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SINGAPORE, September 17, 2018 – Myanmar’s economy was on a gradual recovery path driven by expanding public spending and exports while inflation moderated in fiscal year (FY) 2017/18, after slowing down in the previous FY. This was highlighted in the 2018 Annual Consultation Report on Myanmar published by the ASEAN+3 Macroeconomic Research Office (AMRO) today. The report was prepared on the basis of AMRO’s Annual Consultation Visit to the country from May 15 to 25, 2018 and data available up to 29 June 2018.

The economy grew by 6.8 percent in FY2017/18, up from 5.9 percent in FY2016/17 thanks to expanding public spending and growing exports, and a recovery in agricultural production supported by favorable weather conditions. The economy is projected to recover further at 7.1 percent and 7.4 percent in FY2018 half-year interim and FY2018/19, respectively, supported by sustained foreign direct investment inflows, improving investor sentiment, and continuing strong growth in garment exports and domestic consumption.[1] Inflation moderated further in FY2017/18, mainly due to lower food inflation, and is forecast to stabilize at 5.0 percent in FY2018/19.

Risks to growth emanate ma from ongoing ethnic tensions in Rakhine State and uncertainties in the global environment related to trade and energy prices and could continue to weigh on investor sentiment. Exchange rate pressure and weather conditions that might lead to supply-side disruptions will continue to be key sources of inflation uncertainty.

Vulnerabilities have built up in the financial sector which requires active risk management amidst the efforts to raise banking regulation standards. In particular, the vulnerabilities associated with poor asset quality and thin capital buffer could increase further, in light of the implementation of stricter loan classification under the new prudential regulations. Subdued revenue from state economic enterprises (SEEs) in the energy sector and subsidies to loss-making SEEs will continue to put pressure on the fiscal position.

AMRO commends the authorities’ continued reform efforts in several areas, including fiscal, monetary, financial, foreign exchange, and structural reforms in a bid to sustain the ongoing economic recovery while maintaining macroeconomic stability. Fiscal resources should be further optimized by directing more resources towards priority areas such as transport and electricity with continued improvement in spending efficiency. Adhering to medium-term fiscal discipline can help ensure fiscal sustainability, supported by the establishment of fiscal rules and a resource fund.

The progress made in implementing the monetary-targeting framework is commendable and should be continued, together with phasing out the central bank’s direct deficit financing by 2020. The implementation of new banking regulations will enhance the soundness and resilience of the financial system and contribute to developing a healthier banking sector over the medium term. In the short turn, the process of compliance with new banking regulations could put pressure on banks and dampen the economy and should be managed judiciously. The flexible management of the exchange rate to align with market conditions is a welcome move, while a further build-up of international reserves is recommended to strengthen buffer against external shocks.

In the medium-term, structural and institutional reforms to develop a market-based economy and inclusive growth should be accelerated under a comprehensive and coherent policy framework. Timely implementation of new laws and a strengthening of the rule of law in Myanmar should boost the private sector confidence in investing in the economy. In this regard, the government’s initiative in launching the Myanmar Sustainable Development Plan is expected to help align various policies and institutions in order for Myanmar to achieve stronger and more inclusive growth.

In addition to the overall economic outlook for Myanmar, the report also contains analysis on two selected issues critical to the country’s macroeconomic development: export manufacturing development and fiscal flows of SEE. Regarding the first issue, the prospects for Myanmar’s garment sector look very promising, given the size of the global market. With the advantages accruing from the preferential trade agreements and low labor costs, Myanmar can utilize the time window to address the key constraints in improving both the environment for domestic manufacturing as well as the efficiency of trade logistics. On the second issue, AMRO encourages stepped-up reforms to prevent a further drain on fiscal resources in light of increasing SEE expenditures amid the steady fall in SEE revenues.

[1] Myanmar’s fiscal year will change, starting from this year, from April-March to October-September. The FY2018 half-year interim is from April to September 2018 and will serve as the transition period to the new FY2018/19, which will commence from October 2018 and ends in September 2019.

About AMRO:

The ASEAN+3 Macroeconomic Research Office (AMRO) is an international organization, established to contribute to securing the economic and financial stability of the ASEAN+3 region, which includes 10 members of the Association of Southeast Asian Nations (ASEAN) and China; Hong Kong, China; Japan; and Korea. AMRO fulfills its mandate by conducting regional macroeconomic surveillance, supporting the implementation of the Chiang Mai Initiative Multilateralisation (CMIM), and providing technical assistance to its members.

The Annual Consultation Report was prepared in accordance with AMRO’s macroeconomic surveillance function. AMRO is committed to monitoring, analyzing and reporting to its members on their macroeconomic status and financial soundness. It also helps identify relevant risks and vulnerabilities, and assists members, if requested, in the timely formulation of policy recommendations to mitigate such risks.