FDI to drive Myanmar's growth, but political risks remain

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JANUARY 22, 2020 - 7:20 PM

Myanmar's economy could grow at 6.6 per cent annually until 2030, thanks to solid investment gains, improved productivity and favourable demographics, even as weak business conditions and political risks threaten to dampen investment inflows, Oxford Economics said in a report.

"We expect capital deepening to continue supporting growth, with investment to increase at a healthy pace aided by relatively high domestic savings, FDI (foreign direct investment) inflows, and ongoing support from multilateral lenders such as the Asian Development Bank and EU," the report by Oxford Economics' lead Asia economist Sian Fenner said.

The forecast of 6.6 per cent per annum of gross domestic product (GDP) growth for the years between 2018 and 2030 comes in slightly lower than the 6.8 per cent per annum growth seen from 2008 to 2017. However, Ms Fenner pointed out that the new forecast means a somewhat faster pace of convergence with Myanmar's Asean peers, with GDP per capita rising to around 45 per cent of the Asean average, up from 34 per cent in 2017.

One reason for the favourable investment outlook, the report said, is that Myanmar is a key recipient of China's Belt and Road Initiative. Ms Fenner noted that the government has also passed several pieces of legislation to encourage FDI inflows, including the Myanmar Investment Law and Myanmar Companies Law in 2016 and 2017 respectively, while opening up several sectors to increased foreign ownership in August 2019.

"These actions have already borne fruit. After falling 14 per cent in 2017-2018, FDI inflows rose to around USD$4.2 billion in 2018- 2019. Moreover, investment flows are shifting from mining and energy into the productive manufacturing sector," Ms Fenner said.

In addition, the rise in domestic savings, thanks to higher export revenues and other financial reforms, has contributed to an acceleration in investment. "Looking ahead, we expect Myanmar’s natural resources and improved export capacity to support domestic savings averaging around 27 per cent of GDP," Ms Fenner said.

She said it is likely Myanmar will continue to look abroad, including through joint infrastructure ventures and FDI. She added: "Overall, we forecast investment to grow by 6 per cent per annum to 2030, with the investment-to-GDP ratio hovering around 30 per cent, a level broadly similar to that in Vietnam and Thailand at similar stages of development."

Its labour supply is also expected to rise thanks to its growing working population and as more segments of the population become urbanised.

However, the quality of its labour could lag behind its regional peers, given that compulsory schooling is low at five years and only 61 per cent of students completed lower secondary school in 2018, the report suggested.

In addition, the ongoing Rohingya humanitarian crisis presents immediate risk which could limit the overall growth in FDI inflows, as it has led to the European Union threatening withdrawal of Myanmar's preferential trade status, the report said.

Meanwhile, structural reforms are required not only to boost infrastructure investment but also to improve business operating conditions.

"A poor business environment and social conflict, notably the Rohingya crisis, are factors behind why we score Myanmar poorly in terms of political risks. We see these drawbacks as hindering its ability to fully reap the benefits of its low-wage advantage and potential GDP growth," Ms Fenner said.