Myanmar - Economic Activity - Dec 06 2011

BMI View: On the heels of recent surprisingly fast-paced reforms, potential opportunities for Myanmar's economy are perhaps the highest they have been in over five decades. Moving forward, the economy could be set for a boom period in real estate, tourism, construction, and exports, but much will depend on the government's continued push towards reform and the eventual lifting of stifling US and EU sanctions. We see the Myanmar economy growing by 5.0% in 2012 following a 6.0% performance in 2011 even as growth in the rest of the world falls more sharply given the country's unique prospects of economic liberalisation.
 
One of Asia's best educated and wealthiest states prior to a military coup in 1962, Myanmar is now bereft with a cumbersome dual-rate exchange system, a major infrastructure deficit, and heavy sanctions from the US and EU following almost five decades of failed economic policy. However, on the heels of an election that was widely derided as a rigged handover of power from the military to its own factions in 2010, change may finally be coming in earnest to the beleaguered resource-rich state. 

The culmination of recent (and surprisingly strong) reform efforts was US Secretary of State Hillary Clinton's November 30 visit to Myanmar, during which she met with President Thein Sein and political activist Aung San Suu Kyi. The visit represented the first time such a high level official from the US had visited Myanmar since 1955 and heralded a major thaw in relations between the two countries. Following such an extended period in isolation, the recent pace of change has been relatively breakneck and could open up myriad opportunities for Myanmar's struggling economy. 

Dependence On China To Wane

Myanmar's sudden shift towards political reform is highly indicative of its intentions to stem its growing reliance on giant neighbour China. Over the past 18 months, Myanmar has received 20% more foreign direct investment inflows than it had over the preceding 20 years combined, with China responsible for 70%. President Thein Sein's September decision to halt the China-backed US$3.6bn Myitsone dam project signalled that the new government is serious about balancing the playing field with China, and to do so, Naypyidaw has now turned towards the West.

Shooting Higher
Myanmar - Stock Of Foreign Direct Investment, US$mn
Shooting Higher - Myanmar - Foreign Direct Investment, US$mn

Source: BMI, UNCTAD, Myanmar CSO

This is not to say that Myanmar's relationship with China is likely to deteriorate precipitously. Given China's thirst for Myanmar's natural gas and copper resources, and Myanmar's continued need for Chinese investment, the two countries' mutual interests promise to keep relations close. Moving forward, China is very likely to remain Myanmar's closest ally and largest investor as was indicated by head of Myanmar's armed forces General Min Aung Hlaing's auspicious visit with putative future Chinese president Xi Jinping just days before Clinton's arrival. 

Lifting Of Sanctions Could Usher In New Era

Still, d├ętente with the US in particular could present monumental economic opportunities for Myanmar. Since 1997, the US has forbidden all new investment by American companies into Myanmar as well as most Myanmar exports to the US. While the US has repeatedly stated that Myanmar's government will have to show considerably more progress on the political reform front before it can consider reducing or lifting sanctions, Clinton's visit is a major step forward, indicating that the US is likely to reward Myanmar further if the reform process moves ahead. 

The lifting of sanctions by the US and EU would solidify Myanmar's re-emergence into the international economy and could eventually set the stage for the country to build its own economic miracle. Rich in natural gas, timber, gems, metals, and myriad other valuable natural resources, Myanmar could potentially become a resource exporting powerhouse. Furthermore, with a literacy rate near 85% and at least 5mn English speakers nationally (most of whom live in Yangon) out of a total population near 60mn, Myanmar possesses considerable human capital.

Secondary Axis Required
Asia - Annual Exports Of Goods, US$bn (Myanmar RHS)
Secondary Axis Required - Asia - Annual Exports Of Goods, US$bn (Myanmar RHS)

Source: BMI

Still, it should be noted that corruption remains extremely widespread across Myanmar and will continue to plague its poor business environment for an extended period despite even swift wide-ranging reform. Myanmar's current state is underscored by Transparency International's most recent Corruption Perceptions Index rankings, which place the country second worst in the world, tied with Afghanistan and above only Somalia. 

Real Estate, Tourism Set To Boom?

In the short term, Myanmar's real estate and tourism sectors stand to gain immensely from an opening of the economy. In stark contrast to just one year ago, when struggling local hoteliers were converting chronically vacant rooms to office space, room shortages are already cropping up in the country's largest and most economically active city, Yangon, as businessmen and tourists alike are drawn towards the country's rapidly changing atmosphere.
In the real estate sector, even though prices have risen for every year for the past 20 years (according to media and anecdotal reports), the hopes that reform will lead to reduced limitations on foreign ownership should keep already lofty prices underpinned through 2012. 

With cash being far too risky for most wealthy Burmese to hold and foreign banking not an option for almost anyone holding a substantial amount of wealth, rich Burmese have plunged their capital into real estate, sending the market surging over the past few years. Prices have been reported as high as US$1,245 per square foot in the most sought after locations in Yangon, with properties in some upscale neighbourhoods hovering around US$375 to US$625. 

Still, if and when serious economic reforms take place, foreign demand could lead to massive speculation in the market, driving prices even further skywards over the medium term in what remains an exceedingly underdeveloped market. Furthermore, whereas booming property prices have thus far been restricted to a very limited section of Yangon, they could begin to spread rapidly should economic reforms move ahead as hoped. In such a scenario, a lack of office space in Yangon (where there is only 540,000 square feet of office space, or the equivalent of one New York skyscraper) and across the country is also likely to portend a construction boom. 

Kyat Could See Further Strength

Despite having the brightest outlook in nearly six decades, the Myanmar economy still faces major challenges before it can enter the pantheon of South East Asian miracle countries like Vietnam and Thailand. Standing in its way is a dilapidated exchange rate mechanism, where the black market rate of the Myanmar kyat to the US dollar is more than 120 times greater than the official government rate. As the official government rate of MMK6.4355/US$ is rarely (if ever) used to settle transactions, the black market rate, currently at MMK776.00/US$, is the effective exchange rate. 

Although the government is working with the IMF in order to move towards a single-rate mechanism, it lacks the ability to control the currency in a meaningful way. In light of the suddenly reform-minded government, as well as historic communication with the US, we now see the possibility of continued strength in the kyat despite it having appreciated more than 20% over the past two years. As the economy opens up, foreign demand for the kyat will surge, underpinning the currency's already strong historical price. 

Significant Upside Risks To Growth Forecast

Despite the growing chance of renewed recession in the US and EU, Myanmar's starting position as a nearly completely isolated economy means that it bears little exposure to the global economy's woes. As a result, risks to our growth forecast of 5.0% for 2012 are weighted heavily to the upside. Should either the US or EU ease sanctions considerably, we would consider revising our forecast upwards. 

 
MYANMAR - ECONOMIC ACTIVITY

2011 2012 2013 2014 2015 2016
Nominal GDP, MMKbn 1 45,024.2 f 51,648.3 f 59,247.1 f 67,963.8 f 77,963.0 f 89,433.3 f
Nominal GDP, US$bn 1 55.5 f 60.9 f 67.1 f 74.0 f 81.6 f 90.0 f
Real GDP growth, % change y-o-y 1 6.0 f 5.0 f 5.0 f 5.0 f 5.0 f 5.0 f
GDP per capita, US$ 1 890 f 956 f 1,033 f 1,117 f 1,207 f 1,305 f
Population, mn 2 62.4 f 63.7 f 65.0 f 66.3 f 67.6 f 68.9 f

Notes: f BMI forecasts. Sources: 1 Asian Development Bank. 2 World Bank/UN/BMI.

Posted by Mr Thx Wednesday, April 11, 2012

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