Saturday, March 31, 2012

Manu Bhaskaran: Is the optimism about Myanmar justified?

THE EXCITEMENT ABOUT Myanmar is growing as the country’s leaders have surprised everyone by beginning a process of political and economic reforms. With its population of around 60 million, a strategic position bordering China and India and an undoubted wealth of under-exploited resources, a reforming Myanmar could well become the investment story of the decade. Will Myanmar live up to the optimistic expectations or will it disappoint?

Our take is an optimistic one. We believe that enough momentum will be built as a result of the reforms so far to overcome obstacles to a surge in growth. However, it is typical of countries in the early stages of a growth surge to encounter occasional mishaps along the way, so investors must be prepared for some accidents along the way.

What has spurred the optimism?
Recent developments suggest that Myanmar’s leaders have made a fundamental commitment to a more open economy and a reformed political system. The new initiatives that they have introduced have not been incremental ones, they represent a substantial break with the past.

First, the political shift is very real:
Aung San Suu Kyi, the iconic leader of the opposition, has been released from house arrest and is now contesting by-elections on April 1 that should see her enter parliament. She is being treated with respect by the new leaders who were put in place after the military regime-sanctioned elections in 2010 which were won by the pro-military Union Solidarity and Development Party. The moderate ex-military officer, Thein Sein, was duly elected president by the new parliament.

President Thein Sein’s decision to cancel a Chinese-sponsored dam project, which had aroused considerable opposition, was also a clear departure from previous policies. It showed that his government was much more willing to listen to the ordinary people. Clearly, it also demonstrated that Myanmar’s new leaders were prepared to offend the Chinese if necessary.

A host of smaller liberalisations including a freer media and fewer restrictions on the Internet have followed. A National Human Rights Commission has been established, more than 200 political prisoners were amnestied and labour laws were amended to allow unions and strikes.

Second, while economic reforms have not been as dramatic as the political ones, the omens look good. Trade taxes have been reduced and pensions raised. It is also clear that the government is about to embark on the reform that all the major multilateral institutions have been asking for — currency reforms. Earlier this month, it was learnt that Myanmar will soon eliminate the multiple exchange rates that have distorted the economy for so long. The currency, the kyat will be floated and commercial banks will be allowed to trade in it. The currency reforms are likely to be one component of an overall financial sector development plan which the International Monetary Fund (IMF) is working on. The government is also proposing a new foreign investment law, which would offer foreign investors incentives such as tax breaks and guarantees against nationalisation, as well as the ability to set up in the country without a local partner.

Can the progress be sustained?
There are good reasons to believe that the political reforms will be maintained while economic reforms will be accelerated.

First, the probable motivations for the big break from the past suggest that the reforms will continue. Widespread protests by the country’s revered monks in 2007 shook the regime to its foundations and persuaded Myanmar’s leaders that they survive purely through repression alone. The Arab Spring last year would have persuaded the remaining hardliners of this. Moreover, the regime’s military leaders earned their spurs fighting Chinese-backed communist insurgents: They found the extreme dependence on China that their policies produced difficult to swallow. The military had also studied political transitions elsewhere and realised that they could still retain influence and privileges if they were pro-active in restructuring the political arena rather than wait for a revolution to oust them.

Second, the political reforms have already brought substantial rewards. Within weeks of the political reforms, US Secretary of State Hillary Clinton flew into Myanmar and agreed to ease the sanctions. She was followed by senior officials from Japan and other Western powers. Myanmar was allowed by its Asean friends to take the rotating chair of the organisation in 2014, ending the humiliation of having to forego this right to assuage Asean’s western allies. Foreign investment has also started to pour in and the kyat has strengthened significantly since the reforms began, helping to reduce inflationary pressures. With such clear progress, Thein Sein and his reformist group would have been strengthened against the hardliners who undoubtedly do exist.

Can the economy take off in the way China and Vietnam have?
Myanmar has substantial economic strengths. If sanctions are removed and the right policies introduced, the economy can embark on a huge transformation.

First, Myanmar’s demographics remain excellent. The population is young with the dependency ratio set to fall from 44% now to around 40% in 2020.

Second, Myanmar is the only country apart from Pakistan to have a long border with China and India, the two rapidly growing powerhouses of the global economy. It stands to benefit hugely as a supplier of raw materials, components, services and labour to these two giants. Moreover, Myanmar’s geographic position will make it a vital transit route. Roads, railways and pipelines from Myanmar’s Indian Ocean coast can link China’s isolated but rapidly growing western regions to the global economy. Similarly, India’s remote, isolated and under-developed northeast region can be linked to both China and Asean more easily once Myanmar opens up.

Third, Myanmar has considerable but under-exploited resources. Besides natural gas deposits, gems and teak, it also has fertile agricultural land which has not been developed to produce the higher yields possible.

Fourth, Myanmar has great tourism potential. Its ancient Buddhist structures, beaches and hill resorts will appeal to the growing hordes of Chinese, Indians and other Asian new rich.

Fifth, its low-cost labour force and proximity to China, India and Asean will help it serve as a lowcost manufacturing base for exportoriented manufacturing.

Sixth, Myanmar has a helpful legacy of free market economic institutions and practices, which it retained after independence, including English common law. This could put it at an advantage to Vietnam, for example.

What are the downside risks?
Transitions from authoritarianism to freer politics and from a closed, overregulated economy to a more open and liberal one are never easy. Investors need to watch out for a number of things that could go wrong:
Financial risks: Virtually all rapidly growing economies including China have suffered some form of major financial turbulence because they tend to be slow in putting in place effective supervision of financial institutions and a credible monetary policy that stabilises the currency and inflation. However, Myanmar has already had its share of financial crises — the banking sector almost collapsed in 2003 when the failure of several informal finance companies triggered runs on banks. Lessons have been learnt so the risks of another major crisis have been lessened. If the currency reforms are indeed implemented and the IMF’s financial reforms put in place, such risks can be contained, though not eliminated.
Corruption and the distorting power of vested interests: Some analysts note that several cronylike networks exist in Myanmar, leveraging off their connections with senior officials. If such vested interests grow richer as the economy gains momentum, they will become more powerful and influence policymakers and regulators to their benefit and potentially against the interests of other domestic players — or even against the interests of foreign investors. Even the more successful emerging economies are burdened by such problems, for example, Indonesia and Russia and it is possible that Myanmar could also go this way.

Political instability: Our baseline scenario is that the initial successes of the reform process will lend momentum to more reforms, which then strengthen political stability and bring in even more economic reforms. However, there are risks — given that Thein Sein is reported to have suffered poor health, and given that a lot rides on his leadership. Other risks such as the insurgencies by ethnic minorities persist but it is encouraging to see the government now step up efforts to win the minorities over.

Clearly, risks cannot be avoided and Myanmar is not for the risk averse. However, the more important question is whether the downsides will be great enough to derail the economic takeoff. Here the answer is quite clear — there are enough good developments in Myanmar to crystallise a momentous acceleration in economic growth that can produce an economic transformation at least as exciting as what we have seen in Vietnam.

Source/Extract/Excerpts/来源/转贴/摘录: / no 516
Publish date:26/03/12

1 comment:

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