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SINGAPORE, October 22, 2019 – Myanmar’s economy has picked up in FY18/19 after slowing down during the six-month transition in FY18, supported by an improvement in business sentiment amid renewed reform momentum. This was highlighted in the 2019 Annual Consultation Report on Myanmar published by the ASEAN+3 Macroeconomic Research Office (AMRO) today. The report was prepared on the basis of AMRO’s Annual Consultation Visit to the country from June 18 to 27, 2019 and data available up to August 23, 2019.
After a moderation to 6.5 percent in FY18, the economy is projected to grow at 6.8 percent in FY18/19 and 7.1 percent in FY19/20 with the reform momentum picking up, supported by improving business sentiments, strong growth in garment and other manufacturing products, an expansion of tourism-related services, and stronger fiscal spending. Inflation has been volatile and mainly driven by supply-side factors. It is projected to increase to 8.8 percent in FY18/19 and to around 9.0 percent in FY19/20, partly due to electricity tariff hikes.
Risks to growth stem mainly from continued ethnic tensions in the Rakhine State and uncertainties in the global economy related to trade protectionism, geopolitical risks, and energy prices. The protracted ethnic tensions in Rakhine State are expected to continue to have a dampening effect on investor sentiment, in particular, of western investors. The banking system remains weak and is still transitioning to a more stringent banking regulatory framework under Basel II.
While Myanmar’s economy could be affected by weaker demand from China as a result of the U.S.-China trade tensions, it also stands to gain from investment inflows due to the accelerating relocation of manufacturing—especially in labor-intensive industries—into Myanmar. However, to reap this opportunity, the country needs to improve the business environment and upgrade its hard infrastructure and economic institutions.
Sustaining reform momentum with timely implementation remains challenging. Reform momentum has picked up with a series of new policy actions in FY18/19. Investor optimism has been rising as a result. However, if such momentum is not sustained, it will result in lower growth in FY18/19, and also drag down medium-term growth prospects. The recent increase in electricity tariffs is welcome as it is expected to alleviate the fiscal burden, but it will have a one-off effect on inflation.
AMRO commends the launch of the Myanmar Sustainable Development Plan, which expresses the nation’s long-term development vision for the period 2018-2030, and outlines the policies to achieve the goals. However, there is an urgent need to address infrastructure bottlenecks and human resource constraints to crowd-in private sectorinvestment and raise growth potential. In addition, it is imperative to enhance public service capacity to implement policies and strengthen the tax revenue system to provide a stable and adequate source of funding.
The implementation of the reserve money-targeting framework is commendable, as is the increased flexibility in interest rates. With further development of the financial markets, the gradual liberalization of interest rates should enhance policy effectiveness in the medium term, but further liberalization should proceed cautiously. The Central Bank of Myanmar (CBM) should also continue to let the exchange rate adjust flexibly in line with market forces and continue to build up its holdings of international reserves to strengthen its capacity to manage external shocks.
Improving the soundness of the banking system requires further strengthening of the CBM’s regulatory and supervisory capacity. At the same time, leveraging on foreign capital and expertise to modernize the financial system through various partnerships is commendable. Ongoing reforms of state-owned banks should continue, although medium-term rehabilitation is needed to mitigate the risk to financial stability.
In addition to the overall economic outlook for Myanmar, the report also contains analysis on three selected issues critical to the country’s macroeconomic development: reform of the electricity sector, transforming state-owned banks (to facilitate economic development), and reflections on interest rate liberalization.
About AMRO and AMRO’s Annual Consultation Report:
The ASEAN+3 Macroeconomic Research Office (AMRO) is an international organization, established to contribute to securing the economic and financial stability of the ASEAN+3 region, which includes 10 members of the Association of Southeast Asian Nations (ASEAN) and China; Hong Kong, China; Japan; and Korea. AMRO fulfills its mandate by conducting regional macroeconomic surveillance, supporting the implementation of the Chiang Mai Initiative Multilateralisation (CMIM), and providing technical assistance to its members.
The Annual Consultation Report was prepared in fulfilment of AMRO’s mandate. AMRO is committed to monitoring, analyzing and reporting to its members on their macroeconomic status and financial soundness. It also helps identify relevant risks and vulnerabilities, and assists members, if requested, in the timely formulation of policy recommendations to mitigate such risks.
Assistant Head of Communications, AMRO