Myanmar’s Reform Wave Riptide
As the US and EU debate tougher trade and diplomatic sanctions against Myanmar for expulsion and killing of Muslim Rohingya refugees, after crossing the border by the hundreds of thousands into Bangladesh and now fleeing further South by boat ahead of the rainy season, the two-year old government of Aung San Suu Kyi has also come under harsh international community criticism for economic policy lethargy. The IMF in its March Article IV report joined alienated investors in urging a “second reform wave,” after a number of overdue fiscal, monetary, business and banking steps during the initial transition as outlined under a dozen-point ruling party National League for Democracy plan. These themes were elaborated under a 250 provision blueprint in February spanning objectives from state enterprise overhaul to judicial modernization without designating priorities or assigning responsible ministries.
This muddled vision has kept the country at the bottom of the World Bank’s Doing Business rankings, especially in minority shareholder protection, bankruptcy handling and contract enforcement. It leaves excess bureaucracy and infrastructure defects that hamper normal commercial and credit transactions, despite headline growth and inflation progress. Tax revenue is just over 5% of GDP to embed budget deficits, and implementing rules are still lacking for the new investment code permitting 35% international ownership in local firms. The central bank inaugurated a bad loan resolution push which has stalled without broader direction, as State Counselor Suu Kyi and her team continue to shun technocrats and political outsiders who could contribute sharper business-friendly thinking, including around the moribund Yangon Stock exchange with a handful of illiquid listings.
The IMF report refers to the “downside risk” of the Rakhine State humanitarian crisis, despite limited immediate economic effects. Total reconstruction and social costs have yet to be tallied even as few refugees are likely to repatriate voluntarily, and aid partners may withdraw as investor sentiment sours in protest of documented abuses. Focus there may detract from creation of an “overarching private sector roadmap” for near-term structural changes and productivity gains that can also set a path toward Sustainable Development Goal achievement. Medium term GDP growth will be 7-7.5% with continued foreign direct investment and commodity price improvement, despite a chronic current account gap, but reduced donor budget support would force repeated reliance on central bank funding at the same time it is trying to curb banks’ runaway 25% credit expansion to the construction and real estate sectors. Financial stability would then be undercut on both fronts, the Fund suggests.
Fiscal year 2017/18 growth is estimated at 6.7%, on agricultural recovery and a 40% rise in rice and textile exports notwithstanding mixed tourism. Inflation should be in the 5% range, and the fiscal deficit will rise to 3.5% of GDP as the authorities target a central bank domestic debt buying ceiling at 30% of the total. A main thrust is to cut state company losses which affected one-quarter of them led by the electric power operator. Tax law regimes await thorough updates for personal and corporate income, and in the mining and natural resources industries. The currency was firmer in 2017 compared with the previous year’s depreciation, but dual official and informal rates persist despite calls for greater flexibility. Foreign exchange auctions get minimal bank and non-bank participation and do not aid price discovery and the 0.8% daily trading bond could be formally removed. The system can still be managed but should aim to avoid intervention outside of “disorderly conditions” to enable reserve buildup beyond the current $5 billion or three months imports, the IMF recommends.
Monetary policy in turn should move to interest rate liberalization and inflation targeting, as the interbank and government bond markets develop with introduction of a yield curve. The central bank is not independent but has imposed reserve requirements and bolstered supervisory capacity with expert technical assistance. New capital, liquidity, loan classification and large borrower exposure rules were introduced nine months ago. Private and state run units, with respective two-thirds and one-third asset shares, are undercapitalized and unprofitable. The former must whittle down real estate-related overdrafts, and the latter should “move ahead” with restructuring, both the Fund and international banking analysts argue. However this cleanup has languished along with the broader post-socialist era sweep, as frontier market portfolio investors indefinitely relegate allocation to the dustbin.
