May 2018 Growth Amidst Uncertainty Hans Anand Beck Lead Economist, - - PowerPoint PPT Presentation

May 17, 2018

Myanmar Economic Monitor May 2018 Growth Amidst Uncertainty

Hans Anand Beck Lead Economist, Myanmar

The economy performed better in 2017/18 amidst uncertainty.

• Myanmar’s growth picked up to 6.4 percent led by agriculture

and manufacturing, and helped by strong global economic recovery

• Inflation moderated to 5.5 percent. Current account and fiscal

deficits narrowed and the Kyat strengthened slightly. While the economic outlook remains positive, risks have intensified.

• Rising input costs, policy uncertainty and the perception of

slowing reforms.

• Uncertainty in global trade policy and commodity price

volatility. The government has the reform tools to improve the outlook

• Implement the Myanmar Sustainable Development Plan
• Implement effectively and raise awareness of the Investment

Law and Companies Act to generate FDI and knowledge, and employment.

Key Takeaways

3

Government reforms can raise the outlook and economic potential The outlook remains positive, but risks have intensified The economy performed better in 2017/18 than 2016/17

4

Source: World Bank Global Economic Prospects January 2017

Global conditions improved, providing a favorable environment

2.4 1.6 3.7 3 2.3 4.3 3.1 2.2 4.5 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 World Advanced economies Emerging and developing economies Percent

Real GDP Growth

2016 2017e 2018f

Myanmar capitalized on global recovery, but is losing its lead in the region

1 2 3 4 5 6 7 8 LAO CH MMR CAM VIET INDO MAL THA 2016 2017 2012-17 average

Growth was broad based

8.4% 8.0% 7.0% 5.9% 6.4% 6.8%

• 1%

0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19F Agriculture Industry Services GDP production

Real GDP growth and sector contribution Output, Employment, Future output PMI

April'17 May'17 June'17 July'17 Aug'17 Sept'17 Oct'17 Nov'17 Dec'17 Jan'18 Feb'18 Mar'18 Output Employment Future output index

Strong exports narrowed the trade and current account deficits and FDI flows picked up

• 25%
• 20%
• 15%
• 10%
• 5%

0% 5% 10% Share of GDP Trade balance Services balance Primary income balance Secondary income balance Current account

• 14%
• 12%
• 10%
• 8%
• 6%
• 4%
• 2%

0% 2% Share of GDP Direct Invesment Portfolio Investment Other Investment Financial account

Current account Financial Account

Export growth was led by natural gas, garments and agriculture, with access to new markets

Rice - Acceleration of exports and diversification of destinations (m tons)

50 100 150 200 Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2014/15 2015/16 2016/17 2017/18 Index: April 2017 = 100 Value Quantity Price

Natural gas exports: Quantities and prices

100 200 300 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2013/14 2014/15 2015/16 2016/17 2017/18 USD billion Border Sea Total

Inflation fell in early 2017, but picked up since August driven by food prices

0% 2% 4% 6% 8% 10% 12% 14% Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Year on year change CPI Food CPI Non Food CPI Headline

7 % 5.5%

Broad money growth increased, as CBM reduced its intervention through the deposit auctions

0.0 0.5 1.0 1.5 2.0 2.5 3.0 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% Q4/2015 Q1/2016 Q2/2016 Q3/2016 Q4/2016 Q1/2017 Q2/2017 yoy change Private sector Broad Money Net Claims on CG Reserve Money Money Multiplier (RHS)

Money growth CBM Deposit Auctions

• 8.0
• 6.0
• 4.0
• 2.0

0.0 2.0 4.0 6.0

• 500

1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4 2014/15 2015/16 2016/17 2017/18 Percentage Kyat billion Bids accepted Bids submitted Real Interest Rate (RHS)

Government size remains small and actual fiscal deficit may be considerably lower than the budget

• 1.1%
• 4.3%
• 2.7%
• 5.8%

1.1%

• 0.5%

0.4%

• 1.1%
• 2.2%
• 3.9%
• 3.1%
• 4.7%
• 6%
• 5%
• 4%
• 3%
• 2%
• 1%

0% 1% 2% PA PA PA RE 2014/15 2015/16 2016/17 2017/18 Public Sector SEEs Union Government

Fiscal balances, Percent of GDP Size of general government v per capita GDP, Myanmar in global perspective, 2016.

12

Government reforms can raise the outlook and economic potential The outlook remains positive, but risks have intensified The economy performed better in 2017/18 than 2016/17

Favorable medium-term economic outlook

2015 2016 2017 2018 2019 2020 Real GDP growth (% change) 7.0 5.9 6.4 6.8 6.9 7.1 CPI Inflation (end of period) 8.4 7.0 5.2 4.9 5.3 6.0 Current account balance (% of GDP)

• 7.2
• 6.4
• 5.9 -4.7
• 4.1
• 3.8

Fiscal balance (% of GDP)

• 5.1
• 3.0
• 4.7
• 4.8
• 4.4
• 4.4

But downside risks have intensified

14

Upside

Downside

External risks Domestic risks

15

Government reforms can raise the outlook and economic potential The outlook remains positive, but risks have intensified The economy performed better in 2017/18 than 2016/17

Government has the right tools for reform

• MSDP offers the much-needed unifying and coherent

roadmap for reforms

• By raising more and spending better, Myanmar can use its

budget for addressing priorities under the MSDP, such as investments in energy, transport, education and health

• Myanmar can attract more investment, both foreign and

domestic, by implementing the new Investment Law and the Companies Act, tracking doing business reforms and, providing a secure transactions framework, and further liberalizing key sectors such as Insurance

• Four C’s critical for reforms going forward: coordination,

consultation, certainty and communication

Raising labor productivity will require a better allocation of factors and a focus on infrastructure

• The private sector in Myanmar has changed a lot:

40% of firms are less than 10 years old. There are few foreign firms but they represent 20% of formal employment and of exports.

• Young firms in manufacturing also tend to be very

large – whether because they are new domestic or foreign ventures or because they have recently been privatized

• There is a lot of dispersion in labor productivity

and reallocation should go further to allow productive small firms to grow more and unproductive large firms to shrink

• One important factor that seems to explain labor

productivity is access to electricity

Foreign firms as a share of total:

Investment Law is a milestone to attract FDI. Implementation and awareness is key

• New Investment Law well received, especially

by foreign investors who account for up to a fifth of exports and of formal employment.

• Awareness of law still low, not yet fully

implemented.

• The main changes include lower entry barriers,

more streamlined procedures, a dedicated mechanism to mediate investor disputes, and more selective investment incentives.

• Complementary reforms remain important to

improve investors’ access to factors such as land, infrastructure, skilled labor, and quality domestic inputs.

31.3 20.4 2.0 46.3 34.9 14.9 4.0 46.2 20 40 60 80 100 Foreign or JV Domestic Percentage of firms Source: Myanmar WBES 2016, 2017

Do you feel businesses in your sector will benefit from the New Investment Law?

Yes, the law has positive impact No, the law will have no effect Not aware of the law No, law will hurt my business

Making Finance Work for All

• Myanmar’s financial system significantly

underserves large parts of the private sector and general public.

• Recent changes have yielded significant gains,

including on financial access

• Road ahead is a balancing act between

financial stability with significantly expanding

• utreach and the range of available

instruments.

• Reforms needed are complex and

simultaneous – important that they are clearly articulated and focused on bringing benefits of more effective financial services to the general public

37 64 69 132 36 22 69 45 124 33 22 14 18 7 20 40 60 80 100 120 140 Myanmar Cambodia Philippines Vietnam Indonesia Domestic Bank Deposits / GDP (%) Private Credit / GDP (%) Credit to Government and SOEs / GDP (%)

Financial depth: Myanmar and Comparators, 2016

20