Myanmar Economic Monitor: Growing Economic Vulnerabilities

Feb
16

Myanmar Economic Monitor: Growing Economic Vulnerabilities

World Bank Group Macroeconomics & Fiscal Management | May 2016

 

Recent economic developments

After two years of strong economic growth and macroeconomic stability, Myanmar faced a more difficult economic environment in 2015-2016. The economy in 2013 and 2014 grew at an average of 8.5 percent per year, as reforms opened up the space for private investment, which averaged over 20 percent of GDP per year over this period. Public consumption also accelerated to help fill large gaps in service delivery, whilst increased domestic revenue and access to concessional finance helped to maintain fiscal discipline, with deficits below 3 percent of GDP. Even with rapidly growing demand, inflation in 2013 and 2014 averaged around 5.8 percent per year.

In 2015-2016, economic growth in Myanmar eased to 7 percent amid a supply shock from heavy flooding, a slowdown in new investment flows during an election year, and a more challenging external environment including lower commodity prices affecting Myanmar’s main exports. Agriculture output growth is estimated to have slowed to 2 percent due to the floods, compared to 5.6 percent growth in the previous year. The historic elections of November 2015 created a general sense of economic optimism and private investors have remained upbeat. However, ongoing structural constraints, shortterm exchange rate instability, rising inflation, and the political transition have contributed to a deceleration in new investment flows. These were exacerbated by tightening external financing conditions and declining global demand. Falling international commodity prices have also started to feed through to declining net exports.

These developments have brought to the fore a number of short-term economic vulnerabilities for Myanmar. The supply shock to agriculture contributed to a sharp rise in inflation, which peaked at 16 percent (year-on-year) in October 2015. Low productivity in the sector also means slower recovery, affecting the poor and vulnerable most negatively. Negative shocks to agriculture can exacerbate push relative to pull factors in rural-urban migration, the overall rate of which is increasing rapidly.1 At the same time, Myanmar’s light manufacturing sector, dominated by food processing, is facing more competition from cheaper imports, which affects its ability to create new employment. On the external accounts, the value of exports declined by 12 percent in nominal terms in the first three quarters of 2015-2016 compared to the same period last year due to the agriculture supply shock and declining commodity prices. This has contributed to a growing trade deficit and pressures on the exchange rate.

The institutional capacity and policy responses to deal with these macroeconomic shocks and imbalances have faced some challenges. On fiscal policy, pressures from a weakening Kyat and falling commodity prices led to a sharp increase in monetary financing of the deficit, which will have compounded underlying inflationary pressure. Treasury Bill auctions, which can help to absorb domestic liquidity, remain undersubscribed due to lower than expected discount rates. Concerns over the growing trade deficit seem to have prompted measures to contain the demand for foreign currency and imports. These include limits on the withdrawal of foreign currency, administrative delays and red tape in foreign transfers, and limits on importation of capital machinery. The volume of currency traded in the official foreign exchange auctions has gradually declined over the course of the year, and not offset by any major increase in activity on the interbank foreign exchange market.

 

Economic outlook

As the economy recovers from its 2015-2016 supply shock and private investments begin to pick up again, real GDP growth in Myanmar is projected to rise to 7.8 percent in 2016- 2017, and average 8.2 percent per year over the medium-term. The agriculture sector is projected to bounce back over the short-term, though there are downside risks from the effects of El Niño, which have created severe drought in early 2016. Investors’ demand for services (e.g. transportation, distribution, information technology, communications and logistics) is expected to be the main driver of growth over the short to medium-term. Beyond this, infrastructure construction activity, particularly in the power and transport sectors, are expected to pick up pace and be major drivers of growth over the medium to long-term.

Inflationary pressures are expected to ease relative to 2015-2016, averaging 8.5 percent over the course of 2016-2017. This is linked to recovery from last year’s agriculture supply shock, combined with projected low international commodity prices. International agricultural prices are projected to decline in 2016; the largest drop is for grains (-3.4 percent), which have a relatively big bearing for Myanmar.2 Oil prices are projected to average US$37 per barrel in 2016, which should benefit Myanmar as a net oil importer.3 Downside risks to this projection include continued monetization of the budget deficit and limited monetary policy capacity to mop up excess liquidity.

The Union Budget deficit is projected to average 3.5 percent of GDP over the medium-term. Oil and gas receipts are expected to decline due to a combination of falling production from existing gas fields and lower international commodity prices. At the same time, ongoing tax administration reforms should yield positive results for income tax 2 WBG, “Commodity Markets Outlook: Weak Growth in Emerging Economies and Commodity Markets,” (Jan 2016) 3 Ibid. collections. Government revenue could average around 14 percent of GDP over the medium-term. Spending pressures are likely to remain high with Myanmar’s growing infrastructure bill, but also its rising recurrent needs to improve coverage and quality of public services. Over the medium to longer-term, the manufacturing and processing sectors continue to hold strong promise as potentially important drivers of inclusive growth. Structural transformation towards higher value added manufacturing will depend in big part on the growth of supporting infrastructure and services, but also its rising recurrent needs to improve coverage and quality of public services. Over the medium to longer-term, the manufacturing and processing sectors continue to hold strong promise as potentially important drivers of inclusive growth. Structural transformation towards higher value added manufacturing will depend in big part on the growth of supporting infrastructure and services, but also investment in skills. The garments sector could help address binding constraints in services and infrastructure that affect the manufacturing sector as a whole. This could lay the foundations for higher value addition, and avoid a low equilibrium dominated by trading, low value services, and basic assembly. P

Over the medium to longer-term, the manufacturing and processing sectors continue to hold strong promise as potentially important drivers of inclusive growth. Structural transformation towards higher value added manufacturing will depend in big part on the growth of supporting infrastructure and services, but also investment in skills. The garments sector could help address binding constraints in services and infrastructure that affect the manufacturing sector as a whole. This could lay the foundations for higher value addition, and avoid a low equilibrium dominated by trading, low value services, and basic assembly.

http://documents.worldbank.org/curated/en/232051468186846783/pdf/105944-REVISED-PUBLIC-MEM-May-2016.pdf

Leave a comment

Latest Projects