Construction Infrastructure Potential Yet To Be Maximised
BMI View: We believe that near-term growth in Myanmar's construction sector will remain at levels that are modest relative to its massive growth potential. The sector remains unable to achieve its full potential due to limited upside to foreign investment - the main driver of construction activity - and the numerous threats to the country's political environment before and during the 2015 general elections. In addition, recent issues with two of Myanmar's largest infrastructure projects have highlighted the lack of maturity in the country's business environment.
We continue to hold the view that near-term growth in Myanmar's construction sector will remain at levels that are modest relative to its massive growth potential. We are forecasting real growth for the sector to reach 9.7% in 2014 and 8.5% in 2015, compared to 9.3% in 2012 and 9.4% in 2013. Our outlook is primarily due to two factors.
|Stagnant For Now|
|Myanmar - Construction Industry Value Forecasts|
Limited Foreign Investment: Although foreign direct investment (FDI) into Myanmar in 2013 appeared to surpass levels in 2012 due to a recovery in the global economy, we believe that the recovery remains fragile and could be short-lived. This is because fiscal problems in the eurozone have yet to resolved, while China's economy is once again showing signs of a slowdown due to its structural problems (see 'Trade Contraction Unlikely To Spur Knee-Jerk Stimulus', April 11 2014). Given this uncertain business climate, companies are likely to maintain a cautious outlook and could scale back on fixed investment in markets with high levels of business risks such as Myanmar.
|Drastic Increase Not Repeated|
|Myanmar - Yearly FDI Inflows, US$mn|
This is a major threat to Myanmar's infrastructure sector as the sector is heavily reliant on FDI inflows to spur activity - the majority of the country's FDI inflows were channelled towards the development of fixed assets in FY2013/14 (April-March). Domestically, the country lacks the funds to finance its construction needs - we estimate that Myanmar's foreign reserves in 2013 is about 8% of GDP for the year - and the necessary technical expertise and capacity to implement large-scale construction projects.
Sizeable Political Threats: The country continues to present sizeable political risks over the near-term and we believe that the majority of investors could wait for greater political clarity before carrying out capital-intensive works in the construction sector (see 'Three Risks That Could Derail Political Reforms', July 16 2013).
Firstly, there is significant potential for sectarian violence across the extremely geographically and ethnically diverse country, particularly between the majority Buddhists and minority Muslims in the Rakhine state (see ' Census Struggles Highlight Ongoing Political Quagmires', April 17 2014). This threat of sectarian violence could deter foreign companies from investing in projects in these troubled regions, such as the civil and beach projects in the Thandwe Hotel Zone, located in the Rakhine state.
Secondly, fault lines between factions within the ruling Union Solidarity and Development Party (USDP) are emerging, with a schism developing between key political leaders in the party - President Thein Sein and Speaker of the Lower House Shwe Mann. A substantial falling out between these separate factions in the USDP could pave the way for either a minority government or an uneasy coalition, threatening the country's political stability and reformist trajectory.
|Bottom Of The Table|
|Asia - Short (STPR) And Long (LTPR) Term Political Risk Ratings, out of 100|
Lastly, Myanmar is scheduled to hold general elections in 2015, and the outcome remains clouded. The current constitution prevents veteran democracy icon Aung San Suu Kyi from running as president or for her party, the National League for Democracy (NLD), to amend the constitution even if it wins the 2015 elections. These regulations are judged to be unfair by Suu Kyi and the NLD, but the Myanmar government is showing incipient signs of unwillingness to carry out amendments to the country's constitutions (see 'More Peril Seen In Constitutional Reform Process', February 18 2014).
As such, the NLD is considering boycotting the 2015 elections if the constitution is not amended to provide for a freer and fairer electoral process. Such a scenario would substantially undermine the legitimacy of the 2015 elections and set the stage for political turmoil within Myanmar. This scenario could also have implications on an international level, including the possible re-application of international economic sanctions (most likely led by the US, which has chosen to suspend rather than completely abolish many of its previous sanctions).
Even if the NLD was able to secure a majority in the 2015 elections, a change in political leadership could lead to a drastic change in policy towards infrastructure development. This is a particularly pertinent risk in Myanmar as the country's system of governance remains highly authoritative, with the government exerting a high level of influence on the awarding and reviewing of infrastructure projects.
Immature Business Environment
Recent issues with two of Myanmar's largest infrastructure projects have also highlighted the challenges with reaching financial closure for such projects in what remains an extremely frontier market.
In March 2014, the Myanmar Transport Ministry called for a new round of bidding for the USD1.1bn Hanthawaddy International Airport project due to changes to the project's financing structure and disputes with its preferred bidder over the scope of the project (see ' Financing Difficulties Prompts New Tender For Hanthawaddy Airport', March 12 2014). This comes just after the Dawei maritime hub project failed to receive any bidders for its first three infrastructure projects - a dual-lane highway linking Thailand with Dawei, a small port and an industrial estate.
Beyond the substantial logistics and manpower issues associated with doing business in exceptionally undeveloped territories, securing financing for large-scale projects in Myanmar remains a challenge. This is because the Myanmar government lacks the funds to finance its infrastructure needs, while the country's banking sector remains highly undeveloped (see 'Banking Sector Reform Faces Considerable Challenges' March 7 2014). Foreign banks have not yet been allowed to operate in the market, which has prevented the transfer of international banking expertise and makes it difficult to unlock private sector financing for infrastructure development in Myanmar.
|Investment Challenges Abound|
|Asia-Pacific - Ease of Doing Business Rankings, By Country, 2013 And 2014, Out Of 189 Countries|
In addition, the returns from these large-scale projects are threatened by numerous risks, making it costly to secure financing from overseas sources. We have long highlighted our concerns about the financial viability of some of Myanmar's ambitious infrastructure projects, and these concerns are likely to prompt overseas financiers to demand a higher premium for any loans for these projects. These concerns not only stem from macroeconomic considerations (see 'Airport Viability Concerns Surface Again With Hanthawaddy', February 10 2014), but also from deficiencies in Myanmar's regulatory environment (see 'Transport Infrastructure: Learning From Dawei's Difficulties', July 18 2013). To be sure, the country ranked a dismal 182nd in the World Bank's 2014 Doing Business Report, placing it between the Democratic Republic of Congo (183rd) and Venezuela (181st).
Sanguine Medium-Term Outlook
Despite these downside risks, our base-line scenario is for political stability to persist in Myanmar and for reforms in the country's business environment to continue. Should this view play out, we believe that the growth prospects for Myanmar's construction sector beyond 2015 are bright. We are forecasting real growth for the sector to average 10.8% per annum between 2016 and 2023, making it one of the fastest growing construction markets in the Asia-Pacific region.
|Starting From A Low Base|
|South East Asia Countries - Logistics Performance Index, Infrastructure Indicator, Scores out of Five (LHS); Electricity Access, 2010, % (RHS)|
There are several factors supporting our bullish outlook, and they are primarily related to the country starting from a low economic base. These factors are: extremely high deficit in buildings and infrastructure, pressures from an urbanising population and the significant potential for growth in Myanmar's industrial and tourism sectors (see 'Construction Boom Not A Guarantee', January 15 2014).