Country risk: Red alert in Myanmar unnerves analysts

A Myanmar soldier looks on as he stands inside city hall after soldiers occupied the building in Yangon

On Monday, the Myanmar military led by commander-in-chief Min Aung Hlaing seized power and announced a one-year state of emergency.

The coup took place in the wake of November’s general election, which saw Aung San Suu Kyi’s National League for Democracy secure a majority of seats in parliament to form the next government, leaving the military-backed opposition crying foul play.

Clearly, it was not enough that the military has retained a quarter of the seats in the legislature and control of key ministries since the country returned to democracy in 2015 and that Suu Kyi had backed the military offensive against the Rohingya, which led to hundreds of thousands fleeing ethnic cleansing.

Now she, along with several members of her government and the party leadership, has been arrested for voter fraud.

Suu Kyi is facing a two-year jail sentence for illegally importing hand-held radios allegedly found at her residence and used without permission by her bodyguards. Her ally and choice of president Win Myint is accused of breaching Covid-19 regulations during the elections.

The furore has prompted a campaign of civil disobedience among democracy activists, including a strike among hospital workers.

Owais Arshad, a contributor to Euromoney’s country risk survey, says that fundamentally the coup has “exposed the structural paradox that is baked into the Burmese constitution, which has codified the Tatmadaw’s [armed forces’] role”.

He adds: “This privileged role has been eroded by the verdict rendered in the latest election results and the generals are clearly afraid of further losing their grip on power.”

Some countries such as China, the Philippines and Thailand – which has also endured a period of military rule – are regarding the coup as a purely internal matter. India and Vietnam have also expressed reservations about stepping in.

However, the leader of the coup is personally sanctioned by the US for his involvement in the Rohingya genocide, which will diminish Myanmar’s attractiveness for international capital, says Arshad.

Max Schieler, an economist and senior country risk specialist at Robeco Switzerland, is another survey contributor who says the overall impact depends on whether the situation remains calm or turns violent, and how other countries react, noting that China and Russia could block any UN Security Council actions.

Myanmar’s transition from military rule to democratic elections and economic reform had improved its investors risks after the global financial crisis of 2007-2008, and the country attracted considerable inbound capital and foreign aid as a result, supporting strong growth and development.

Yet it remained one of the highest-risk countries, globally, in Euromoney’s risk rankings and is now lying 143rd out of 174 in total. A tier-five, highest-risk category investment, its survey score deteriorated last year as a result of the pandemic and political concerns related to corruption and policymaking.

In fact, experts’ scores for all of the political risk indicators have remained consistently low, with the government-stability assessment worse than other countries in the region, such as Bhutan, Cambodia, Nepal and Vietnam.

Now the coup has further ratcheted up political uncertainty, as well as fears for the economy and creditworthiness.

ECR survey contributor Yannick Bineau, a director of Expertise France – a public agency engaged in international projects – says it is likely that the effects will be increased by the impact of the health crisis.

“This is already destabilizing the economies of all countries, but probably more strongly in countries such as Myanmar, where the health facilities and network is already insufficient,” he says.

The IMF approved as recently as January a second disbursement of emergency financial assistance for Myanmar’s urgent balance-of-payments needs, totalling $350 million, and issued revised economic projections showing GDP growth of just 0.5% for fiscal year 2020-2021 (to end-September), down from 3.2% in FY 2019-2020 and 6.8% in FY 2018-2019. However, the World Bank is more cautious for 2019-2020, estimating 1.7%.

“New sanctions, smaller foreign investment and aid flows, the cancellation or postponement of investment projects and lower tourist arrivals will all have an additional dampening effect on economic activity,” says Robeco’s Schieler.

“The generation of foreign exchange will be negatively affected and thus further impair the country’s already fragile credit fundamentals.”

According to the World Bank, 34% of Myanmar’s approved investment is channelled from Singapore-based sources and 26% from Hong Kong.

Myanmar may turn to China, which is already its closest ally and trading partner, notably if it wishes to push ahead with the Myanmar Economic Corridor project forming part of the Belt and Road Initiative, but this would be plausible only if Myanmar avoids unrest.

New, extensive sanctions imposed on Myanmar by the US would affect industries such as telecommunications and commodity producers, Arshad warns.

“They might struggle to attract further investment and international businesses may seek to de-risk their exposure to Myanmar,” he says.

A decline in industrial-sector work opportunities coupled with the closure of borders would likely have a detrimental impact on employment and social stability. Supply disruptions and a long state of emergency would weigh heavily on the economy and institutional risk.

More optimistically, the crisis may not last either, “because of Myanmar’s crucial geo-strategic position for some of its neighbours and the presence of significant natural resources”, says Bineau.

“If sanctions are set, as some commentators have discussed, leading some companies to leave the country, other companies from other countries would strongly consider entering its markets, which in some areas are in the process of restructuring,” he adds

Still, Bineau is as uncertain about Myanmar’s future as other experts, which means investors will need to adopt utmost caution and play the waiting game.