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25 Nov 2020

Econ Digest

Myanmar … after Aung San Suu Kyi won her second term in office

      Prior to the government under the leadership of Aung San Suu Kyi, the value of foreign investment in Myanmar averaged only USD2.083 billion per year, with China as the largest foreign investor in the country, aiming at investment in natural resources such as copper, iron and jade mining, etc. Since Aung San Suu Kyi won her first term, foreign investment flowing into Myanmar averaged USD6.654 billion per year, three times more than that of previous years, with nearly half of the investment value coming from Singapore - an ally of western countries in ASEAN. It has been seen that the government under the leadership of Aung San Suu Kyi has tried to balance foreign direct investment between China and western-allied countries. In addition, Myanmar’s government has also tried to refocus investment from relying on natural resources to centering on the industrial sector and infrastructure such as roads, industrial estates and power plants. Such investment will strengthen Myanmar's long-term competitiveness.

      Within the few years that Ms. Aung San Suu Kyi has been running the country, Myanmar has changed from mainly exporting natural resources and agricultural products to being a country that exports industrial products (textiles and clothing) the most, while the exporting of agricultural products and mineral fuels such as natural gas is gradually declining. This change in export structure indicates that the economic development of Myanmar has entered an era of industrial revolution.

      Currently, Myanmar's strengths are its wages, which are the lowest wages in ASEAN, and its tariff privileges awarded under the Generalized System of Preferences (GSP) that allow foreign investors to export their products to the EU and US markets without additional taxes. As a result, Myanmar is a country that greatly attracts investment in labor-intensive industries. More importantly, when compared to rival countries with low wages in ASEAN such as Laos and Cambodia, Myanmar has reformed its bureaucratic system to be more conducive to business operations, for instance by establishing company registration through online channels and the reduction of company establishment fees, which resulted in the significant rising of ranking in Ease of Doing Business (Myanmar ranked 165th of Ease of Doing Business in 2020, which was better than the ranking of 177th before the administration of Aung San Suu Kyi), in contrast to weakening ranking of Laos and Cambodia during the same period.

      Therefore, KResearch views that, now that Aung San Suu Kyi has secured her second term in office, foreign direct investment in Myanmar will increase continuously. This will be supported by the US-China trade war that pushes China to invest in infrastructure more, particularly in the infrastructures connecting the Yunnan Province with the Indian Ocean on the western coast of Myanmar, such as railway projects. These projects will be a key strategy for building China's energy security, as well as being a gateway for Chinese products to access the Indian Ocean. Meanwhile, western-allied countries tend to invest more in labor-intensive industries, such as the textile and garment industry, because the US has realized the importance of Myanmar to China. As a result, it is highly likely that the US will not revoke Myanmar’s GSP privileges, which is a risk factor that would negatively impact Myanmar's investment situation at this time. These factors will benefit the competitiveness of Myanmar in attracting investment in labor-intensive industries from western-allied countries in the future.

      However, the situation of the COVID-19 pandemic caused a supply chain disruption in the textile industry earlier in 2020. As Myanmar relies on imports of Chinese fibers and fabrics as high as 90%, many garment factories in Myanmar have been shut down. As a result, the exports of Myanmar's industrial products contracted 8.1% during the period of January - August 2020. KResearch sees that the closure of garment factories in Myanmar will result in a short-term disruption in the development of the textile industry in Myanmar (for 1-3 years), but it will not affect the competitiveness of Myanmar, and foreign investment in the textile and garment industry will recover again in the long run.

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