Hamstra thinks that the reform process may be irreversible, but it has the possibility of being slowed down or even stopped by the military if it chooses to do so.

Ethnic divisions and conflicts remain one of the key obstacles to reform. There have been many cease-fires signed in 2011, but there remain two serious areas of conflict, the Kachin in northernmost Myanmar and the Rohingya in the Rakhine state on the West coast of Myanmar.

The conflict with the Kachin seems to get the most attention both because is symbolic of the ethnic struggles in general in Myanmar and because of the involvement of the Chinese government in negotiations between the Kachin and the Myanmar government. The basic position of the Kachin is that they will only agree to a cease-fire if the government first grants them more self-rule. The government’s position is that they will only agree to granting them more self-rule if the Kachin first agree to a cease-fire. The negotiations between the two parties by the Chinese are aimed at bridging the gap between these two diametrically opposed positions.

The other serious area of conflict is in the Western Rakhine state of Myanmar with the Rohingya people, a Muslim people in a country which is mainly Buddhist. The government’s refusal to give citizenship rights to the Rohingya, and the violence perpetrated against them directly by the military and indirectly by the fomenting of sectarian violence between Buddhists and Muslims, is complicating Myanmar’s relations with ASEAN (Association of Southeast Asian Nations). The problem with the government’s relations with the Rohingya is that ASEAN is not as strong a counterweight in the conflict as China is in the conflict with the Kachin state to the north.

The low-hanging fruit in terms of reform has already been done. As reforms get harder, fault lines may begin to occur in parliament.

4. Economics—Positive Developments

The GDP growth will accelerate to a level of 6.7% a year in the period from 2014-2017. Inflation will remain manageable, but will remain vulnerable to typhoons and other weather-related events because 70% of the economy is still tied to agriculture.

Foreign direct investment is ramping up, and regional trade will start to ramp up as well.

Reforms are trying to liberalize state-run enterprises, and thereby increase private competition. Two examples of reforms that are being carried out are a) monetary independence of the central bank and b) fiscal transparency. Regarding monetary independence, this is the first time the central bank will gain independence from the Finance Ministry. Regarding fiscal transparency, last year was the first time the budget was openly debated in parliament as opposed to being decided upon behind closed doors.

5. Economics—Challenges

Corruption is still a very serious problem that hampers foreign direct investment. The infrastructure, especially the electrical grid, remains poor, and therefore growth in foreign direct investment and trade will remain gradual.

The agricultural sector now accounts for 70% of GDP, and all of the investment seems to be going in resource-extraction projects, which does nothing to boost domestic demand. Myanmar will not be an export-oriented global “tiger” for many years to come.

6. Key Issues to Watch

Political: constitutional change ahead of the 2015 election, peace process with ethnic groups Kachin and Rohingya

Economic: International telecoms will bid for 2 out of the 4 licenses available (Myanmar has low mobile phone penetration rate of 9%)

Here’s a chart summarizing the positive developments and challenges:

Positive Developments Challenges
Politics
  • April 2012 elections fair
  • Parliament functions well
  • Support for reform is broad-based
  • Expansion of civil and political rights
  • + relationship between opposition leader Aung San Suu Kyi and President
  • Military still dominant political force, retains “veto power” over reforms
  • Ethnic conflict in Kachin and Rakhine states
  • Sectarian violence
  • Reforms will get more difficult
Economics
  • GDP growth high (6.7%)
  • Inflation manageable
  • FDI, trade increasing gradually
  • Economic reforms (transparency, liberalization)
  • Corruption
  • Investment concentrated in resource-extraction
  • Infrastructure poor
  • Domestic demand lags

7. Economic and Political Forecast—Three Scenarios

In May 2012, the EIU gave a webinar in which they gave the following three scenarios and their likelihood.  This probably remains the basic forecast for Myanmar according to EIU.

Scenario

Economic

Political

GDP Growth

Likelihood

1) Most likely

Investment occurs, reform slows

Military in control, NDL reform party still marginal

7%

60%

2) Optimistic

Breakup of state monopolies, reforms implemented

Multi-party democracy, NDL not majority but very influential

8.5%

25%

3) Pessimistic

Only growth in extractive industries, reform halts

Military cracks down on reforms, ethnic conflicts unresolved, sanctions reinstated

5% (current baseline)

15%

8. Question and Answer session

Here are the discussion questions that came at the end of the presentation

Question 1: Will there be progress towards the settlement of ethnic conflicts?
There will be partial progress, especially at the meeting between the nationalities of the federal council representing 11 ethnics groups and the government. They have agreed to facilitate economic development in these areas, in order that the economic reforms benefit the regional areas as well as the area around the capital. The government in return wants the ethnic militias to be subsumed in a border guard controlled by the government.

Remember, the government is trying to move towards feudalism, and has the problem of working against 50 years of movement the other way, as the military tried to centralize control of the country.

Question 2: To what extent will Myanmar be able to create a Special Economic Zone (SEZ)?

There was initial interest in setting up an SEZ by Japanese and other foreign investors, but this is now waning because issues of insufficient infrastructure (electricity in particular) and land rights need to be resolved first. The problem is that most of the investment is flowing into resource extraction, and not infrastructure at this point.

Question 3: How does the mobile phone penetration rate of Myanmar compare to that of other countries in the area?

Mobile phone penetration in Myanmar is estimated at between 3 and 9%. For comparison, in Cambodia the rate is 70%, and in Thailand it is 110%. That is why the issue of the international telecoms gaining licensing rights in Myanmar is an important one.

Question 4: What is the banking situation in Myanmar?
This is one of the most challenging areas, because state-owned banks are dominated by people with close ties to the former military regime. The function of these banks was to funnel money to government-related projects that were not necessarily in the interest of the country as a whole. The state-owned banks will not be broken up, but their portfolio expanded as foreign direct investment increases. The main problem from a development perspective is that banks are not granting loans to agricultural and rural areas, which are in greatest need of such development.

Question 5: What is China’s role in the negotiations with the Kachin ethnic group?

China is playing a positive role in the Kachin negotiations. It has influence over Kachin because it is hosting refugees—there are currently ethnic Kachin on the Chinese side of border. Chinese have been the main provider of support for the military in Myanmar in the form of weapons, training, and intelligence. China is seen by the government of Myanmar as fairly neutral. The influence is beneficial, but may not be strong enough break the deadlock in negotiations that currently exist: Kachin wants political settlement before a cease fire, and the government wants a cease fire before political settlement.

Question 6: What are the roadblocks ahead for reform in Myanmar?

Although there is strong popular support of reform in Myanmar, and popular support for the democratic opposition, the main problem is that the pro-government forces are supporting investment to foreigners who want to exploit the natural and land resources of Myanmar, and these investments do not help the entire country as a whole.

Question 7: What is the role of Japan in Myanmar’s economic development?

Japan has played a critical role not only because of investment, but because they were at the forefront in terms of debt forgiveness. It not took the lead in terms of debt forgiveness, but also in terms of creating bridge loans to restructure the remaining debt. They played a role in looking into developing an SEZ near Yangon, although this development has stalled due to reasons of poor infrastructure and land rights issues.

Question 8: What is the exchange rate regime?

The exchange rate was vastly overvalued. In April 2012, the official exchange rate was revalued, and the kyat, the currency of Myanmar, will appreciate gradually over the next few years, causing higher flows of investment into the country.

Question 9: What is the current state of development of the SEZ in the port of Dawei with the Thai government?

There was an MOU signed back in 2008 under the former military government. However, the government canceled plans for a power plant to provide electricity to the SEZ, and a Burmese conglomerate subsequently phased out investment in the zone. There has been waning confidence on the Thai side as well. The electricity supply needs to be ensured before the project gets off the ground.

This concludes this blog post.    

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