Asean Investor

What Does Myanmar Need to Liberalize its Economy?

ASEAN_Investor
Publish date: Tue, 11 Aug 2015, 12:44 PM
Marc Djandji, CFA is the Editor-in-Chief of The ASEAN Insider, a subscription-based monthly investment newsletter committed to finding compelling investments backed by powerful structural trends in Southeast Asia. He is also a co-Founder and Partner of ASEAN Strategy Group Ltd., an independent investment banking boutique focusing on cross-border M&A and corporate finance advisory for companies in the small to mid-market segment in Southeast Asia.

Myanmar Investment

Its military regime, coupled with sanctions, forced economic isolation upon Myanmar for 49 years.

This has caused the Southeast Asian nation to fall behind many of its ASEAN counterparts in terms of economic growth and living standards. In 2009, together with North Korea, the economy was named the least free in Asia.

Since 2011, the year the quasi-civilian government of President Thein Sein came to power, Myanmar has seen some positive trends. Social and political reforms were started and are still in progress.

Foreign capital has reacted favorably to those reforms, with foreign direct investment in Myanmar gradually increasing. Between January and November of 2014, foreign direct investment totaled up to US$4.4 billion.

Yet the economic liberalization process is far from straight forward. While Myanmar's economy is poised to grow at around 8.5% this year, the nation is exposed to many domestic and international risks.

Arguably, the strong US Dollar poses the biggest risk. As the Federal Reserve looks set to increase interest rates by the end of this year, the Burmese kyat is expected to depreciate even further than it already has. "Myanmar simply does not have enough foreign reserves to resist a kyat depreciation," warned the IMF as it described that Myanmar could be set for a "perfect storm".

Myanmar is flooded with natural resources which makes the nation a favorite partner for its neighboring countries. Yet the widening current account deficit is hampering such potential by reflecting a fundamental weakness in the Burmese economy.

Experts have thus advised that Myanmar should opt to finally adopt a flexible exchange rate that mirrors market conditions. This would close the gap between official and parallel market rates - demand for US Dollars would be suppressed which in return would lead to a strong kyat. Such measures would cut Myanmar's current account deficit and curtail imported inflation.

Myanmar also still faces an uphill battle with regard to its current fiscal accounts. In order to improve fiscal conditions, Myanmar has to gain control of its expenditures and increase tax revenue - reportedly, tax revenue in 2014 was only 7% of GDP, the lowest among ASEAN nations by far. Military expenditures have to be cut sharply.

There is no room for argument that Myanmar has come a long way since 2011. The economy is slowly integrating into the global arena. Nevertheless, to ensure more economic prosperity, reforms to liberalize the economy need to continue.

By Mireille Bisnaire - investasian.com

The post What Does Myanmar Need to Liberalize its Economy? appeared first on Asean Investment | Marc Djandji Blog.

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