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Time to Deliver

The Myanmar government knows it needs to improve the country’s economic performance and extend the benefits of development more evenly across society. With elections only a year away, the ruling National League for Democracy (NLD) needs some big wins to prove to the country’s entrepreneurs and the urban middle class that it is pro-business.

In recent weeks the government has announced plans to push ahead with financial sector reform, with increased moves to liberalise the banking industry, ease restrictions on money transfers, launch much-awaited government bond auctions and privatise loss-making state-owned factories.

“The NLD is running out of time, and in the meantime the economy is continuing to stagnate,” said Kyaw Kyaw Hlaing, a political commentator and CEO of the conglomerate Smart Technologies.

“So far their economic record in government has been disastrous: there’s no plan, no vision, and no strategy,” he told Asia Focus.

The government has faced a Herculean task since coming to power in April 2016. On the one hand, the NLD was committed to economic liberalisation, creating jobs and increasing the country’s attractiveness to foreign investors, while also maintaining prudent economic policy, both fiscal and budgetary.

At the same time, it faced enormous resistance from the country’s old guard — the top bureaucrats, the cronies of the former military junta and those who had benefited from the traditional opaque way of doing business. These groups remain entrenched and have quietly opposed the government’s efforts to bring about change. Policies that stress greater accountability and transparency are clearly aimed at reducing the influence of the old oligarchs.

“International investors have been waiting a long time for the promised economic reforms, especially in the financial sector,” said William Maung, a local expert on the banking and insurance sector.

“In the past four years the government has had to try to balance stability with reform, and so far has erred on the side of caution, leading to foreign investor frustration when their raised high expectations were not met.”

“Economic reform is always tough, especially in the face of strong incumbent interests,” Sean Turnell, a top economic adviser to the government, told Asia Focus. “Of course, the reform agenda in Myanmar also has a very long trajectory.”

The civilian government had to start “from scratch” where economic reform was concerned, Hanthar Myint, the NLD’s leading policy architect for policy, told Asia Focus shortly after the party’s overwhelming electoral victory four years ago.

It has been a slow process since then, but the end is in sight, according to government ministers and economic advisers. “I think what we are currently witnessing is an acceleration of the programme of economic reform in line with the interest of the country,” said Mr Turnell.

This is outlined in the Myanmar Sustainable Development Plan (MSDP) which clearly establishes the national priorities for development, especially in regard to infrastructure projects, he added.

In the last year or so, financial sector reform has been creeping along, according to William Maung. Even banking liberalisation has been happening in dribs and drabs, he said. But the broader opening of the sector, especially to international investors, has only begun to happen in the past year — and it has been piecemeal at that.

But the liberalisation of the insurance sector has shot ahead, he told Asia Focus, which in turn put the spotlight on the need for further financial sector reform to support the development of the fledgling insurance market.

Earlier this month the government announced it would start auctioning 10-year sovereign bonds to help meet demand for long-term debt from the insurance industry.

“We are planning to launch auctions for 10-year government treasury bonds soon as demand, mainly from insurance companies, is rising,” Si Si Pyone, director-general of the Treasury Department in the Finance Ministry, told a conference in Yangon recently.

It is common for insurance firms to invest their premiums in long-term government bonds — which are less risky than funds and equities — to increase their overall profitability, and allow them to lower their premiums, making policies more attractive.

For the government it is an essential part of its long-term plan to deepen the bond market in order to raise capital to cover the fiscal deficit. In the long run, the government wants to reduce its reliance on the central bank to finance the deficit, and end it altogether within the next two years.

“It’s profoundly important,” Mr Turnell explained to Asia Focus. “It is integral to sound public finance — the ultimate source for the liberation of Myanmar from ‘printing money’ as the highly destructive basis of government funding. It will help ensure macro-financial stability — something the government has been both steadfast and enormously successful in doing.

“Government bonds are the foundation more broadly of a country’s capital markets — the benchmark securities against which all other debt instruments can be priced, marketed, and so on. So the issue of government bonds in Myanmar is central to the expansion of access to capital for Myanmar’s entrepreneurs, and all the businesses that hitherto have not had the ‘connections’ to access the finance they need to expand.”

Myanmar first introduced sovereign bonds in 2015, when it began auctions for three-month Treasury bills. In 2016, it launched six- and 12-month bills as well as two- and five-year bonds. Over the past four years, the country has managed to raise over 600 billion kyats (US$396 million) in sovereign debt, according to Si Si Pyone. But this needs to be expanded, she added.

The ministry is currently working on a bond market master plan, which includes strategies to deepen and manage the market over the short and longer term, with the support of the Asian Development Bank.

Although the bond market is in its infancy, William Maung said the plan to introduce 10-year bonds is a step in the right direction. The hope is that when the Yangon Stock Exchange expands, this will also help expand the market for government debt.

Meanwhile, foreign and local investors are still waiting for the government to bite the bullet and tackle debt-ridden and non-functioning state-owned enterprises (SOEs). Only four of the 57 factories controlled by the Ministry of Industry are making money.

Around a third of these factories — with losses of about 300 billion to 400 billion kyats each year — need to be closed. Others that are still operating need to be upgraded and overhauled. The plan is to privatise them — fully or partially, according to government sources.

A total of 55 state-owned factories have already been restructured under various public-private partnership (PPP) agreements between 2012 and 2015, according to government information.

“It’s important to privatise the factories and promote production that is in line with market demand. In doing so, it would be effective if the ministry can cooperate in managing shares, assets, PPP bonds and take necessary action to prevent further financial losses,” Deputy Finance Minister Set Aung told parliament recently.

Tackling the problem of the moribund SOEs, which are costing the government more than a billion dollars a month, according to some experts, is an ongoing process. Recently Sate Counsellor Aung San Suu Kyi told the government’s main economic committee, over which she presides, that the privatisation of the SOEs was a top priority, according to government insiders.

“It’s crucial to review and modify these [SOEs]… and develop a better organisational structure,” Set Aung told parliament. To achieve its current aim of a market economy, a smooth reform of the state-owned factories under a new and more streamlined structure is essential, he added.

These reforms are all part of a strategic liberalisation programme that is being accelerated, said Thaung Tun, the Minister for Investment and effectively the country’s economic tsar.

“We’ve entered phase two of the government’s planned economic reform programme,” he told Asia Focus last week. The financial sector reforms are crucial to providing a level playing field for both local and foreign investors, he added.

There is an unfolding momentum to the liberalisation programme, according to the government’s top adviser. “It is profoundly important in expanding the range and sources of financing available to Myanmar companies — small-scale entrepreneurs and even individuals. It’s a further ‘chipping away’ of the old closed order, so crucial to better integrate Myanmar into the global economy,” Mr Turnell told Asia Focus.

But while Myanmar maybe banking on financial sector reform to push economic development to the next level, many in the business community remain sceptical. But economic growth is predicted to increase in the coming election year, as the government plans to boost spending — especially on infrastructure — by easing the cap on ministries’ budgets.

Source: Bangkok Post

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