[Premium | Myanmar Briefing] Reform in Myanmar: Better Late than Never – But is it Enough?

December 2019 |

Controversy about Myanmar is increasing with the focus on the recent ICJ case accusing the government of genocide in the Rakhine state. This is not only a political issue and unless addressed, it can trigger more sanctions. At present however, sanctions have been taken against specific military commanders and not more broadly against the country or even major corporations, as happened in the past.

As such, despite the controversy, investors remain interested in Myanmar. We are therefore providing an analysis of factors that relate more to the economic and domestic political agenda.

Reform in Myanmar: Better Late than Never – But is it Enough?

The NLD government suffered from a slow start, with a first two years in which the economy took a back seat to political and social concerns, indicated by the fact that GDP growth fell from 7 per cent in 2015 to 5.9 per cent in 2016. Investor confidence fell as the NLD struggled to put forward coherent economic plans while coming to grips with governance. However, the NLD government has in more recent times refocused its efforts on implementing key economic reforms and encouraging foreign investment. It has notably overhauled outdated legislation, implementing both the Myanmar Investment Law in 2016 and the Myanmar Companies Law in 2017. In response, GDP in 2018 grew 6.8 per cent, with GDP in 2019 being similarly forecast to grow at 6.8 per cent despite external pressures brought on by the Sino-American trade war.

Amidst these efforts however, Myanmar continues to face persistent pressure from the international community over the ongoing crisis in Rakhine state. A new round of elections is furthermore due to be called in late 2020, which may put perceptions of the NLD’s continuing popularity to the test, especially in Myanmar’s border regions, where ethnic political entities have grown in size and influence.

1. The thorny issue of the Rohingya – The Rohingya issue has seen renewed attention recently as The Gambia has filed a case against Myanmar at the International Court of Justice, alleging that Myanmar’s actions against the Rohingya are “genocidal in nature”. State Counsellor Aung San Suu Kyi has urged judges to throw out the case because it might “undermine reconciliation”. The crisis remains a significant issue for Western investors, who are concerned about reputational risk and the implementation of further sanctions. Narrow sanctions on select military officials held to be personally culpable in human rights abuses have already been implemented by the United States. Furthermore, Myanmar’s trade privileges with the European Union under its Generalised System of Preferences programme are currently being re-examined, pending improvements to Myanmar’s human rights record in Rakhine State. Myanmar has made efforts to facilitate repatriation, but as of November 2019, only around 400 of the approximately 900,000 Rohingya refugees in Bangladesh are reported to have returned.

2. An ongoing reform agenda – While the Rohingya issue is of considerable concern, others continue to focus on the need for further economic reform within Myanmar. The President’s Office has pushing forward with a proposal to combine the Ministry of Industry (MOI) with the Ministry of Planning and Finance (MOPF). Minister for Planning and Finance U Soe Win took on the role of interim Industry Minister after the previous Industry Minister U Khin Maung Cho stepped down due to his involvement in a corruption scandal. Furthermore, the MOPF’s deputy minister U Set Aung recently noted the need for Myanmar’s state-owned factories to be privatised – a long awaited and necessary adjustment given that only four of Myanmar’s 57 state-owned factories are profitable. As these factories fall under the purview of the MOI, the merging of the ministries could facilitate this reform.

In the finance sector, Myanmar is preparing to offer a third round of foreign bank licenses in 2020 – these would be the first such licenses issued under the NLD government. Most recently, The Securities and Exchange Commission of Myanmar announced that it would be allowing foreigners to buy stocks and shares on the Yangon Stock Exchange, with the hope that an injection of foreign capital might galvanize activity on the relatively quiet exchange. As of November 2019, foreign insurance companies have also been given their official licenses to operate, and have begun selling life insurance policies to the wider public. Myanmar’s progress on this front has been noted, and the country rose five positions on the World Bank’s Ease of Doing Business Index in 2019 – a promising step after two years of stalled progress on this front.

3. Politics in action – Myanmar’s political scene is seeing much greater activity given the impending elections in 2020. Significant figures have attempted to form their own political power bases, with the powerful ex-general Thura Shwe Mann and the popular ex-NLD legislator Daw Thet Thet Khine forming the Union Betterment Party and the Peoples’ Pioneer Party respectively. These parties add to a growing cacophony of voices, as Myanmar’s political arena swells with more than a hundred recognised political parties. The NLD nevertheless remains confident of its victory, and has rebuffed suggestions that it should form strategic alliances with political rivals. This continues to be the case within the ethnic states, despite the fact that previously disparate rival parties have coalesced into more unified political entities to oppose the NLD.

The NLD has suffered during by-elections held in 2017 and 2018, losing a number of seats in both federal and regional parliaments. State Counsellor Aung San Suu Kyi has most recently noted that the party is undergoing internal changes to its strategy and composition, and may see up to half of its candidates replaced in 2020. Activity is furthermore not isolated to political parties alone. Myanmar’s military, the Tatmadaw, has also moved to become more politically visible. This has manifested through the strengthening of its tacit alliance with Buddhist ultranationalists, as occurred in June 2019 when Major General Thet Pone of Yangon’s military command made a widely-publicised US$20,000 donation to the fundamentalist religious grouping previously known as the Ma Ba Tha. Aside from this, however, other senior figures such as Tatmadaw Chief Senior General Min Aung Hlaing, have taken part in surprising efforts to reach out to practitioners of other religions, visiting Christian, Muslim and Hindu shrines and making donations.

4. Infrastructure constraints – Investors also continue to be concerned about Myanmar’s lack of infrastructure. Of particular concern is the country’s electrical grid, which still leaves swathes of the countryside unconnected to power, while also having proven more recently to be inadequate to the needs of Myanmar’s urban core. Blackouts, scheduled or otherwise, continue to be a common occurrence in Yangon, due to the limited availability of power generation facilities, as well as oil and gas supply problems. The NLD government has recently stepped in to address these issues at one of their sources – by drastically lowering electricity subsidies for both residential and commercial users. Commercial and industrial tariffs rose by between 20 per cent and 60 per cent depending on the units of electricity used, while residential users saw their bills rise by as much as 70 per cent. The NLD government hopes that this unpopular but necessary change will see foreign investors more willing to invest in Myanmar’s previously unprofitable electricity sector. As a stopgap measure, the government also opened tenders on five short term, five-year emergency contracts to generate electricity in areas with high demand. All contracts have been won by companies with strong ties to China, such as the Hong Kong-based VPower group and China Energy Engineering Corporation. These contracts have been criticised by industry watchers due to their extremely short, 210-day implementation deadlines and heavy penalties.

5. New ambitions for an old city – The New Yangon City project is a planned development project to build a smart and liveable city in Dala township, on the southern bank of the Bago river opposite downtown Yangon. The first phase of the project, covering 18,390 acres of land, is due to cost US$1.5bn. The project as a whole is expected to house 1.2m people by 2050. Yangon’s regional government recently announced it would be moving forward to issue land compensation to farmers situated in and around Dala. Meanwhile, ongoing efforts to develop and clear the vice-ridden, overcrowded and underdeveloped Hlaing Tharyar region west of Yangon are being viewed as a pilot project for the broader project. The New Yangon City project has run into its fair share of issues over the course of its development, including controversy regarding its awarding of contracts to Chinese companies without issuing an open tender. September 2019 saw the project’s Chief Executive Officer Serge Pun announce that the New Yangon Development Company (NYDC’s) board of directors would be reorganised to include more members of Yangon’s municipal governing body due to a need for tighter integration with the wider Yangon city area. Concerns also persist regarding the project’s susceptibility to climate change-related environmental threats, as the proposed area to be developed is highly flood prone, and mitigation efforts such as dyke systems might end up adding hundreds of millions to the project’s eventual cost.

6. The shifting Sino-Myanmar dynamic – Myanmar continues to be strongly dependent on China economically and in both domestic and international political arenas. This presence is most keenly felt in the northern Kachin and Shan states, which share a lengthy land border with China. Border trade between the two countries was valued in FY 2018 at approximately US$4.3bn, though these numbers have suffered recently due to the activities of Ethnic Armed Organisations (EAOs) and the consequent intermittent closure of the primary overland trade corridor along the Muse-Mandalay highway. China continues to have significant influence with many of the EAOs operating in these regions as well, most notably the Northern Alliance, which is comprised of the Arakan Army, the Kachin Independence Army, the Myanmar National Democratic Alliance Army and the Ta’ang National Liberation Army. Negotiations between them and the government are often mediated by China, and sometimes take place in China. China has also recently begun taking a more active role in ongoing negotiations between Myanmar and Bangladesh over the Rohingya crisis. It enjoys good ties and significant influence over both parties, and has stated that it is interested in working towards repatriation, given improved conditions on the ground in Rakhine state. Work is also continuing on projects along the China Myanmar Economic Corridor, and feasibility studies have commenced on a road and river route linking Kunming city in China with Mandalay and Yangon via the Ayeyarwaddy River. This route is planned to function in concert with planned rail connections, and will involve the construction of inland river ports, avoiding issues of congestion and violent conflict currently faced with land transport.