Myanmar’s continued dependence on foreign funds-
Among all the Southeast Asian countries, Myanmar has the least developed financial sector, which is incapable of adequately fulfilling its role as a financial intermediary. While the country’s banking sector is at a rudimentary stage, the capital and bond markets are struggling to emerge as alternative funding sources. With the domestic financial sector unable to provide the leverage needed to meet growing funding requirements, the country relies on foreign sources and budgetary support to meet infrastructure investment worth $120 billion by 2030.
Primitive banking sector
Myanmar’s financial sector continues to be dominated by banks. This traditional source of finance is underdeveloped and marred with a host of problems. The growth of the financial system in general and the banking system in particular is constrained by weaknesses in basic institutional systems. The legal framework as well as the financial infrastructure of the banking industry lags behind international standards. State banks are encumbered by social responsibilities imposed by the state, and dynamic private banks are rapidly eroding their market share of lending to businesses. Furthermore, state banks have little incentive to manage risk, partly because their lending is largely directed to the government, and partly because government guarantees ensure that banks will be recapitalised in the event of insolvency.
The government has made considerable progress in quite a short period in implementing reforms that will have a significant effect on the development of the financial sector. The key reforms include liberalisation of the foreign exchange market, and enactment of various laws such as the new Central Bank Law, 2013, and new Securities Exchange Law, 2013. However, the continuation of these regulatory reforms, and the development of human resources remain a major cause of concern. Banks need to address the broader challenge of regaining people’s trust in the sector, which was heavily shaken by a series of demonetisation measures and the banking crisis in 2003.
Insufficient budgetary support
Myanmar still faces several development challenges, particularly in the areas of infrastructure and human capital. Since 2011, budgetary support to the power sector has increased from MMK 40.9 billion to MMK 87.7 billion, during which capacity added has risen from 1,591 MW to 2,300 MW. The education sector received a small boost in terms of budget allocation; however, the spending is still significantly lower than international standards. Moreover, the high number of poorly educated and unskilled workers entering the labour market undercuts efforts to achieve inclusive economic growth, and infrastructure weaknesses, especially power outages, affect businesses. Therefore, much needs to be done to offset the effect of shortfalls in spending in education and infrastructure on the economy.
Nascent stock exchange
After years of military rule, the civilian government ushered in numerous economic reforms. One of them was the launch of the Yangon Stock Exchange (YSX) in December 2015. After three months of inactivity, the stock exchange witnessed trading in March 2016 with the inaugural listing of only one firm. The bourse is currently open only to domestic investors and firms, although there are plans to allow foreign involvement in the future. Although the opening of the YSX has been well received by enthusiastic investors, few players are actually entering the market. Furthermore, the years of isolation have resulted in a reticent and uncooperative approach by the business community, which will be a major issue for the successful operation of the capital market. Therefore, ensuring stringent regulation of the capital market is needed in order to gain credibility.
Dependence on foreign sources of finance
Foreign direct investment (FDI): With the opening up of the economy, Myanmar began implementing significant reforms to spur economic development and create an attractive business climate meant to generate more inward foreign investment. Eliminating multiple exchange rates, passing a new foreign investment law, reducing trade restrictions, and reforming tax policy and administration were some of the steps taken by the government on this front.
Most FDI in the past decades went into natural resource sectors, with only a small portion going to the manufacturing and service sectors. However, the trend has started to change in recent years. The sectors receiving the largest share of FDI since 2011 include oil and gas, transport, telecommunication, power and tourism, whereas mining, agriculture, and livestock and fisheries have received the lowest share of FDI. Given the size of the potential market, FDI prospects seem to be promising.
Offshore bond policy: Myanmar has paved the way for offshore bond issues by coming up with a draft public debt management law. Under the draft guidelines, only the Ministry of Finance is permitted to borrow money or issue government bonds. The government can raise debt to finance the budget deficit, projects and investments, repay existing debt, and for refinancing. Citi and Standard Chartered Bank have been mandated to carry out ratings advisory works. In order to invest in infrastructure projects, especially in the road and power sectors, the government needs to issue bonds as commercial bank lending is still in its infancy. Projects such as the East-West Economic Corridor have huge capital requirements, which could be supported through foreign financial assistance.
In a recent initiative, the country granted provisional operating licences to nine foreign banks, a notable move for an economy that is propelled mainly by large-scale foreign investment. The move is expected to encourage the sale of sovereign bonds and will enhance the overall institutional strength of the banking sector.
Multilateral funding: An incentive for Myanmar to resort to overseas borrowing is the high cost of borrowing from domestic banks vis-à-vis multilateral agencies. Funding activity from multilateral agencies has been on the rise since 2013. The Asian Development Bank (ADB) and the World Bank are the key agencies providing financial assistance to Myanmar.
ADB’s lending increased from 2013 both in terms of the number of infrastructure projects as well as funding volumes. The World Bank financed one project each in 2013, 2014 and 2015. The International Finance Corporation (IFC), the private sector lending arm of the World Bank, recently provided a loan worth USD40 million for the development of an industrial port. This is the first investment by IFC in Myanmar’s transportation sector.
The power sector received the maximum funding from the two agencies, followed by telecommunication. While the World Bank has extended financial assistance to only two sectors (power and telecommunication), ADB has funded urban infrastructure and road projects as well.
