Myanmar's NLD government cautiously rolls out reforms

Yangon

FOREIGN observers have been disappointed by the lack of economic reforms since the National League for Democracy (NLD) was elected to power in Myanmar in November 2015, but progress is picking up pace in recent years, with hopes for greater market liberalisation.

For the first two years the NLD economic team did little in the way of economic reforming, and initially slowed down foreign direct investment (FDI) application approvals and new infrastructure projects, while they reviewed the various deals okayed by the previous military-dominated regime.

According to NLD insiders, the party's first priority after coming to power was to change Myanmar's local business culture, then focus on attracting FDI later in the game.

"Myanmar has a very big informal economy, with illicit trade at the borders and a lot of rent-seeking businesses," said Ye Min Oo, a member of the NLD Economic Development Committee. "So, once we won the election, we announced we would not use these ways anymore.

"For the first one to two years Myanmar companies didn't know how to do their business but the third year they understood and gradually they changed. That's why, last year, we saw some improvements in the economy."

Reforms that require opening the economy to FDI have often been blocked by local business groups, but their opposition has arguably weakened over the past two years.

The shift might have been hastened by the disastrous events in Rakhine State in August 2017 when the Myanmar military, after attacks by armed groups on several police stations, launched a brutal reprisal on Rohingya Muslims in the northern part of the state, forcing 700,000 to flee across the border into Bangladesh.

The assault renewed Myanmar's pariah status in the international community and was not good for business or FDI, already dampened by the NLD's lacklustre performance on the reform front.

FDI approvals dropped off in the 2016-2018 period, although they have shown signs of improving in last fiscal year, ending Sept 30.

"The total value of approved FDI increased between 2017/18 and 2018/19. Total approved FDI rose from US$3.3 billion to US$4.2 billion, supported by a 94.3 per cent increase in the transportation and communications sector and a 31.5 per cent increase in the manufacturing sector," said the World Bank's latest report on Myanmar, published in January.

According to World Bank figures, gross domestic product (GDP) growth hit 6.3 per cent in 2018/19, up marginally from 6.2 per cent in 2017/18 and 6.0 per cent in 2016/17.

The NLD's reform momentum picked up in May 2018, after the appointment of Soe Win as the new finance and planning minister. Mr Soe Win was the former managing partner of Deloitte's Myanmar operation.

Since then, several important reforms have been pushed through, starting with the new Company Law passed in August 2018, which allows companies with up to 35 per cent foreign equity to be classified as local (the previous limit was one per cent).

This allows firms with 35 per cent foreign equity to enjoy local privileges, such as the right to list on the Yangon Stock Exchange and own property.

The rule was extended to local banks as of Jan 1, with immediate results. Thailand's Kasikorn Bank, for instance, is in the process of negotiating a 35 per cent stake in Myanmar's A Bank.

Also, in January, Singapore's sovereign fund GIC and Norway's government-owned Norfund AS revealed they would purchase a 30 per cent stake in Yoma Bank worth US$88.7 million, Yoma sources confirmed.

Yoma Bank, part of the Yoma Strategic Holdings founded by Myanmar businessman Serge Pun which is listed on the Singapore Stock Exchange, has already sold a 4 per cent equity stake to the International Finance Corporation, the financial arm of the World Bank.

Another significant reform for the financial sector came in April 2019, when the government finally announced the granting of licences to five 100 per cent international life insurance companies comprising the United Kingdom's Prudential, Japan's Daiichi Life, Hong Kong's AIA, the United States' Chubb and Canada's Manulife.

The decision had been expected four to five years ago but was continually put off, in part, by opposition from local banks, many of whom have branched out into the insurance sector, which is still minuscule (total premiums now amount to 0.1 per cent of GDP, or US$22 million, according to World Bank figures).

Myanmar's bond market, currently one of the main sources of government borrowing, will eventually benefit from the presence of the foreign insurance firms as they commonly seek steady investments such as the local bond market for their kyat-denominated premiums.

Myanmar's total public debt is only 36 per cent of GDP, small by regional standards, and nearly all of it is in local kyat borrowings. One of the NLD's untrumpeted accomplishments has been to wean the government of dependence on borrowing from the central bank, which was the common mode of budget financing under the previous military-run government. "They went to zero borrowing from the central bank last year and they could do that because they were aggressive in offering treasury bonds," said one economist monitoring Myanmar.

The monetary prudence gives the current government plenty of leeway to return to using the central bank in times of potential crises, such as runs on the country's still weak banking system (there are 28 private banks and four state-owned ones).

"We are creating a mechanism through which the central bank can provide liquidity to the banks," said Sean Turnell, special economic consultant to State Counsellor Aung San Suu Kyi and director of research at the Myanmar Development Institute. "So, if push comes to shove we can print money."

The NLD-led government is also opening up the banking sector to more foreign players. Under new rules announced last year it will allow foreign banks to open 100 per cent subsidiaries in Myanmar, with up to 10 local branches, that should open for business in early 2021. There are already 13 foreign banks operating in Myanmar which were granted licenses in 2014 and 2016.

Where the government could be doing a lot more is in terms of fiscal spending, especially in the power generation sector.

"The situation is likely to get worse: peak demand is expected to reach 8.6 GW (gigawatts) by 2025 and 12.6 GW by 2030, more than three times the current level of 3.6 GW. This is the result of decades of underinvestment in infrastructure and inadequate policies," said the World Bank's latest report.

It estimates that the government will need to spend about US$2 billion per year to add five GW of new generation capacity by 2025. If it doesn't invest in electricity supply for the people, after hiking rates 80 per cent last year, patience with the NLD might wear thin this dry season, when blackouts and brownouts will become more common, observers note.