The National League for Democracy continues to consolidate its position as Myanmar's new government, having installed leader Aung San Suu Kyi in the powerful new role of 'State Counsellor' in order to circumvent constitutional restrictions regarding the presidency. Nevertheless, the government faces an increasingly difficult uphill battle in accomplishing its wide-ranging goals around economic and political reforms in the country. Its first major test will be the upcoming 21 st Century Panglong Conference held on August 31. The conference represents an attempt to move forward with the country's decades-long national reconciliation process, the heart of which is a national ceasefire agreement which has only been signed by 8 out of 15 major ethnic rebel groups. Should the government find a way to accomplish even a limited peace (its lack of control over the military, as well as myriad other complications makes a universal peace accord unlikely), it would free up highly taxed government resources for the task of addressing economic reforms. That said, foreign direct investment continues to pour into the country and should be bolstered by an increase in confidence following the positive election outcome, and we believe that even incremental moves in the right direction will keep the economy on track for strong growth over the coming years. We forecast real GDP growth of 8.0% in FY2016/17.
We see a growing threat that the recent crackdown by the government on the opposition and civil society will spark a return of potentially-violent street protests. Additionally, while not our core view, further human rights violations could raise the prospect of US and EU sanctions. Cambodia's deteriorating political situation poses a growing threat to the country's garment industry, and we have downgraded out real GDP growth outlook for 2016 and 2017 due to such risks. We forecast real GDP growth in 2016 and 2017 to come in at 6.6% and 6.4% from 6.9% and 6.9% previously.
The new regime has seemingly adopted a more balanced foreign policy stance as compared with its predecessors who leaned more towards China, and we believe that this could lead to deeper economic ties between Laos and its ASEAN neighbours. However, this is highly unlikely to come at the expense of its economic relations with China. Vientiane is likely to remain neutral on regional issues particularly after its chairmanship of ASEAN ends, and play a supportive role to Beijing's regional economic plans.
We believe that Laos' current account deficit will remain wide (averaging around 19% of GDP) over the next few years, owing to the country's reliance on imports, and a relatively modest export growth outlook. The recovery in global oil prices will also add to Laos' external woes as a net importer of oil. This poses downside risks to external stability given that Laos has a 'pegged' currency and foreign exchange reserves are low. That said, a fast-growing tourism sector and rising power exports should provide some support to Laos' external balance.
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