Trading friends

Opinion | 30 May 2017

As Myanmar opens up its economy to the world, it has a great example to follow in Vietnam but for the sake of both nations' long-term prospects, they must end their overreliance on exporting
to China, says Agnes Vargas

Of all the world's emerging economies, few have developed as impressively as Vietnam. Having climbed out of a (still relatively recent) history of conflict, partition and poverty, the country has transformed itself into a local industrial and exporting powerhouse.

Myanmar looks likely to follow in Vietnam's footsteps. One year on from the election of its first democratically elected government (after more than five decades of political isolation and military dictatorship) the country is poised to open up its economy to foreign investment and trade.

Just like the other members of the Association of South-East Asian Nations (Asean), the fortunes of both countries have historically depended considerably on trading links with China. But such a reliance may yet prove a hindrance if China's own economic growth continues to decline. If Vietnam and Myanmar are to safeguard their future prosperity, they would do well to diversify their range of exports.

The Vietnamese economy grew by 6.2% in 2016, and is likely to expand by a further 6.7% this year. Since the millennium, its annual expansion has averaged almost 6.5%, boosting what was once one of the world's poorest countries into the World Bank's lower-middle income bracket.

Vietnam's economy has performed well largely as a result of continued focus on modernisation, liberalisation and industrialisation. Competitive minimum wages, low utilities costs, and a labour force that is growing by around one million a year have helped boost foreign direct investment (FDI) in the manufacturing sector.

The country has diversified its export mix, adding machinery, telecommunication components and computer electronics (which altogether represent some 41% of total exports) to an existing base of textiles and commodities.

This has translated into a strong performance for trade. Working with local banks to deal in both short-term trade business, such as hedging export risk, and longer-term financing and re-financing for intra-Asian trade, we have seen the results. In only the last five years, the volume of Vietnam's exports has doubled.

Figure 1: Myanmar real GDP growth

Source: IMF

Could Myanmar follow suit?

Vietnam could well be the model Myanmar emulates as it takes its own steps towards greater economic development. Having recorded a GDP growth rate of 8.1% last year, Myanmar's economy could sustain expansion of more than 7% over the next few years, according to the International Monetary Fund (see Figure 1).

Along with democracy has come the easing
of US and EU sanctions and, as a result, since 2016 the country has been open to the flow of
US dollars. This is crucial for attracting the foreign investment that can build trade.

Figures from the Directorate of Investment and Company Administration, a government agency in Myanmar's Ministry National Planning and Economic Development, show that FDI inflows in 2016 amounted to US$3.3bn - 2015 brought an all-time high of US$9.5bn. Capital flows were mainly driven by interest from Singapore and China. Such sustained investment, if channelled to new industrial sectors from abroad, can help the country rise up the value chain. It could help move Myanmar beyond the primary goods (natural gas and oil products, and vegetables, wood, precious stones, fish, rubber and fruits) that currently underpin its export revenues.

Through our network of correspondent banking relationships, we have seen the effects of this FDI at work on the ground. Demand among German carmakers for coverage of risk has grown as they set up factories in the country, and considerable construction of water, transport and telecommunications infrastructure (which should help pave the way for more such investment)
is also underway.

Figure 2: Vietnam's export mix

Source: UN trade statistics

Overreliance on China

Despite such a budding outlook for Myanmar, and the template for success from Vietnam, a possible check on future progress remains - their continued dependence on China as a consumer.

Vietnam relies on being able to sell over
10% of its goods to its northern neighbour. China is also Myanmar's most important trading partner, responsible for buying as much as 38% of its exports. Yet as Beijing continues to post slower growth figures (the 6.7% rate of growth posted in 2016 was the slowest in 26 years) Vietnam and Myanmar must both account for tighter Chinese purse strings.

In fact, the problem is mirrored across Asean. As Figure 3 shows, despite the danger of overdependence on China, Asean's share of trade with the country has actually increased from around 11% in 2010 to over 15% in 2015. The share of intra-Asian trade and trade with other global partners, meanwhile, has decreased.

Figure 3: Asean top trading partners in 2010 and 2015

Source: IMF / Commerzbank research

Broadening horizons

Vietnam and particularly Myanmar would do well, therefore, to broaden their range of export markets.

One potential avenue lies in greater trade with the West. Vietnam has made good progress in this regard. A state once known for its isolation has embraced globalisation, particularly in the 10 years since signing up to the World Trade Organization. While just a decade ago the country was dominated by local and Chinese businesses, Western advertising now adorns the streets, thanks to its close trading links with Germany, the EU and the US. Myanmar could also build on existing trading relationships with Germany.

Vietnam and Myanmar could also look to gain from the Regional Comprehensive Economic Partnership (RCEP). With politics having now effectively buried chances for Vietnam to gain from the Trans-Pacific Partnership (TPP), the RCEP represents a significant opportunity to boost Vietnam and Myanmar's trade across the Pacific. The groundwork may have been laid,
as both countries already maintain close trading links with Japan and South Korea.

Another opportunity could be closer to home. In late 2015, the Asean launched the Asean Economic Community (AEC). This trading network is intended to act as a regional single market - allowing for the free flow of goods, services, labour, investment and capital, and with the potential to connect some 600 million people in the region.

As Asean itself celebrates its 50th birthday this year, success with the AEC would doubtless help to reduce Vietnam and Myanmar's dependence
on the Chinese economy.

Myanmar looks to be following Vietnam down a well-trodden path to economic success. Along the way, both countries must keep on the lookout for trading opportunities beyond tried-and-tested Chinese markets.

Agnes Vargas is regional head for Greater China and Asean at Commerzbank

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