Greater Mekong Economic Outlook - 2021 | H1 - Austcham ...

2021 | H1

Greater Mekong
Economic Outlook
Cambodia | Lao | Myanmar | Vietnam

Feature note | Improving governance for growth in CLMV economies 3

Cambodia | Diversification is key 8

Lao PDR | Amplified fiscal risks 10

Myanmar | Recovery has a long way to go 12

Vietnam | From recovery to solid growth 14

Contacts 16

Important Notice 17

 Published 11 November 2020
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 Please refer to the Important Notice.

Feature note

 Improving governance for growth in the CLMV economies

  An improvement in the quality of governance will positively impact the long term
 economic performance of the CLMV economies, lifting their per capita GDP growth
 as much as 1.4ppts higher per annum.

  The three main channels through which better governance impacts growth are
 foreign direct investment, human capital, and infrastructure development.
 Improved quality of governance can also help achieve important economic ends,
 such as enhancing CLMV participation in the global trade of tech-intensive goods,
 which have delivered rapid economic gains to several Asian economies even in the
 face of pandemic-led crisis.

  Among the CLMV economies, Vietnam’s ascent to a key regional trading hub for tech-
 intensive goods is testimony to the multi-faceted impact of focussed policy efforts
 and good governance. Yet, even Vietnam has much room to improve further.

 Governance reforms for growth
 The quality of governance has become pivotal in explaining the variation in economic growth
 and development across economies. The role of public policy in driving economic factors has a
 direct bearing on productivity growth. In this report, we discuss the potential economic impact
 of improving the quality of governance in Cambodia, Lao PDR, Myanmar, and Vietnam (or CLMV
 group of economies). We specifically explore how improved governance can lead to productivity
 benefits via channels like foreign direct investment (FDI), human capital, and infrastructure. We
 also discuss how via these channels, improved governance can become the means to important
 economic ends for CLMV, such as stepping up their exports of tech-intensive goods over time.

 Potential productivity gains from improved governance
 To capture the multi-faceted nature of governance, we constructed an index (GI) by calculating
 the average of four indicators from the World Bank’s database. They are: (i) control of
 corruption; (ii) government effectiveness; (iii) political stability; and (iv) regulatory quality. The
 average index is then rescaled between 0 and 10, 10 being the highest possible score (Figure 1).
 We estimated a model1 to get a sense of the impact that governance reforms can have on real
 per capita income growth, which is our proxy for productivity growth (see Appendix for details).

 We find that our GI has a strong positive influence on real per capita income growth. Our model
 suggests that if the GIs for Cambodia, Lao PDR, and Myanmar converge to the ASEAN-4’s 2019
 average, yearly per capita income growth could rise by 1ppt for Cambodia and Lao, and by 1.4ppt
 for Myanmar, all else equal (Figure 2). Since Vietnam already fares well among CLMV, we
 compared it with Malaysia, which has the best GI in our sample. We estimate that Vietnam can
 add 0.8ppt to its annual productivity growth if its GI converges to Malaysia’s 2019 index. In our
 view, the impact that governance has on productivity growth occurs through three key channels,
 namely FDI, human capital, and physical infrastructure.

 Figure 1. Governance Indicator or GI Figure 2. Productivity growth benefit from
 governance reforms
 3

 1.6 6.0
 Governance indicator or GI

 1.4
 1.2 5.0
 Percentage points

 (min:0, max:10)

 1.0
 0.8 4.0
 0.6
 0.4 3.0
 0.2
 0.0 2.0
 Myanmar Cambodia Laos Vietnam (wrt
 MYS)
 Growth benefit if GI converges to benchmark, LHS
 ASEAN4 average GI 2019 (or MYS's for VNM), RHS
 2019 GI, RHS
 Source: World Bank, Macrobond, ANZ research

1
 Apart from CLMV we included Malaysia, Philippines, Thailand, Indonesia (ASEAN4) and India to increase sample size.
ANZ Greater Mekong Outlook | 11 November 2020 3

Feature note

 I) FDI channel
 For CLMV, FDI inflows are of great economic importance to supplement their capital stocks
 and bring in foreign production technologies. The quality of governance drives FDI by
 impacting foreign investors’ expectations of returns on their investments and broader
 stability of the economy. We find a strong positive correlation between FDI and GI for our
 sample (Figure 3). The measure of linear elasticity between FDI stock per worker and GI was
 in the range of 3-3.5, implying that a 1% rise in the GI can induce a 3-3.5% increase in FDI
 stock per worker, other things unchanged (see appendix for details). In fact, the role of
 governance in driving FDI inflows was found to be stronger than that of realised GDP growth.
 This is likely because FDI flows into developing markets are often predicated on their
 expected future growth. Improvement in governance positively impacts the potential growth
 of an economy.

 From the perspective of CLMV, the role of focussed and effective government policy in
 driving FDI inflows is illustrated well by Vietnam. Vietnam’s government has put in concerted
 efforts over the last two decades to become a part of nearly twenty free trade agreements
 (FTAs), enticing global businesses to benefit from its wide market access. These FTAs have in
 turn helped the government to anchor some deep reforms domestically to improve the ease
 of doing business over the years. Policymakers have especially focussed on reducing the
 barriers to trade, both tariff and non-tariff, to signal that Vietnam is open to foreign
 businesses (Figure 4). As a result, Vietnam receives massive FDI inflows every year from
 countries like China, South Korea, and Japan, which are its important trading partners via
 FTAs, and have helped in its ascent to an important hub for foreign trade in the region.

 Figure 3. GI and FDI stock per worker are highly Figure 4. Focussed policy efforts have helped
 positively related Vietnam become friendly to global businesses

 10 100
 90
Log(FDI stock per worker)

 9
 80
 70
 8
 % of total 60
 7 50
 40
 6
 30
 20
 5
 10
 4 0
 1 2 3 4 5 6 7 Cambodia Myanmar Vietnam
 Governance indicator (GI) Exports affected by non-tariff barriers
 Source: World Bank, Macrobond, ANZ research Imports affected by non-tariff barriers
 3

 II) Human capital channel

 The quality of governance acquires an even larger role in augmenting human capital in CLMV,
 given their relatively early stage of development. We find that the prevalence of malnutrition,
 an important health indicator that determines labour productivity, is negatively correlated with
 GI. On the other hand, our GI is strongly positively correlated to education indicators, such as
 tertiary school enrollment ratio in the economies in our sample (Figures 5).

 To add perspective, our regressions indicate that a unit increase in GI can cut the prevalence of
 malnutrition in our sample by as much as 3%, all else equal. Such impact of improved quality of
 governance is larger in size than that of realised economic growth by our estimates, which is
 similar to our findings for FDI. This is perhaps due to the outsized role of government in
 ensuring access and affordability of health and education in developing countries, apart from
 highlighting that rapid GDP growth by itself doesn’t ensure equitable development outcomes.

 Vietnam is an example worth emulating on how good governance can give the much
 needed thrust to human capital development. Its government spending on education far
 exceeds that of other countries in CLMV, and so do its metrics on educational participation,
 right up to the tertiary level of schooling (Figure 6). Its thrust to quality universal primary
 education has been well-documented. In fact, the Programme for International Student
 Assessment (PISA) places Vietnam ahead of even a few OECD economies on parameters
ANZ Greater Mekong Outlook | 11 November 2020 4

Feature note

 pertaining to learning outcomes of students and educational environment at school. Such
 longstanding government policy thrust to education has translated into availability of skilled
 yet low-cost workforce in Vietnam. This attribute has been a key enabler for Vietnam that
 has allowed it to participate in the global supply chain of technology-related goods. FDI into
 this sector would not have occurred in the absence of such a workforce.

 Figure 5. Governance Indicator or GI and human Figure 6. Vietnam government’s thrust in education
 capital indicators of health and education has been noteworthy

 50 60
Prevalence of undernourishment (%)

 45
 Tertiary school enrolment (%)

 50
 40

 35
 40
 30

 25 30

 20
 20
 15

 10
 10
 5

 0 0
 1 3 5 7 0 5 10
 Governance indicator (GI) Governance indicator (GI)

 Source: WB, Macrobond, ANZ research Source: WB, Macrobond, ANZ research 3

 III) Infrastructure channel

 A general lack of private sector capacity in developing countries translates into a greater role for
 government to develop infrastructure in order to facilitate and boost economic activity. Thus,
 the effectiveness of government expenditure on infrastructure and its efficient management
 becomes important for productivity growth. In the literature, productivity benefits due to
 improved infrastructure are usually attributed to lower trade costs, which in turn are known to
 enhance the export potential of the economy.

 To validate this, we compared our GI with the World Bank’s Quality of Port Infrastructure index,
 which captures the perception of port infrastructure among businesses of a country. The tight
 positive correlation between the two is quite evident. Further, we also find that a higher QPI
 index is invariably linked to a greater share of world exports, revealing the role of governance in
 stimulating foreign trade via infrastructural improvements (Figure 7). From the perspective of
 the CLMV economies, removing infrastructural bottlenecks is clearly essential to enhance their
 foreign trade. Even for Vietnam, which is an export success in the group, the QPI index has
 room to increase (Figure 8), which will boost its participation in global trade further.

 Figure 7. Governance Indicator or GI, port Figure 8. The quality of Port Infrastructure index
 infrastructure, and world export shares
 3

 6 1.8

 1.5
 Shar ein world exports (%)

 5
 1.2
 QPI index

 4 0.9

 0.6
 3
 0.3

 2 0.0
 2 3 4 5 6 2 3 4 5 6
 Governance indicator (GI) QPI index

 Source: WB, Macrobond, ANZ research Source: WB, Macrobond, ANZ research

 ANZ Greater Mekong Outlook | 11 November 2020 5

Feature note

 Governance: the means to important economic ends
 Our above discussion indicates that improving the quality of governance is desirable in its own
 right, given its far reaching impact on variables like FDI, human capital, and infrastructure.
 However, via these channels, governance reforms also become means to important economic
 ends. One such aspect is enhancing the participation of CLMV economies in the global trade of
 tech-intensive goods, the need for which has become apparent from the recent pandemic-led
 crisis. The tech-heavy economies of Asia have seen their growth rebound more firmly,
 supported by an upturn in the global technology cycle in the aftermath of COVID-19 crisis.
 However, as Figure 9 illustrates, apart from Vietnam, none of the other three economies in the
 CLMV group has a significant exposure to exports of such goods, although the trends have been
 positive overall.

 The exports of tech-intensive goods also reinforce productivity gains since their production
 involves greater value addition. We find that excess focus on ramping up low-tech goods can
 actually prove counterproductive for per capita income growth over time. Figure 10 indicates
 that other things unchanged, a higher export-to import ratio (proxy for value addition to
 exports2) for primary and low-tech goods has a negative effect on per capita income growth,
 while the same due to high-tech goods is much larger and positive.

 Figure 9. Governance Indicator or GI, port Figure 10. Focus on low tech exports can be
 infrastructure, and world export shares counterproductive for productivity growth3
 3

 40 0.6

 35 0.5
High-tech exports (% f total)

 0.4
 Percentage points

 30
 0.3
 25
 0.2
 20 0.1

 15 0.0
 -0.1
 10
 -0.2
 5
 -0.3
 0 Primary and natural Low technology goods Medium and high
 resources goods technology goods
 95 97 99 01 03 05 07 09 11 13 15 17 19
 Cambodia Laos Myanmar Vietnam Impact on per-capita income if export-to-import ratio rises by a unit

 Source: UNCATD, Macrobond, ANZ Research Source: UNCTAD, ANZ Research

 The potential role of governance in enhancing CLMV participation in foreign trade of tech-
 intensive goods becomes clear once we profile the key factors that have enabled Vietnam’s rise to
 an exporting hub of such items in recent years. Vietnam’s protracted thrust in human capital via
 high public spending on education has created a skilled workforce at low cost for foreign firms.
 Vietnam’s government, at the same time, has undertaken external and domestic sector reforms
 to open up its economy to foreign businesses and FDI by lowering trade barriers, ramping up
 investment in physical infrastructure, securing FTAs, and improving the ease of doing business. In
 brief, many years of multifaceted improvements in Vietnam’s governance and public policy
 underlie its export success of recent years. Nevertheless, even for Vietnam, there is still ample
 scope to accrue greater productivity benefits by shifting the goalposts for improving the quality of
 governance further ahead.

2
 The data on value addition in exports by ‘technology-type’ of goods is scanty, so we proxied it with export-to-import ratios. A
higher export-to-import ratio for a traded good approximates greater value addition domestically.
3Note that export-to-import ratios are proxies for value addition in exports; they don’t exactly represent it. Hence, the
coefficients should be read for their relative magnitudes and signs, rather than their absolute sizes.

ANZ Greater Mekong Outlook | 11 November 2020 6

Feature note

 Appendix for estimations and results
 1. Governance and productivity growth: Sample includes yearly data for Cambodia, Lao PDR,
 Myanmar, Vietnam, India, Indonesia, Malaysia, Philippines, and Thailand. The EGLS pooled
 regression equation is with dependent variable log (real per capita income) over 2000-2019.
 The specification and result are as follows:

 ( ) = 4.76∗∗∗ + + . ∗∗∗ − . ∗∗∗ ( 2 ) + 0.03∗∗∗ −1 − 0.01∗∗ − 0.01∗∗∗ −1 ∗ + 

 − = 0.99, = 1.27

 Where = ; = ; (−1) = ℎ
 and = , 

 ∗∗∗ 1% ,∗∗ 5% , ∗ 10% 

 2. Governance and FDI: For same sample as above, the EGLS pooled regression equation is with
 dependent variable log (FDI per worker) over 2003-2019. The specification and result are as
 follows:

 ( ) = 2.18∗∗∗ + + . ∗∗∗ ( ) + 0.17∗∗∗ −1 + 0.11∗∗ − 0.05∗∗∗ −1 ∗ + 

 − = 0.98, = 1.55

 3. Governance and health: For same sample as above, the EGLS pooled regression equation is
 with dependent variable prevalence of malnutrition in population (%) over 2000-2017. The
 specification and result are as follows:

 ( ) = 29.2∗∗∗ + − . ∗∗∗ ( ) − 0.70∗∗∗ −1 + 1.3∗∗ − 0.0 ∗ −1 ∗ + 

 − = 0.98, = 1.29

 4. Productivity and export-to-import ratios by technology type of goods: For same sample
 as above, the EGLS pooled regression equation is with dependent variable log (real per capita
 income) over 2000-2019. ‘XM’ represents export-to-import ratios. The specification and result
 are as follows:

 Primary goods:
 ( ) = 7.92∗∗∗ + − . ∗∗∗ ( ) + 0.01∗∗∗ −1 − 0.06∗∗∗ − 0.006∗∗∗ −1 ∗ + 

 − = 0.98, = 1.03

 Low-tech goods:
 ( ) = 8.04∗∗∗ + − . ∗∗∗ ( ) − 0.007∗∗∗ −1 − 0.04∗∗∗ − 0.004∗∗∗ −1 ∗ + 

 − = 0.99, = 0.91

 High-tech goods:
 ( ) = 7.37∗∗∗ + + . ∗∗∗ ( ) − 0.003 −1 − 0.07∗∗∗ − 0.003∗∗∗ −1 ∗ + 

 − = 0.99, = 1.19

ANZ Greater Mekong Outlook | 11 November 2020 7

Cambodia

 Diversification is key

  We forecast Cambodia's GDP growth to rebound modestly to 5.1% in 2021 after a
 plunge in 2020. The crucial garment industry was hit especially hard by the slump in
 export demand amid the pandemic, and by the partial suspension of Cambodia’s
 preferential trade access to the EU.

  Inflation is expected to remain subdued next year amid weak demand and low
 commodity prices, including food.

  A severe hit to tourism revenue and weaker remittances will likely see the current
 account deficit widen in 2020, and narrow slightly only next year. Fiscal buffers will be
 severely stretched this year.

 Macroeconomic outlook
 We expect Cambodia’s economy to contract by 3.8% in 2020, led by a severe downturn in
 services growth and multiple business closures in the crucial garment, footwear and travel goods
 industry. Since the peak of the pandemic in March, close to 400 garment factories have
 suspended their operations due to weak export demand. In addition, the partial withdrawal of
 Cambodia’s preferential trade access to the EU under the “Everything But Arms” (EBA)
 Agreement, effective 12 August, has further impacted garment exports. Exports of bicycles and
 electrical parts have helped offset some, but not all of the decline in garment and footwear
 exports. A sharp dip in tourism flows and discretionary services will see a severe contraction in
 services growth this year. Agriculture will provide the only silver lining, rising 0.5% y/y despite
 less than optimal rainfall in June and July. GDP growth over the second half of the year should
 show a mild recovery, but not enough to offset the contraction in the first half.

 GDP growth is forecast to rebound to 5.1% in 2021, contingent on a revival in services activity,
 resumption in construction activity, and stable export growth. A further drop in garment exports
 or lack of improvement in export demand are the key downside risks, especially as major export
 destinations such as the EU and US (which comprised 30% and 29% of all exports in 2019,
 respectively) have seen a resurgence in COVID-19 cases. There is a need to diversify the
 country’s export markets to make its long-term growth outlook more resilient, in our view.

 Inflation has been more volatile this year because of food prices but is still within a comfortable
 range. We expect it to remain stable this year and into 2021 due to the subdued growth outlook
 and soft commodity prices.

 A sharp decline in export growth, especially for key items like garments and footwear, as well as a
 complete halt in tourism revenue, means the current account deficit will widen to 21.1% of GDP in
 2020. It is expected to improve mildly next year as the export momentum recovers slightly.
 Meanwhile, fixed direct investment (FDI) flows have remained robust albeit a marginal dip in Q2.

 After recording a fiscal surplus for two straight years, the budget balance in 2020 is likely to take
 a sharp hit due to underwhelming revenue collection and increased stimulus-related spending.
 Collections are likely to be lower than the revised estimates in the austerity budget announced in
 April 2020, given that the export and construction sectors are primary contributors to the
 revenue base. Although Cambodia’s public debt is still contained at 30% of GDP, the World Bank
 estimates it will widen to 35% due to higher fiscal slippage. Given that the government has
 already announced a 50% cut in spending plans for 2021 (USD4bn) compared to projections for
 2020 (USD8.2bn), the deficit will likely be trimmed to 7.6% of GDP next year from 9% of GDP
 this year.

 With the stresses in the real economy likely to spill over to the financial sector, the National Bank of
 Cambodia (NBC) had announced many liquidity-enhancing measures earlier in the year, including
 making credit more freely available and reducing reserve requirements for domestic and foreign
 currency to 7% in March (from 8% and 12.5% respectively). However, the deep contraction in real
 estate and construction activities, as well as elevated job losses, could lead to a spike in non-
 repayment of loans. Thus, alternatives such as delayed repayments or payment rescheduling can
 be considered by the central bank to help mitigate some of the cash flow challenges faced by
 consumers and businesses.

ANZ Greater Mekong Outlook | 11 November 2020 8

Cambodia

Figure 1. GDP growth to contract in 2020 Figure 2. CPI is less of a concern even in 2021

Figure 3. Bicycle and electrical exports have helped Figure 4. Mobility is picking up again but is still well
offset declines in garment and footwear exports below its baseline

 Cambodia’s key forecasts
 2015 2016 2017 2018 2019 2020f 2021f
 Real GDP growth (%) 7.0 6.9 7.0 7.5 7.1 -3.8 5.1

 - Agriculture (%) 0.2 1.3 1.7 1.1 -0.5 0.5 0.8

 - Industry (%) 9.7 7.7 7.1 9.5 11.3 2.2 5.4

 - Construction (%) 19.2 21.8 18.0 18.1 13.0 3.1 6.2

 - Services (%) 7.1 6.8 7.0 6.8 6.2 -13.8 6.3

 - Taxes less subsidies (%) 8.5 8.1 8.8 8.7 7.0 1.1 5.8

 CPI inflation (%) 1.2 3.0 2.9 2.5 1.9 2.5 2.2

 GDP deflator (%) 1.3 3.5 3.3 3.1 2.1 2.2 2.2

 Current account balance (USDbn) -1.6 -1.7 -1.8 -2.9 -4.1 -5.5 -4.8

 - as % of GDP -8.8 -8.6 -8.1 -11.8 -15.2 -21.1 -17.3

 Overall budget balance (KHRbn) -1,959 302 -822 716 2,538 -9,629 -8,727

 - as % of GDP -2.7 0.4 -0.9 0.7 2.3 -9.0 -7.6

 USD/KHR (end of period) 4,050 4,070 4,033 4,040 4,070 4,080 4,100

 Avg saving deposit rate (%) 1.17 1.47 1.19 0.59 0.60 0.60 0.50

 Source: IMF, ADB, World Bank, CEIC, Macrobond, ANZ Research

 ANZ Greater Mekong Outlook | 11 November 2020 9

Lao PDR

 Amplified fiscal risks

  GDP growth will contract this year but we forecast a soft recovery to 4.0% in 2021 as
 pandemic-related stresses wear out, albeit slowly.

  Inflation is expected to average 5.5% this year on higher food costs and imported inflation
 due to a weaker currency. Inflation will likely stay elevated at 5.0% in 2021.

  The current account deficit is expected to narrow this year on subdued imports and lower
 oil prices. However, pandemic-related spending will keep up pressures on the fiscal side,
 including aggravated risks over rising public debt and servicing costs.

 Macroeconomic outlook
 We now expect Lao PDR’s economy to contract by 1.1% in 2020 due to COVID-19 related
 disruptions. Closed factories, lack of tourism revenue, and cautionary private sector spending
 have resulted in reduced economic activity over the first half of the year. Despite the relatively
 effective containment of the COVID-19 outbreak, the various restrictions have still impacted the
 economy, especially services which we estimate will shrink by 7% this year. Industry and
 agriculture will help offset this, but not fully. A resumption in construction will likely see industry
 eke out a small positive growth while agriculture will likely only grow 1.9% due to less-than-
 expected rainfall (the Mekong river has reported its second consecutive year of drought this year).

 We forecast GDP growth to rebound to 4.0% in 2021 as the services sector recovers and
 pandemic related disruptions fade. However, this is still below pre-pandemic growth rates of ~5%
 in 2019 as consumer and business caution spills into next year.

 Inflation has averaged 5.7% between January and September 2020 owing to sharply higher food
 prices and rising healthcare costs amid the pandemic. A severely weaker kip has added to
 imported inflation, including that of clothing and footwear. We forecast inflation to average 5.5%
 this year as prices moderate in H2 2020 on subdued demand; food prices will normalise as
 production resumes and supply disruptions ease. This trend is likely to extend into 2021, with
 inflation remaining elevated at 5%.

 Slow import growth on the back of subdued demand amid restrictions and weaker oil prices will
 lead to the current account deficit shrinking to 4.2% of GDP this year. However, it is likely to
 widen to 6.4% of GDP in 2021 as a revival in economic activity increases import demand,
 especially for capital goods and equipment for hydrocarbon and infrastructure-related projects.
 The last of the 75 tunnels of the 414km long ‘China-Laos’ railway project under the Belt and
 Road Initiative has been completed, signalling a timely completion by December 2021. Work on
 the National Road 11 is set to begin this year with completion in three years.

 Pandemic-related spending amid slower revenue collection has brought to the fore Lao PDR’s
 worsening fiscal risks. The budget deficit is expected to widen to LAK10.3trn (~6.0% of GDP
 based on our 2019 growth estimates) from ~3.7% of GDP in 2020. This will in turn impact on
 the economy’s debt levels and servicing commitments which are already high. The World Bank
 estimates public debt to rise to 68% of GDP in 2020, with debt service costs at USD1.2bn
 (~6.1% of GDP). The government has been seeking ways to address this concern, including
 issuing bonds to mobilise funds. The deficit issue could become a chronic concern if higher
 borrowing is resorted to in order to meet current debt obligations. The amplified risks prompted
 both Fitch and Moody’s to downgrade Lao PDR’s sovereign credit rating this year to CCC and
 Caa2, respectively.

 Short term policy rates will likely stay flat after the 100bp reduction to 3.00% earlier this year.
 Yet, policy action needs to be accommodative to revive credit growth in the economy, which
 remains sub-par. FX reserves at ~USD1.5bn are sufficient for only around two months of
 imports falling short on adequacy requirements. Stronger policy on building a substantial
 reserves buffer and containing public debt are key for a sustained growth recovery over the
 medium term.

ANZ Greater Mekong Outlook | 11 November 2020 10

Lao PDR

Figure 1. GDP growth slump in 2020 Figure 2. Inflation is showing signs of moderation

Figure 3. Commercial bank credit growth remains Figure 4. Current account set to improve further
subdued

 Lao’s key forecasts
 2015 2016 2017 2018 2019e 2020f 2021f
 Real GDP growth (%) 7.3 7.0 6.9 6.2 5.1 -1.1 4.0
 - Agriculture (%) 3.6 2.8 2.9 1.3 1.0 1.9 2.4
 - Industry (%) 4.2 12.9 10.2 4.2 6.8 3.5 4.0
 - Construction (%) 20.7 8.4 18.0 22.6 7.2 4.0 5.5
 - Services (%) 8.0 4.7 4.5 6.8 5.0 -7.0 4.4
 - Taxes less subsidies (%) 11.5 7.8 7.0 6.2 5.3 1.1 3.2
 CPI inflation (%) 1.3 1.6 0.8 2.0 3.3 5.5 5.0
 GDP deflator (%) 2.3 3.0 1.8 2.0 2.1 5.9 4.2
 Current account balance (USDbn) -2.3 -1.4 -1.3 -1.4 -0.9 -0.8 -1.3
 - as % of GDP -15.7 -8.7 -7.4 -7.9 -4.6 -4.2 -6.4
 Overall budget balance (LAKbn) -7.0 -6.7 -7.8 -7.1 -6.0 -10.3 -7.5
 - as % of GDP -5.9 -5.2 -5.6 -4.6 -3.7 -6.0 -4.0
 USD/LAK (end of period) 8,148 8,184 8,293 8,545 8,885 9,300 9,400
 ST lending rate (end of period *) 4.50 4.25 4.00 4.00 4.00 3.00 3.00

 Source: IMF, ADB, World Bank, CEIC, Macrobond, ANZ Research

 ANZ Greater Mekong Outlook | 11 November 2020 11

Myanmar

 Recovery has a long way to go

  GDP growth decelerated to a mere 1.0% in FY2019-20. Multiple headwinds on the external
 and domestic front will persist into H1 of FY2020-21.

  Households are facing an income shock amid a slump in key industries such as manufacturing,
 services and agriculture. Falling international remittances have exacerbated matters.

  Inflation is expected to remain subdued next year amid weak demand but the annual growth
 rate will rise on the back of low base effects in H2 2021.

 Macroeconomic outlook
 Myanmar’s GDP growth will slow to 1.0% in FY2019-20 (FY20) despite a strong start to the fiscal
 year during October-December 2019. Economic growth was first dented by global supply
 disruptions due to the COVID-19 outbreak in China in Q1, followed by weakened external demand
 and rising infection cases in Myanmar. Real-time indicators dipped again in September amid
 reinstated restrictions, reflecting a tenuous recovery.

 On the external front, Myanmar is struggling with weak external demand for its apparel exports. Its
 major clients, apparel brands and retailers in the EU and the US have cancelled or postponed
 orders, including those already produced. This has left domestic firms in the lurch, with crimped
 revenues and limited cash flows to pay wages. According to the Myanmar Garment Manufacturers
 Association, orders dived by 75% this year and 44 out of approximately 600 factories remain
 closed, leaving 22,000 workers unemployed (ILO). Additionally, the fall in natural gas prices has
 squeezed profit margins in the domestic energy sector. Inward remittances from overseas workers,
 who support an estimated 18.5% of households, have also fallen for much of FY20 (Q3: -44% y/y).
 Of the approximately 3.5m Burmese nationals employed in Thailand, Malaysia, and Singapore, at
 least 4% had returned by June, with more expected (World Bank).

 The labour market is weighed upon by the sluggish manufacturing and service industries.
 Furthermore, Myanmar’s large agricultural sector has been challenged by domestic mobility
 restrictions and drought (agriculture accounts for 22% of overall GDP and employs 70% of the
 labour force). Estimates suggest that 75% of rural and 84% of urban households have lost
 employment and income in the past six months. A weak external demand outlook and local
 pandemic restrictions will keep employment depressed into FY2020-21 (FY21) as well.

 Although the manufacturing PMI languishes below the neutral mark, some reprieve is expected
 thanks to China’s economic rebound. Indeed, Myanmar’s exports to China, compared with its other
 large trading partners like Thailand and Japan, have risen in recent months. This also bodes well for
 the agriculture sector since China accounts for half of Myanmar’s food exports. We also expect
 better economic prospects in FY21, which has just commenced, thanks to increased FDI approvals
 (29.5% y/y from October 2019 to August 2020). Increased investment will favour the construction
 sector, especially as restrictions are lifted and heavy-weight infrastructure projects get underway,
 for instance the second GMS highway modernisation project and various public works under the
 ambit of the Belt and Road initiative.

 This year, the central bank of Myanmar eased macro-prudential regulations and reduced its key
 policy rate to maintain ample liquidity in the system. Liquidity has been further bolstered by the
 central government’s policy measures, supporting access to credit in the economy. For instance, the
 SMEs in Tourism, Hotel and CMP (Cutting, Making, Packaging) companies can apply for loans at a
 reduced 1% interest rate for one year. Increased fiscal spending to combat the pandemic and a fall
 in revenue streams likely pushed up the budget deficit in FY20 and we expect it to widen further in
 FY21.

 Inflation has fallen below 2% from its peak of 10.9% last year. Besides the high base effects,
 muted household consumption has dampened underlying inflationary pressures. We expect
 inflation to rise slightly in FY2020-21 as activity edges back to pre-COVID levels.

ANZ Greater Mekong Outlook | 11 November 2020 12

Myanmar

Figure 1. FY20 GDP faces inevitable decline Figure 2. Restrictions have stifled economic activity
 but may have helped control the outbreak

Figure 3. PMI has been in contractionary zone this Figure 4. Chinese demand helps lift Burmese exports
year

 Myanmar’s key forecasts
 2015 2016 2017 2018 2019 2020f 2021f
 Real GDP growth (%) 8.0 40.6 5.8 6.4 6.8 1.0 3.6
 - Agriculture (%) 2.8 25.8 -1.5 0.1 1.6 0.5 2.0
 - Industry (%) 12.1 60.7 8.7 8.3 8.4 2.0 3.0
 - Construction (%) 15.9 47.4 9.7 8.1 8.7 3.0 6.0
 - Services (%) 9.1 36.8 8.1 8.7 8.3 0.5 5.0
 CPI inflation (%) 7.2 9.2 4.7 5.9 8.6 5.8 6.0
 GDP deflator (%) 4.2 -19.1 5.4 5.4 6.3 4.0 5.0
 Current account balance (FY, USDbn) -1.4 -3.0 -2.6 -2.8 -1.4 -3.5 -2.7
 - as % of GDP -2.8 -5.1 -4.4 -4.7 -2.0 -4.1 -3.6
 Overall budget balance (FY, MMKtrn) -2.8 -2.0 -2.1 -4.2 -5.2 -7.0 -7.3
 - as % of GDP -4.3 -2.6 -2.5 -4.5 -5.0 -6.3 -6.1
 USD/MMK (end of period) 1,310 1,358 1,362 1,534 1,477 1,320 1,400

 Source: Bloomberg, Macrobond, CEIC, ANZ Research

 ANZ Greater Mekong Outlook | 11 November 2020 13

Vietnam

 From recovery to solid growth

  Supply chain shifts have contributed to Vietnam’s recent export outperformance and will
 underpin a solid growth performance in 2021 as well. Domestic demand recovery could trail,
 but still record a decent pace of growth.

  Inflation will remain below the central bank’s target. After delivering 150bps of rate cuts so far
 this year, we expect the SBV to remain on hold throughout 2021.

  The current account surplus and FDI have surprised on the upside, and will put some
 appreciation pressure on the VND. We expect the central bank to continue accumulating FX
 reserves to absorb the inflows, but allow a mild appreciation of the currency.

 Macroeconomic outlook
 Vietnam’s economic recovery from the pandemic-led crisis has been one of the fastest in Asia. Not
 only will it be one of the very few economies globally to eke out positive growth this year, it is set
 to recover at a much faster pace in 2021. Much of the expected economic upturn will continue to
 hinge upon exports, while domestic demand will normalise at a relatively slower but decent clip.

 Vietnam’s exports, especially in the FDI sector, will continue to benefit from the ongoing supply
 chain relocations in the region. The US and China have respectively gained export and import share
 in Vietnam’s trade in recent months, indicating that such trade shifts likely accelerated during the
 pandemic. Even a less confrontational US-China trade relationship under a Biden administration will
 not stem the shift of production to Vietnam, given the country’s strong ‘pull’ factors such as
 availability of skilled workforce, attractive labour costs, and wide preferential access to global
 markets via numerous trade agreements. Therefore, we also expect FDI inflows to remain robust in
 2021; items such as electronics and related goods will gain additional share in Vietnam’s overall
 exports.

 The pace of domestic demand normalisation has been reasonable, if not as sharp as for exports.
 Most high frequency indicators of private consumption, such as consumer imports and retail sales,
 have surpassed the pre-pandemic levels. However, the pullback in high value purchases such as
 passenger cars will likely continue into H1 2021, given the lasting impact of the tourism downturn
 on incomes. Vietnam’s labour market will continue to progress well, especially with official
 unemployment rates falling across sectors and the PMI employment sub-index expanding since
 October. On the investment side, the fiscal thrust to fixed investment and construction has been
 fairly supportive, although private sector appetite remains cautious. We expect broader economic
 conditions to solidify sufficiently by mid-2021 to lead to a revival in private investment demand.

 The price situation in Vietnam remains broadly comfortable. Headline inflation has been
 decelerating in recent months as food inflation continues to moderate while oil prices remain
 broadly weak. The negative output gap, which has been exerting downward pressure on core
 inflation, is expected to close fully only by Q2 2021. We expect further moderation in CPI inflation
 in this quarter and Q1 next year, partly as base effects turn favourable. Thereafter, inflation could
 edge higher, especially as improved demand conditions translate into increased pricing power for
 businesses. However, inflation will remain below the SBV’s target.

 Fiscal and monetary policies are expected to remain accommodative. The government’s borrowings
 rose to 7.3% of GDP in Q3, reflecting the strain on fiscal finances due to rising expenditures and
 subdued tax collections. The fiscal deficit in 2020 could thus reach as high as 5.7% of GDP.
 However, a fairly broad-based recovery in growth and fading stimulus measures will allow for a
 decent pace of fiscal consolidation in 2021. On the monetary policy side, the SBV has cut interest
 rates by 150bps hitherto in 2020. We expect interest rates to remain on hold throughout 2021.

 On the external front, we are nudging higher our current account forecasts for this year and the
 next, taking into account Vietnam’s solid trade surplus in recent months and robust FDI inflows.
 The US recently imposed preliminary anti-subsidy tariffs on tyre exports from Vietnam (0.8-1.0%
 of total exports), partly due to currency under-valuation. While we expect the SBV to continue
 accumulating FX reserves to absorb the inflows into the country, we see the authorities allowing
 the VND to appreciate slightly in 2021.

ANZ Greater Mekong Outlook | 11 November 2020 14

Vietnam

Figure 1. Supply chain shifts are propping up Figure 2. Most consumption indicators have
Vietnam’s trade surplus surpassed their pre-COVID levels

Figure 3. FDI has stayed the course, despite previous Figure 4. Unlike strong public investment, private
prediction of weakness investment demand remains weak

 Vietnam’s key forecasts
 2015 2016 2017 2018 2019 2020f 2021f
 Real GDP growth (%) 6.7 6.2 6.8 7.1 7.0 2.8 7.7
 - Agriculture (%) 2.4 1.4 2.9 3.8 2.0 1.5 2.7
 - Industry (%) 9.4 7.1 7.8 8.8 8.9 4.0 10.1
 - Construction (%) 10.8 10.0 8.7 9.2 9.1 5.4 7.4
 - Services (%) 6.3 7.0 7.4 7.0 7.3 1.7 8.0
 - Taxes less subsidies (%) 5.5 6.4 6.3 6.1 6.5 3.7 6.4
 CPI inflation (%) 0.6 1.9 3.5 3.5 2.8 3.4 3.2
 GDP deflator (%) -0.2 1.1 4.1 3.4 1.8 3.0 2.7
 Current account balance (USDbn) -2.0 3.0 -1.7 6.1 13.1 6.0 9.8
 - as % of GDP -1.1 1.5 -0.7 2.5 5.1 2.2 3.2
 Overall budget balance (VNDtrn) 179 161 137 192 203 364 287
 - as % of GDP -4.3 -3.6 -2.7 -3.5 -3.4 -5.7 -4.1
 USD/VND (end of period) 22,485 22,761 22,698 23,175 23,173 23,170 23,100
 Discount rate (end of period *) 4.50 4.50 4.25 4.25 4.00 2.50 2.50
 Source: Bloomberg, Macrobond, CEIC, Ministry of Finance Vietnam, ADB, IMF, ANZ Research

ANZ Greater Mekong Outlook | 11 November 2020 15

Contacts

 ANZ Research team

 Khoon Goh Head of Asia Research Singapore Khoon.Goh@anz.com
 Rini Sen Economist Bengaluru Rini.Sen@anz.com
 Kanika Bhatnagar Economist Bengaluru Kanika.Bhatnagar@anz.com
 Dhiraj Nim FX Analyst Bengaluru Dhiraj.Nim@anz.com

ANZ Greater Mekong Outlook | 11 November 2020 16

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