They have good reason to feel good about the future. The country is not only geographically blessed; it has large reserves of oil, gas and other precious minerals to go with its millions of hectares of arable land and abundant water supply.
Yet despite the optimism, Myanmar faces many challenges in its transition from five decades of military rule to functioning democracy.
However, ANZ believes with the right policy settings Myanmar could enjoy five decades of economic catch up - over just the next five years. Our new report, ‘Myanmar – Asia’s Uncut Gem’ released by ANZ Research and written by Glenn Maguire, ANZ Chief Economist, South Asia, ASEAN and Pacific; and Warren Hogan, ANZ Chief Economist, provides a detailed analysis of such a rapid economic transformation.
If our bullish assessment were to eventuate as we expect, it would be the most rapid transformation of any of the Asian economies to date – surpassing Japan’s post war rise and even the recent mass urbanisation of China. It would be spectacular.
That’s not to deny the immediate period ahead is not without risk. Myanmar’s leadership is quickly discovering emerging from five decades of economic isolation is no easy task.
This self-imposed exile has resulted in poorly capitalised financial institutions, untested regulatory structures and a workforce without the skills to meet the demands of a manufacturing based economy.
The template for economic transformation in Asia is well known. Most pressing however is the need to improve transport infrastructure to the level required to take advantage of Myanmar’s shared borders with India and China – with McKinsey suggesting the bill could reach around $650 billion to $750 billion.
While McKinsey’s estimate is at the upper end of the range, it reinforces the need for policy makers to introduce a targeted strategy to manage the large capital inflows and the associated volatility as the required infrastructure is built out.
No matter what the final figure, it will be historically significant. This will require an immediate strengthening of public institutions to help manage the inevitable complications billions of dollars flowing into the economy will bring.
Myanmar’s leaders will also need to strike the right balance between the immediate economic gains of resource extraction with the more medium term benefits of upskilling its workforce to take advantage of the manufacturing opportunity.
While ramping up the development of its extraction industries to fund social and physical infrastructure would be a logical early step, an over reliance on volumes should be avoided given the sharp recent declines in commodity prices.
Already without direct government intervention we have seen the majority of foreign direct investment flow towards the energy sector with little associated pick-up in public infrastructure.
This may result in government needing to be more proactive, and visible, in using resource revenues to fund both infrastructure and programs to help build out its manufacturing base.
And as it strives to develop a balanced economy, Myanmar should look to its past history and continue the development of its fledgling agricultural industry.
Its starting position is enviable. Significant arable land and generous water supply could see Myanmar return as the ‘rice bowl’ of Asia, given its most immediate neighbours continue to grapple with concerns over land degradation and environmental pollution.
Development of its agricultural industry, plus programs to boost productivity, should see Myanmar emerge as one of the most competitive and efficient agricultural exporters in the region – helping to diversify foreign investment away from the resources sector, while also providing employment opportunities for its large working age population.
Underpinning all of Myanmar’s progress of course is development of its financial system and the associated regulatory systems, which despite strong recent progress remain small and underdeveloped. Financial intermediation is minimal, with private credit only equating to approximately to 10 per cent of GDP compared with 90 per cent in other ASEAN nations.
While the finance sector is still dominated by local state owned banks, steps are being taken to arrest the status quo. Recent moves to grant nine foreign banks, including ANZ, preliminary approval for a banking licence will help develop the industry in a similar way to that experienced by other Mekong countries like Cambodia and Vietnam.
Another important milestone was the recently enacted law granting central bank independence and autonomy from the Ministry of Finance, as well as monetary policy instruments, tools and best practices being developed jointly with the IMF.
Despite these reforms, the economic transformation of Myanmar is not a foregone conclusion. But with half of the world’s consuming class to be located within a four hour flight by 2030, the opportunity is compelling.
We are bullish on Myanmar’s prospects and expect annual growth of between 8 per cent and 9 per cent over the next five years, with some periods as high as 10 per cent.
However, if the country is to truly emerge from its isolation it needs to stay the course and continue with the reform agenda it has started, enabling the economy to grow beyond its reliance on basic agriculture and resources into a major manufacturing and supply chain hub of Asia.
We know the political and economic challenges are immense but we are very optimistic this uncut gem is on a path to becoming one of Asia’s sparkling economies.
ANZ was included in a group of nine foreign banks granted preliminary approval for a banking licence by the Central Bank of the Republic of the Union of Myanmar in October 2014. The bank established a representative office in March 2013 and will open a branch this September, providing corporate banking services to foreign companies, joint ventures and local financial institutions.
Illustration: Chris Kelly. Corporate caricatures & illustrations.
Accessible pdf version of infographic.