Another seven foreign banks awarded banking licenses
On 6 April 2020, the Central Bank of Myanmar (CBM) announced a new round of banking sector liberalization by awarding preliminary licenses to both subsidiaries and branches of 7 foreign banks, all Asian (Table 1). The final licenses will be awarded within 9 months. The CBM also granted approval to Kasikornbank (KBank) to buy 35-percent equity stake in Ayeyarwaddy Farmers Development Bank (A Bank), the maximum allowed for foreign participation. A Bank is a small bank with 0.48% of the total assets of the banking system (2018). A branch license would cost USD75mn as minimum paid-in capital, and a subsidiary license would cost USD100mn as minimum paid-in capital. Subsidiaries of foreign banks will be allowed to start retail banking activities in January 2021 with up to 10 branches, in addition to wholesale banking activities.
Foreign participation in the banking sector would expand credit to the economy and facilitate FDI inflows
With stiffer competition in the local market and more stringent capital requirements, the consolidation of smaller local commercial banks or greater foreign equity participation are critical for the survival of local banks.
Foreigners allowed to trade on Yangon Stock Exchange
On 6 March 2020, the Securities and Exchange Commission of Myanmar (SECM) issued a directive that allows both resident and non-resident foreigners to trade in stocks on the Yangon Stock Exchange (YSX) through Myanmar Kyat (MMK) current accounts with local brokers starting 20 March 2020. The main points of Directive No.1/2020 are as follows:
Yangon Stock Exchange (YSX): An Overview
Yangon Stock Exchange (YSX): Background
Growth is projected to slow to only +1.8% in 2020
We are in line with the IMF’s growth projection for Myanmar. We now expect growth to decelerate to +1.8% in 2020 (instead of +6.8% at the beginning of the year), and there is still downside risk. Myanmar will return to its normal growth trajectory in 2021. The sharply slower growth in 2020 is due primarily to economic shocks triggered by the Covid-19 pandemic and the uneven recovery of the global economy. Given greater trade and investment links with China and the global economy, Myanmar’s economy would be severely hurt by the pandemic through international trade, foreign direct investment (FDI), supply-chain disruptions, and tourism channels. Recently, the government launched relief measures to weather the impact, including an emergency low-interest rate loan program and the Central Bank of Myanmar (CBM) decision to cut policy interest rates twice in March 2020 by a total of 150 bps [1].
Stronger headwinds suggest further downside to growth
Myanmar’s economy will experience stronger headwinds following the Covid-19 global pandemic. Growth would decelerate to +1.8% this year from its potential of 6.5% - 7.5% p.a. Growth would be supported by FDI inflows, which will also moderate, and government investment in several infrastructure projects and projects under the China-Myanmar Economic Corridor (CMEC).
Ongoing structural reforms would make Myanmar an attractive FDI destination over the long term
Th Covid-19 pandemic would deter FDI inflows into Myanmar and make it more challenging for the government to meet its USD5.8bn FDI target for FY2019/20. However, we remain optimistic that ongoing structural reforms and liberalization of key industries including banking, insurance, retail and wholesale trade, education, and other priority sectors, coupled with fewer restrictions on FDI and improved ease of doing business, would continue to attract FDI into the country. FDI should continue to flow into the manufacturing sector, especially the garment and textile industry. Myanmar would also benefit from the relocation of labor-intensive production out of China, which has been accelerated by US-China trade tensions.
Manufacturing activity has been disrupted by pandemic
Manufacturing activity in Myanmar has been disrupted because China, its main source of imported raw material, has temporarily suspended production of raw materials and intermediate inputs after the government ordered lockdowns to contain the coronavirus outbreak. Manufacturers in Myanmar, especially in the garment industry, depend heavily on inputs imported from China. This is partly reflected by the drop in Manufacturing PMI data to a record low in March. But we are optimistic the manufacturing sector will resume production activity in 2H20.
Less-open economy should insulate Myanmar from trade tensions, but not weak global demand
Low openness to trade and connectivity to China’s supply chains would insulate Myanmar from trade uncertainties. However, economic shocks triggered by the Covid-19 pandemic coupled with weak global demand would hurt its exports, despite its relatively small exposure in AEs compared to regional peers. A structural slowdown in China could also reduce imports from Myanmar, especially basic metals. Nevertheless, exports of garment, textile, and footwear (GTF) products should continue to expand and drive Myanmar’s total exports in 2H20.
Vulnerabilities emerging in the banking sector with the adoption of more stringent regulations
Macroeconomic stability remains broadly weak
Maintaining macroeconomic stability while implementing structural reforms is challenging. It is challenging to maintain price stability when strong inflationary pressure, rising electricity tariffs, and supply-side shocks including food prices, pose upside risks to inflation. Twin deficits are threatening external stability. The current account deficit is sufficiently financed by FDI inflows, but looking ahead, the growing export-oriented manufacturing sector, more FDI-driven investments, and the implementation of several infrastructure projects, would widen the current account deficit. This would in turn, put downward pressure on the MMK, which is stable currently. The effect of a weaker MMK is normally passed through relatively quickly to domestic prices because Myanmar relies substantially on imports.
Key takeaways: Myanmar’s 2020 economic growth outlook
- Growth is expected to moderate substantially to only +1.8% in 2020, and resume potential growth trajectory in 2021 with growth expected to recover to +7.5%.
- Risks to growth is tilted to the downside. The major risks are uncertainties surrounding the global economic recovery, growth slowdown in China, and fluid developments in the Covid-19 global pandemic.