The new rising star of Asia: if reforms continue apace

The Myanmar government has yet to draft policy initiatives aimed at alleviating poverty, but the expected improvement in relations between Myanmar and international donors should give this process much-needed impetus. 

Unlike the junta, the current government appears to favour limited economic reforms. While the government is expected to undertake reforms to improve the business environment in the medium-term, state-owned enterprises and large military holding companies will continue to dominate segments of the economy.  

On fiscal policy, the Myanmar government is likely to run a large fiscal deficit in the coming year (fiscal deficit was 4.9 per cent of GDP in 2011), driven by heavy spending on major projects such as the ongoing development of the new national capital, Nay Pyi Daw. Although central government tax revenue is likely to continue to increase rapidly in nominal terms given the rapid economic growth prospects, this will not be sufficient to reduce the budget deficit, given the government’s small revenue base. Owing to limited institutional capacity and efficiency, fiscal revenue is not expected to rise significantly in the coming years.  

Until the government accepts Article VIII obligations under the IMF’s Articles of Agreement (which forbid “multiple-currency practices” without prior approval), thus paving the way for greater financial assistance from multilateral donors, it is expected to continue to borrow funds from the Central Bank of Myanmar to support its investment projects. A reduction in the proportion of public funds spent on the military, which stood at almost one-quarter of total planned expenditure in the budget for fiscal year 2012, would give the government greater room for manoeuvre.

On monetary policy, the central bank’s willingness to print money to finance the public deficit will continue to undermine the effectiveness of monetary policy in the coming year. The stock of the central bank’s claims on the government has risen sharply in recent years. In 2010 broad money supply (M2) rose by 42.4 per cent, and it grew further, by an average of 37.7 per cent year on year, from January to September 2011. 

This rapid pace of money supply growth is likely to stoke inflation, but the central bank is not expected to raise interest rates in response to this threat, as such a move would increase the government’s domestic debt-servicing burden. This was probably the reason behind the central bank’s decision to cut its main policy rate from 12 per cent to 10 per cent at the start of 2012. Assuming that the government fails to rein in expenditure, we can expect the central bank to keep monetary policy accommodative for the time being.

I think Myanmar’s economy has strong potential to be successful given its vast natural resources. Myanmar’s opening will be both an opportunity as well as a threat to Thailand. Increasing income for our neighbour’s people will generate additional demand for Thai businesses. However, Thailand will now have yet another direct competitor besides Vietnam in the agricultural sector. Rice production in Myanmar is likely to rise in 2012, driven in part by a new government policy of paying slightly above-market prices for unmilled rice (paddy) in an effort to lift output and exports. Under the previous military regime, farmers were often forced to sell paddy at below-market prices as part of the junta’s attempts to boost food stocks and to dampen price pressures. This policy drove down output and exports. The Myanmar Rice Industry Association (MRIA) reportedly expects an increase in output this year from its figure of around 31 million tonnes in 2011. Rising output may result in higher rice exports, thanks to reasonably strong regional demand. 

According to the latest trade statistics, Myanmar’s rice exports jumped to 789,000 tonnes in 2011, from 450,700 tones in 2010. Rice exports could rise to 1.5 million tonnes in 2012, according to the MRIA, before reaching 2 million tonnes in 2013 and 3 million tonnes by 2015. Myanmar’s economic and political reforms just add another dimension to the challenges and opportunities of the advent of the AEC in 2015. 

Dr Chodechai Suwanaporn is executive vice president of economics & energy policy, PTT Public Company Limited. [email protected]