Myanmar’s new Finance and Planning Minister Soe Win represents a breath of fresh air for the country’s otherwise gasping economic planners and reformers. The veteran banker and businessman was sworn in to office on June 5 with high expectations he will steer a turnaround in the country’s economic direction.
Soe Win, 79, the former country manager and partner for multinational accounting and consulting firm Deloitte, brings decades of international banking and business experience with him to the job, significantly at a time the country is desperately trying to lure more foreign investment and stimulate economic growth.
“The whole atmosphere at Naypyitaw [the capital] has changed,” said Sean Turnell, special economic consultant to State Counsellor and de facto national leader Aung San Suu Kyi. Turnell has been providing advice on economic policy since Suu Kyi’s National League for Democracy (NLD) Party came to elected power in March 2016.
“The vista for reform has really opened up and there is a real feel that we are back to March 2016 with the ideas we were entertaining back then are now possible again,” said Turnell, who is an economics professor from Macquarie University of Australia.
The Myanmar business community and foreign investors have been underwhelmed by the NLD’s economic policies to date. The NLD government, packed with ex-political activists and victims of the former military regime’s penal system, is generally blamed for Myanmar’s slower-than-expected economic performance, although there are certain signs of an uptick.
Myanmar’s gross domestic product (GDP) grew 7.0% in 2015, the year before the NLD came to power, but dropped to 5.9% in 2016 before reviving somewhat to 6.4% last year, according to World Bank statistics. The bank projects 6.8% growth in fiscal year 2018/19 ending on March 30 next year, barring adverse impacts from rising oil prices and a lack of government investment in much-needed infrastructure.
Suu Kyi’s NLD government has emphasized boosting agriculture, which makes some sense in a country where 70% of the 53 million population still reside in rural areas and agriculture still accounts for 40% of GDP. The second main focus has been on national reconciliation, where it has fared poorly.
The military’s brutal campaign against minority Rohingya Muslims in western Rakhine state, offensives that have forced 700,000 refugees to flee into Bangladesh beginning last August 25, and a more recent offensive against the ethnic Kachin in northern Kachin State, have both been bad for business.
Last October, in response to the Rakhine crisis, the World Bank suspended a US$200 million credit line extended to the Myanmar government to be spent at its discretion.
Despite these challenges, Myanmar’s macroeconomic picture could be worse. The kyat currency has been stable for the past year and inflation is manageable at 5-6%. The budget deficit was 2.6% of GDP last fiscal year, while public debt to GDP was only 35%, the lowest ratio in the region.
That’s partly because the government is not investing in much-needed infrastructure, including roads, power plants and ports. One of the first challenges Finance Minister Soe Win will face is raising funds to finance those investments. Before that, he will need to figure out what his fiscal spending priorities are and get Suu Kyi’s cabinet behind his program.
Soe Win is planning to revitalize a “national economic coordination committee” which was supposed to be set up by the NLD in the first few months of its rule to coordinate and implement reforms, sources said.
Another step will be the publication of the Myanmar Social Development Plan (MSDP), scheduled for the end of June, which will spell out the government’s economic platform and goals.
There is much discussion in the MSDP (a preliminary draft was released in February) of agriculture, national conciliation, social development and environmental protection while also including a section on infrastructure building.
“Infrastructure projects that are deemed commercially viable and bankable, shall be pursued through a PPP (public private partnership) model,” notes the MSDP draft, which was however short on details about the proposed PPP model.
PPPs are notoriously difficult to implement if they fail to clarify risk-sharing arrangements between public and private players, and don’t allow private players management control over the projects.
The MSDP also clearly states the need for financial reforms. “It is imperative that the banking and financial sectors be further liberalized…The MSDP seeks to relax conditions imposed on foreign bank branches,” the draft said.
Banking reform is crucial for Myanmar’s economic development. Less than 20% of the population has access to formal financial services, leaving the majority of consumers, businesses and farmers dependent on informal lenders who can impose interest rates of anywhere between 24% to 60% interest per year.
There are a host of reforms Myanmar banks need to implement to facilitate financial inclusion, a professed goal of the government.
For the past five years, banking liberalization has been stalled by the Central Bank of Myanmar (CBM), whose some say overly cautious governor Kyaw Kyaw Maung is due to retire in July.
“In truth you can’t really fault him for anything, except for doing nothing,” said one Myanmar banker who asked to remain anonymous.
There is a possibility that Kyaw Kyaw Maung’s term will be extended, a scenario many Myanmar bankers see as negative to future reform.
Soe Win and Kyaw Kyaw Maung are known to have a good working relationship, so there are still hopes that the central bank would at least be open to reforms driven by a revitalized finance ministry.
“Regardless of how it turns out, we are hoping the central bank will become a more positive player,” said government advisor Turnell.
Reforms are needed on various fronts. For starters, the central bank could change mandated banking hours, now limited to 9am to 3pm, and allow banks to open certain branches on weekends. More crucially, the CBM needs to allow commercial banks to set their own interest rates according to lending risks. At the moment, deposit interest rates are fixed at 8% while credit rates face a ceiling of 12%.
Last July, the central bank issued prudential regulations on the banks that would have forced them to reduce their overdraft lending (OD) to 20% of their respective portfolios by year-end 2017. OD lending accounts for 75% of all lending, or US$9 billion. Realizing that the requirement could have sparked a banking crisis, the deadline was later extended for three years.
Myanmar banks have resorted to OD lending – loans to clients at fixed interest rates that are rolled over annually without being called in to assess the value of the collateral – because most loans are limited to one year durations by the CBM. Nearly all loans are guaranteed only by property – land and buildings – making OD the simplest way to swiftly turnover loans to clients.
While weaning the system of OD lending makes sense and would also be good for the banks, the CBM should also allow banks greater freedom to set their own interest rates and length of loans in tandem, bankers say. Loosening restrictions on both domestic and foreign bank branches is another crucial step towards boosting Myanmar’s private sector and stimulating the economy, they say.
Myanmar granted foreign bank licenses to 13 foreign banks in 2014/15, but does not allow them to lend directly to Myanmar companies, restricting them to lending only to foreign companies. And yet only foreign banks have sufficient capital to finance the infrastructure projects and other large investments in cement plants and power plants needed to jumpstart growth.
Currently, a significant percentage of domestic and foreign banks’ capital goes to buying Myanmar government bonds, the main vehicle for financing the national budget. This funding is thus being diverted away from more productive private sector investments, critics say.
One avenue Soe Win could immediately explore would be issuing government bonds overseas, or more specifically in Thailand, where authorities are keen to turn the kingdom into a regional financial hub for the Greater Mekong Sub-region (GMS).
“I am sure there is good opportunity for Myanmar government bonds,” said Adisorn Singhsacha, founder and chief executive officer of the Bangkok-based Twin Pine Group, which helped neighboring Laos issue US$2 billion worth of bonds on the Thai market including US$1.6 billion issued by the Lao Finance Ministry.
“What Myanmar is lacking is money to invest. This is where sovereign bonds come in to the picture,” said Adisorn, who has been in discussions on the issue with the past three Myanmar finance ministers, so far to no avail. “I’m a lot more confident with the new team at the finance ministry.”