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Macroeconomic risks could derail Myanmar’s bright outlook: AMRO 

Jul 02. 2017
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THOUGH MYANMAR’S growth is expected to recover in fiscal year 2017-18 (ending March 31) to 7 per cent yearly after the economic slowdown last year, ASEAN+3 Macroeconomic Research Office (AMRO), the regional macroeconomic surveillance unit of Chiang Mai Initiative Multilateralisation, has warned of significant macroeconomic risks that could derail the nation’s favourable outlook.

According to AMRO’s 2017 Annual Consultation Report on Myanmar, launched on June 28, the nation needs to address four main risks: expenditure management, current account deficit, inflationary pressures and rapid credit growth.

“Managing the fiscal position remains challenging, as falling revenues require tighter expenditure management,” the report says. Due to falling revenues and rising expenditure, the fiscal deficit for FY2016-17 is expected to increase further to 4.8 per cent of gross domestic product (GDP). 

External stability risks remain significant, as the current account deficit continues to widen. Inflation is expected to stabilise at around 6.2 per cent this year, but inflationary pressures remain high on the back of strong credit growth and some pick-up in oil prices. 

The report says rapid credit growth poses significant risks to the financial sector, especially if the loans weaken bank balance sheets. Loan portfolios of state-owned banks may weaken, owing to their low capacity for risk assessment and continued dependence on government funding.

The report was prepared on the basis of AMRO’s consultation visit to Myanmar earlier this year. Chaipat Poonpatpibul, AMRO’s group head and lead economist, headed the 7-member mission. The unit’s senior management_director, Junhong Chang, and chief economist, Hoe Ee Khor, also participated in key policy meetings with Myanmar authorities.

“Amid the expansion of manufacturing activities, headwinds to growth come from weak agriculture, a slowing property and construction sector, sluggish demand from major trading partners, and lower commodity prices,” said Chaipat.

He urged authorities to safeguard macroeconomic stability and undertake deeper reforms to secure sustainable growth in the medium-term.

“Enhancing tax revenue and improving public expenditure efficiency is required amid a tight fiscal environment. Maintaining exchange rate flexibility and building up international reserves are essential,” he said.

He said the central bank needed to maintain tight monetary policy, phase out direct financing of the deficit, closely monitor commercial banks and publish financial soundness indicators.

“The phasing out of direct deficit financing by the central bank will strengthen monetary discipline and ease pressure on the external accounts. With credit growth expanding rapidly in recent years, authorities need to be watchful of potential effects in terms of growing bad debt and weak bank balance sheets,” he said. 

Despite the risks, the report insists there is a bright outlook for growth in Myanmar this year. 

“Increased investments with the implementation of the new Investment Law and stronger export performance with the development of Special Economic Zones are behind the improved prospects for growth,” it says.

The report stressed the importance of issuing new regulations under the Financial Institutions Law that was enacted last year. The authorities also recognised the need to implement regulations in a timely manner to address emerging risks. 

“The implementation of the regulations should provide clarity and consistency,” the report says.

The unit hailed the authorities’ efforts to improve the availability of macroeconomic statistics and reduce time lags. 

The report pointed out the government’s decision to prioritise funding for existing projects could make new projects more challenging to fund.

Another key recommendation is the prioritisation of the infrastructure budget to support medium-term growth, with concessional loans and grants from development partners. 

It also recommended maximising revenues from state economic enterprises (SEE) and privatisation of non-strategic SEEs to reduce fiscal pressures on the government budget. 


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