Myanmar: Riding high on foreign investment Asia Pacific Economic Outlook, January 2015

Economic growth is set to remain strong in the medium term on the back of FDI inflows into sectors such as telecommunications and oil and gas, but obstacles include a pre-election slowdown in reforms.

Myanmar

Myanmar’s economy continues to make progress, drawing on the benefits of greater integration with the rest of the world. Economic growth is set to remain strong in the medium term on the back of foreign direct investment (FDI) inflows into telecommunications, oil and gas, banking, and construction. The economy will also benefit from infrastructure development and institution building. To accomplish these, the country has been actively partnering with international organizations such as the World Bank and the International Monetary Fund (IMF) as well as key economies such as Japan. Myanmar’s increasing global engagement was most evident this year, when the country took over the rotating chairmanship of the Association of South East Asian Nations for the first time.

A surge in FDI

FDI into Myanmar surged in the first few months of the fiscal year, resulting in an upward revision to the FDI forecast for 2014–15. According to the Myanmar Investment Commission, FDI in the first five months of the fiscal year stood at $3.32 billion, a 113 percent year-over-year rise.1 The commission now expects FDI to cross $5 billion this fiscal year, up from an earlier estimate of $4 billion. Telecommunications has been a key recipient of FDI, accounting for 31 percent of total inflows into the country from April to August. Oil and gas (23.8 percent), real estate (18.4 percent), and hotels (13.3 percent) have been the other key beneficiaries of FDI.2 While rising housing demand has been a key factor aiding real estate, the sector, along with the hospitality industry, is increasingly benefitting from rising tourism inflows. According to the Ministry of Hotels and Tourism, tourist arrivals went up about 93 percent to 2 million in 2013; the ministry expects this figure to touch 3.1 million by the end of this year.3

In October 2014, Myanmar’s central bank granted operating licenses to nine foreign banks, all from the Asia-Pacific region.

Ooredoo and Telenor start operations

In January, Qatar-based Ooredoo and Norway-based Telenor received licenses to operate in the country. The two companies emerged successful from a bidding process; they are the first foreign telecom operators in the country. Both companies have started offering services, with Ooredoo starting in August, followed a month later by Telenor. Telenor has expanded operations to the city of Yangon after launching in Mandalay and Nay Pyi Taw. Earlier Ooredoo had launched operations in all three cities and has now expanded coverage to 35 townships in the Yangon region.4 Both companies are eager to tap into a market where the mobile penetration level is one of the lowest in the world, with just 12.3 percent of the population having access to a mobile phone.5 The rollout of services, however, has not been easy for the two companies. They have faced electricity shortages, poor road networks, and stifling rules related to land acquisition for setting up towers.

Hydrocarbon sector expanding

Proven hydrocarbon reserves in Myanmar amount to 50 million barrels of oil and 280 billion cubic meters of natural gas.6 Given limited exploration so far, the figures are likely to increase as foreign oil companies start prospecting in offshore sites, especially deep-water wells. In March 2014, the government had awarded 20 offshore blocks. In October, they announced that another nine offshore blocks will be auctioned in 2015; five of them are deep-water blocks, while four are shallow-water ones. Rising exploration is likely to add to hydrocarbon exports in the medium to long term, thereby offering much-needed revenue for the government as it starts to invest in infrastructure, skills, and poverty alleviation. Gas exports alone accounted for nearly 30 percent of total exports in the last fiscal year. Earnings from gas exports are likely to increase in the medium term as rising production helps offset domestic demand while boosting supplies to China and Thailand.7

Foreign banks set to start operations

In October 2014, Myanmar’s central bank granted operating licenses to nine foreign banks, all from the Asia-Pacific region. These banks are expected to begin operations in the first half of 2015. This is a positive first step in increasing credit flows into the economy and introducing advanced technology into the sector. However, rules relating to foreign banks appear tight at the moment. First, lending by foreign banks will be limited to foreign businesses in Myanmar. Second, they will be allowed only one branch and will not be involved in retail banking. Finally, they will be allowed to offer only US dollar–denominated loans to companies; any Burmese kyat–denominated loans to local companies will only be allowed in partnership with local banks. This last restriction may disappoint policymakers, who appear keen to keep in check dollarization, which is rising due to the opening of the economy to foreign firms and a steady weakening of the kyat.

Despite strong growth, concerns remain

Buoyed by increasing FDI and growth in construction, manufacturing, and tourism, Myanmar’s economic momentum is likely to continue in the medium term. According to the IMF, the economy is expected to grow at about 8.50 percent during the current and next fiscal years; this is up from an estimated 8.25 percent in 2013–14 and 7.30 percent in 2012–13.8 Myanmar, however, has a long way to go before it emerges as a key player in Asia. There are tangible risks in sight, including a slowdown in reforms before elections scheduled for the end of 2015. Moreover, years of economic isolation have led to poor infrastructure, low skills, and data inadequacy, thereby stifling businesses and preventing prudent policymaking. These factors have also delayed the building of institutions, especially those critical for a well-functioning free-market economy. Such institutions include financial markets, regulatory bodies, and legal systems. The government will need to fix these loopholes if it wants to ensure strong growth over the medium term. Otherwise the benefits of opening the economy to the world might just dry up.