YANGON -- With Myanmar mired in the Rohingya humanitarian crisis and few signs of any short-term solution, Aung San Suu Kyi's government is struggling to maintain recent efforts to shore up the economy as uncertainty assails investment confidence and domestic sentiment.
The government is facing an international outcry over its handling of the Rohingya refugee crisis, triggered by the brutal military response to attacks on police and military facilities in the country's western Rakhine State by Rohingya militants on Aug. 25. Further pressure on Naypyitaw is likely to result from the United Nations General Assembly which opened this week in New York. Some countries are contemplating a resolution critical of Myanmar's handling of the Rohingya refugee crisis.
On the domestic front, Suu Kyi faces growing discontent over her government's handling of the economy over the past 18 months. With new determination to step up the pace of reform, these challenges might be easier address.
"Naypyitaw understands that a lot of people are worried about the economy, and are feeling pessimistic," Sean Turnell, an economics professor at Australia's Macquarie University who has taken leave to act as an economic consultant to Suu Kyi, told a recent seminar in Yangon.
Suu Kyi's National League for Democracy-led government, packed with politicians whose main training for running a country was jail time under military governments, put a brake on Myanmar's budget spending in its first year in office from April 2016, compounding a slowdown in economic growth.
Gross domestic product grew 6.4% in 2016, compared with 8.0% in 2014 and 7.3% in 2015, according to Asian Development Bank. The World Bank recently forecast 6.9% growth for the year to end-March 2018.
Turnell said the spending cuts were necessary to restore fiscal stability and that the regime of former President Thein Sein financed the budget to a large extent by getting the central bank to print money, with a 31% increase in monetary circulation in 2015 prior to the election won by the NLD. He said that much of the recent growth was driven by money-printing and speculation in unproductive sectors such as property.
This explanation glosses over significant liberalization efforts pushed through under Thein Sein's administration from 2011 to early 2016, such as the opening of the telecommunications sector to foreign companies, the granting of 13 licenses to foreign banks (albeit strictly limited to commercial "wholesale" operations) and encouragement of wider foreign direct investment. FDI flows peaked at $2.8 billion in 2015, and fell to $2.2 billion last year, according to the U.N. Conference on Trade and Development.
Under the NLD's frugal management, the budget deficit dropped from 4.5% in the fiscal year to April 2016 to 2.5% in 2016-2017, while inflation has fallen from 11.4% in 2015-2016 to about 6.3% currently, according to the Myanmar government. In theory, Myanmar is well positioned to wean itself from money-printing and move on to borrowing to finance spending on infrastructure, deemed crucial for jump-starting the economy.
The latest Global Infrastructure Outlook published by the G-20 group of large economies in August forecast a $112 billion disparity gap between Myanmar's infrastructure needs and projected investments up to 2040.
"The country needs spending now. We have got to get electricity financed now. Roads have to be built now. There are a whole bunch of things that need to be done now," Turnell said. "So how do we finance it if you don't want the central bank printing money? You sell bonds. You actually fund the deficit through issuing debt securities to the private market."
Myanmar has been issuing relatively small-sized bonds to domestic banks for years but its ambitions are now bigger.
Persuaded to invest
The NLD government has issued four tranches of bonds, all in the local currency, kyat, since last year. The first bond, which raised 200 billion kyat ($148 million) was "oversubscribed," but only just, with bids amounting to 201 trillion kyat, according to Turnell.
Subsequent government bond issues performed poorly, raising 75%, 50% and 40% of the target, primarily from domestic banks, several of which are state-owned. With inflation at 11.4% last year, and kyat bonds offering a 9% coupon, their lackluster performance was understandable and pointed to why only domestic banks were strong-armed into buying.
Dollar-denominated bonds would be more attractive, because the U.S. currency is more stable and American inflation lower and more predictable. However, to issue dollar bonds Myanmar would require a sovereign credit rating. U.S. investment bank Citi has been advising Myanmar on the process for the past three years, and brought it to the point of final agreement; but since the NLD government came to power, there has been little progress.
"The fact is, if Myanmar was to get a credit rating right now it would not be investment grade and there is nothing you can do about that," Turnell said.
However, even a sub-investment grade rating might benefit Myanmar's banks. "Once a country gets a sovereign credit rating then the banks can base their credit ratings on that, meaning that their credit rating can be much higher even if they are in a country that has a low credit rating, or [does not have] an investment level credit rating," said Eric Rose, lead director of Herzfeld Rubin Meyer & Rose, the first U.S. law firm to be established in Myanmar.
The Myanmar government might benefit from taking lessons on sovereign credit ratings from its neighbors. Cambodia, for instance, sought a sovereign credit rating from Standard & Poor's Financial Services eight years ago primarily to allow its leading private bank -- ACLEDA Bank -- to acquire a rating to boost its reputation. ABA Bank, the fifth largest bank in Cambodia, is also considering seeking a rating this year. "That should help us with our international borrowing," said Askhat Azhikhanov, ABA CEO.
Laos did not wait for a sovereign credit rating before it launched a sovereign bond in the Thai market in 2013. Twin Pine Group, a financial adviser based in Thailand, arranged the launch of Laos' first sovereign bond of $50 million in May 2013, and the three-year debt instrument was 2.74 times oversubscribed. Laos later acquired a sovereign credit rating from TRIS Rating, a Thailand-based credit rating agency 49% owned by S&P, to facilitate bond sales in Thailand.
Twin Pine's Managing Director Adisorn Singhsacha said the company has been trying to do something similar in Myanmar. "I do believe that Myanmar could come to the Thai bond market unrated, and they could also do a test U.S. dollar bond issue," Adisorn said. "But what is preventing the Myanmar companies from coming to the market is pretty much the rules and regulations inside the country."
Myanmar's central bank has been cautious about allowing domestic banks to seek borrowing or joint venture partners. Although 13 foreign banks have been granted licenses to operate single branches in the country, they are not permitted to lend to local companies or to engage in retail banking with Myanmar citizens.
Authorities have also prevented foreign life insurance companies from entering the market -- no licenses have been awarded, even though local regulations theoretically allow them to operate. Their presence would generate employment and create pools of capital for investment in the local bond market, as they have in Thailand and Vietnam.
Generally, insurance companies are required for prudential reasons to limit their investments to local currency instruments, creating a captive market for government bonds and corporate debentures. Partly because of the insurance market, outstanding bonds issued from Thai entities have grown rapidly over the past decade to about 10 trillion baht ($302 billion). If Myanmar could build up a similar bond market, that would go a long way toward financing its infrastructure requirements.
Creating a bigger demand for kyat bonds would also fit Myanmar's apparent priorities, which do not include raising funds in foreign capital markets. "For the moment, the concentration is on developing the domestic financial sector, the domestic capital market," Turnell said.
The government also appears to be seeking to boost domestic banks rather than opening the banking sector to full foreign participation, as in Cambodia and Laos, where 100% foreign-owned banks are permitted to engage in universal banking. "There is talk of allowing the foreign banks to engage in trade finance, but not retail yet," said one Central Bank of Myanmar official, requesting anonymity.
At a recent meeting of chief executives of Myanmar's 22 local banks, many of them once considered "cronies" in the days of military rule, Suu Kyi hinted that they should be prepared for more foreign bank involvement in the banking sector. "Aung San Suu Kyi called all the bank chairmen because she wants to change a lot of things. There is no need to protect the Myanmar banks," said Khin Shwe, a construction tycoon and chairman of the Small & Medium Industry Development Bank. "Now is the time to joint venture with foreign banks," he said.
Allowing foreign banks to play a bigger role, even as joint venture partners with existing Myanmar banks, would be a step in the right direction. But more is needed to attract the billions of dollars that Myanmar requires to fund electricity supplies to the 70% of the population still living in the dark, and decent roads for the majority of the population who live in the hinterlands.
"The problem I'm having is that I don't see the very dramatic steps that need to be taken to jump-start the economy right away," said Rose. "Ultimately it all comes back to money. They don't have the money needed for the infrastructure building. That's what Western companies all bring in."