Star Continues To Rise, But Risks Brewing


BMI View: Myanmar's international profile continues to be burnished, with the country receiving substantial support from the US, EU, and Japan as its reform drive rolls on. However, while we continue to believe that democratic and economic reforms have indeed reached a critical stage at which they are unlikely to be rolled back, we note that the country faces critical tests in addressing rising ethnic tensions as well as the run-up to 2015's general election. The government's ability to navigate these situations will be crucial in realising the economy's true potential.

Despite the pall cast by ongoing ethnic tensions that have spread across the country in recent months, Myanmar's nascent reform drive continues to push the right buttons with the international community, earning the government high praise from US, Japanese, and IMF officials. Indeed, in yet another first for the nominally civilian Union Solidarity and Development (USDP)-led government, President Thein Sein made an historic visit to the White House in May. The reform-minded president's landmark trip was the first by a Myanmar head of government since 1966, when prime minister (and future dictator) Ne Win met with US President Lyndon Johnson.

While the two visits may on the surface present a number of parallels, the circumstances are in fact entirely different. At the time of Ne Win's visit, the controversial leader (who assumed power in a coup d'etat) had already begun to implement a disastrous series of reforms known as the "Burmese Way To Socialism," which would lead Myanmar down the path towards extreme economic stagnation and military rule. On the contrary, Thein Sein's White House visit can be viewed as a sort of bookend to this period. Although the widely-hailed reformist was not technically the product of fully free and fair elections, he has nevertheless overseen the most dramatic shift towards true democracy and economic liberalisation in the country's recent history.

And despite the myriad questions surrounding Myanmar's still mysterious and rather sudden embrace of democratic and economic reform, progress continues at an impressive pace. Much of the focus of economic reforms has been placed on the unification of previously segmented markets (such as with the local currency, the kyat, which now trades at a single, free-floating rate as opposed to its previous dual-rate regime) as well as increased legal, fiscal, and monetary transparency. Thus far, this has culminated in the passage of a few landmark laws, such as the Foreign Investment Law in November 2012, and although there is much progress left to be made, momentum remains solidly in positive territory.

Critics Sidelined As Thein Sein Makes Historic White House Visit

The sustained push towards meaningful reform has thus far flummoxed even some of the staunchest Myanmar critics, and has continued to burnish the former pariah's persistently rising star. Thein Sein's visit to the US is particularly noteworthy in the sense that it is the US that has arguably assumed the toughest stance on Myanmar since the late 1990s, spearheading the adoption of the wide-ranging sanctions that it has been the most cautious in retracting in comparison to the EU, Australia, et al. Coinciding with Thein Sein's visit, one of the most critical US lawmakers and Senate minority leader Mitch McConnell indicated a major shift in his position on the remaining sanctions against Myanmar, stating that, as they had now achieved their desired effect, it was now time to allow them to lapse.

While the decision to allow the remaining US sanctions against Myanmar to lapse will not have a major near-term effect (as the sanctions, which include a ban on imports from Myanmar, have already been temporarily lifted by the Obama administration), it nevertheless indicates that the country's relationship with the US is on the right track. Indeed, American politicians have even begun to embrace the term Myanmar (the country's pre-colonial name that the military junta reintroduced in 1989) in the place of Burma, which a small group of states (including the US and the UK) have up until now maintained in protest of the previous government's illegitimacy.

Japan, EU Also Going Out Of Their Way To Engage

Myanmar's embrace by the international community has not been limited to the US. In a sign of warming relations, the country's largest creditor, Japan, has forgiven a total of JPY502.4bn (US$5.0bn) of debt, while at the same time extending a fresh loan of JPY51bn (US$510mn) earmarked for infrastructure improvements. The loan was announced during Prime Minister Shinzo Abe's first visit to Myanmar, in which he pledged "all possible assistance" in order to help the country realise its economic potential. The EU, for its part, has moved more quickly than the US in lifting economic and political sanctions, having removed the remainder of its sanctions (excluding an arms embargo) in April after initially suspending them for a year.

Leading The Way Forward
Asia - GDP at Constant Prices, % chg

Of course, the international community's swift reaction to Myanmar's about-face is not borne entirely out of charitable spirit. For both Japan and the US, Myanmar represents a massive opportunity to counter rival China's rising influence in the region, and a wide array of new partners are lining up to gain access Southeast Asia's final frontiers that could become a new base for low-cost manufacturing and resource extraction. As we have previously stated, Myanmar's unique combination of geostrategic and economic significance will draw the interest of international investors even in the case that improvements to its business environment are only incremental. For perspective, in comparison to the Association of Southeast Asian Nations (ASEAN), a group which in our view will prove to be among the most promising economic blocs in the world over the coming decade (and of which Myanmar is a member) with average annual real GDP growth of 5.3%, we forecast that Myanmar's economy will expand at an even more impressive pace of 7.2%.

Cause For Concern?

Against the seemingly constant positive flow of news regarding Myanmar's international profile, potentially destabilsiing trouble spots have nonetheless arisen. While it continues to be BMI's opinion that reform momentum has reached the critical stage at which it is unlikely to be derailed, festering ethnic tensions between Buddhists and Muslims are proving to be a substantial challenge to the civilian government's power. As these conflicts, fed by complicated and deeply-seated cultural differences, continue to spread across the country, the main risk is that reactionary hardliners within the USDP will be bolstered in the face of rising instability.

Additionally, opposition leader Aung San Suu Kyi in late May decried the government's reform progress, stating that tangible progress in the rule of law and peace has not yet been realised. Her statement reflects a substantial shift away from her previous position, in which she has been seen to work well with the ruling USDP and, in particular, president Thein Sein. However, with general elections approaching in 2015, such criticism of the ruling party is to be expected, particularly by Suu Kyi, a potential presidential candidate. As such, the next two years will prove to be a critical test of Myanmar's democratic transformation, and we note that it remains to be seen whether or not the country's nascent civilian political system will hold up in the face of what is likely to be a major transfer of power from the ruling USDP to the opposition NLD.

This article is tagged to:
Sector: Country Risk
Geography: Myanmar