BMI View: We continue to believe that near-term construction growth in Myanmar will remain close to the modest levels seen in 2012. This lack of acceleration in growth is due to the limited upside to foreign investment - the main driver of construction activity - and the numerous threats to the country's political environment before and during the 2015 general elections. That said, our base scenario is for broad political stability to persist in Myanmar and reforms in the country's business environment to continue. Should that be the case, we believe that the growth prospects for Myanmar's construction sector beyond 2015 are bright, due primarily to the country starting from a low economic base.
It is still our opinion that near-term growth for the Myanmar construction sector could remain at levels close to 2012. We are forecasting real growth for the sector to reach 9.4% in 2013 and 9.7% in 2014. This relatively robust growth rates are primarily because the country continues to posses strong fundamentals for construction activity. Not only is Myanmar offering significant project opportunities due to its severe shortage in buildings and infrastructure, but the country is also willing to continue carrying out sweeping economic reforms to improve its business environment for investors. The Myanmar government recently launched the country's first construction and housing development bank (the bank's remit is to provide loans for local home purchases and construction), with other reforms set to take place in 2014 - namely an online platform for construction permit application and the privatisation of some state-owned railway lines in and around Yangon.
However, we believe that the Myanmar construction sector is unlikely to maximise its growth potential and achieve double-digit growth rates. In fact, it is our opinion that the sector could see a dip in growth in 2015, falling to 8.5%. This is primarily due to two factors:
Limited Foreign Investment: Although foreign direct investment (FDI) into Myanmar in 2013 looks set to surpass levels in 2012 due to a recovery in the global economy ( see 'Political Stability A Threat To Construction Boom', October 21 2013), we believe that the recovery remains fragile and could be short-lived. This is because fiscal problems in the eurozone have yet to resolved , while the cyclical upturn in China's economy (brought on by a huge surge in its domestic credit) is unlikely to last into 2014 due to its structural problems ( see 'Another Credit Binge Will Not Cure Economy', September 12 2013). The US economic recovery is expected to accelerate going into 2014, but the country is still suffering from political gridlock and has yet to address its federal debt ceiling, which must be raised by February 2014 to avoid a default. Given this uncertain business climate, companies are likely to maintain a cautious outlook and could scale back on fixed investment in markets with high levels of business risks such as Myanmar.
| Drastic Increase Not Repeated |
|Myanmar - Yearly FDI Inflows, US$mn|
This is a major threat to Myanmar's infrastructure sector as the sector is heavily reliant on FDI inflows to spur activity - almost all of the country's FDI inflows were channelled towards the development of fixed assets in FY2012/13. Domestically, the country lacks the funds to finance its construction needs - we estimate that Myanmar's foreign reserves in 2013 is about 8% of GDP for the year - and the necessary technical expertise and capacity to implement large-scale construction projects.
Sizeable Political Threats: The country continues to present sizeable political risks over the near-term and we believe that the majority of investors could wait for greater political clarity before carrying out capital-intensive works in the construction sector ( see 'Three Risks That Could Derail Political Reforms', July 16 2013).
Firstly, there is significant potential for sectarian violence across the extremely geographically and ethnically diverse country, particularly between the majority Buddhists and minority Muslims. To be sure, Myanmar suffered another flare-up of communal unrest at the end of September 2013,with Buddhist mobs reportedly setting fire to over 100 homes in the state of Rakhine, leaving more than 500 residents homeless and at least five people dead ( see ' Sectarian Tensions Highlight Weak Political Risk Profile', October 10 2013). This threat of sectarian violence could deter foreign companies from investing in projects in these troubled regions, such as the civil and beach projects in the Thandwe Hotel Zone, located in the Rakhine state.
Secondly, fault lines between factions within the ruling Union Solidarity and Development Party (USDP) are emerging, with a schism developing between key political leaders in the party - President Thein Sein and Speaker of the Lower House Shwe Mann. A substantial falling out between these separate factions in the USDP could pave the way for either a minority government or an uneasy coalition, threatening the country's political stability and reformist trajectory.
| Bottom Of The Table |
|Asia - Short (STPR) And Long (LTPR) Term Political Risk Ratings, out of 100|
Lastly, Myanmar is scheduled to hold general elections in 2015, and the outcome remains clouded. The current constitution prevents veteran democracy icon Aung San Suu Kyi from running as president or for her party, the National League for Democracy (NLD), to amend the constitution even if it wins the 2015 elections ( see 'Uncertainty Over Constitutional Reform Elicits Concern', December 23 2013). These regulations are judged to be unfair by Suu Kyi and the NLD and they are considering boycotting the 2015 elections if the constitution is not amended to provide for a freer and fairer electoral process. Such a scenario would substantially undermine the legitimacy of the 2015 elections and set the stage for political turmoil within Myanmar.
Even if the NLD secures a majority in the 2015 elections, this change in political leadership could lead to a drastic change in policy towards infrastructure development. This is particularly pertinent in Myanmar as the country's system of governance remains highly authoritative, with the government taking a hands-on approach in awarding and reviewing infrastructure projects.
Sanguine Medium-Term Outlook
Despite these downside risks, our base-line scenario is for political stability to persist in Myanmar and reforms in the country's business environment to continue. Should this view play out, we believe that the growth prospects for Myanmar's construction sector beyond 2015 are bright. We are forecasting real growth for the sector to average 10.8% per annum between 2016 and 2023, making it one of the fastest growing construction markets in Asia. There are several factors supporting our bullish outlook, and they are primarily related to the country starting from a low economic base.
| Stagnant For Now |
|Myanmar - Construction Industry Value Forecasts|
The positive outlook for Myanmar's industrial sector. We believe that two factors are driving activity in the non-residential building construction sector in the medium term:
Low Wages: Myanmar's low-end manufacturing industry (eg. textiles) is set to grow robustly despite shortages of skilled labour, high electricity costs and large deficiency in logistics capacity. This is because wages in Myanmar are significantly lower than in China and other South East Asian countries, and multinationals are keen to take advantage of the labour cost differential. For example, in August 2013, the Myanmar Investment Commission allowed several companies from China, Singapore, Hong Kong and Taiwan to set up garment manufacturing facilities in Myanmar with 100% foreign ownership.
Resource Wealth: Many foreign companies are also keen to develop Myanmar's agricultural produce and energy resources, with China's North Mining Investment Company recently submitting the proposal to the Myanmar government to invest in the Mway Taung Phar Ttaung copper mining project in Chin State. There are also plans to convert the country's resources into higher value processed products such as petrochemical products. In January 2014, China's Sichuan Henglu Industrial Company formed a joint-venture with Myanmar's Good Plus Star Mining Company to refine lead in Kalaw Township, Shan State.
The long-term drive to develop Myanmar's tourism sector. Among the industries set to benefit from Myanmar's growing political and economic liberalisation, the tourism sector is perhaps the most promising. This is because it is typically the easiest to realise economic benefits and the Myanmar government has already identified tourism as a key sector. This is evidenced by the creation of a comprehensive plan for tourism with the Asian Development Bank in June 2013 and the country's target of reaching 7.5mn tourist arrivals by 2020 (a 700% increase from current levels).
| Air Transport Crucial For Tourism |
|Myanmar - Tourist Arrivals, By Type|
To realise Myanmar's tourism potential, transport infrastructure, particularly airports, will have to be adequately developed to facilitate tourist arrivals. This has already started to take place, with Myanmar's Ministry of Transport announcing the preferred bidders for three major airport projects in August 2013 ( see 'Airport Awards Highlight Growth Opportunities', August 14 2013). Other tourism facilities such as hotels will also need to be upgraded and increased. According to statistics from the Ministry of Hotels and tourism, there are only 9,451 hotel rooms in Yangon, and, according to Jones Lang Lasalle, only 1,500-2,000 of these rooms are suitable for tourists. At present, we have already seen several international hotel firms - such as Accor, Hilton, Best Western, Novotel, and Shangri-La - announce plans to develop new facilities in Myanmar.
An urbanising population. With rising economic development and better paying jobs in major cities, we expect Myanmar's urban population to increase from 34% of total population in 2013 to 39% by 2022. This will further boost the demand for residential and non-residential buildings. As it is, the country is already suffering an acute shortage in both residential and non-residential buildings. This has led to a sharp increase in property and land prices, with a 2012 report by independent research agency Myanmar Survey Research indicating that land prices in Yangon has increased by nearly five-fold between 2002 and 2011.
| Driving Demand For Urban Infrastructure |
|Myanmar - Population and Urbanisation Rate Forecasts|
The Myanmar government has plans to address this deficit, with the Ministry of Construction announcing in October 2012 that it plans to build more than 1mn flats between 2013 and 2028. The country had only built 240,594 flats between 1989 and 2012. Rising urbanisation would also place pressures on public transport, which is currently under-developed in Myanmar. According to a study by the Japan International Cooperation Agency in June 2013, 90% of Yangon's population used public transport, but only 3% of them use the local commuter rail network. This is primarily due to the network's lack of maintenance and coverage.
The severe lack of affordable and reliable electricity to support economic activity. Myanmar has the second lowest electrification rate in Asia after Cambodia, and is suffering from a deficit in power generation and grid capacity ( see 'Power: Opportunities In All Areas And Timeframes', July 9 2013). The government is keen to address this deficit - it had previously announced a US$20bn plan to increasing generating capacity to 16,500MW by 2022 - and we have already seen several foreign companies announce plans to develop power plants in Myanmar. They include Thailand's Electricity Generating Authority of Thailand, GMS Power and Global Power Synergy, Malaysia' Mudajaya, China Guodian, Indonesia's Bukit Asam and South Korea's Hyundai Engineering & Construction, Hanza International and Western Power Company.
We do however, highlight that hydropower projects in Myanmar are increasingly plagued by environmental concerns. There also appears to be a preference by the government to develop thermal-based plants at the moment ( see 'Hydropower Projects Still Advancing, But Storms Ahead', October 10 2013).
| Starting From A Low Base |
|South East Asia Countries - Logistics Performance Index, Infrastructure Indicator, Scores out of Five (LHS); Electricity Access, 2010, % (RHS)|
The low quality of transport infrastructure to support trade and tourism. As highlighted above, Myanmar has moved to address its demand for tourism-related transport infrastructure, but the country also needs to develop and upgrade the infrastructure needed to maximise its strategic location on the Asia-Europe trade route ( see 'Myanmar: A Wealth Of Logistics Opportunities', July 17 2013). According to the World Bank Logistics Performance index, the quality of Myanmar's trade and transport related infrastructure remains one of the poorest in Asia despite improvements in recent years. Besides the Dawei port, the Myanmar Port Authority had signed agreements in August 2013 to study the potential for the construction of the Kalargote deep seaport on the Tanintaryi coast and the Ngayokekaung deep seaport in the Ayeyarwady region.