Country risk: Myanmar poses a dangerous game for investors

Continuing protests and actions against the military coup have signalled a dramatic drop in Myanmar's risk score. Source: Reuters/Myanmar Out.

The military coup on February 1 was not entirely unexpected in light of the pre-existing tensions between the elected government led by the now-deposed state counsellor Aung San Suu Kyi and the military generals who had reserved powers and were not going to simply allow a democratically elected government to become too popular and continually push for constitutional change.

Although the military already had 25% of seats reserved in both houses of the legislature and control over many of the important ministries of state, the National League for Democracy’s (NLD’s) overwhelming victory over the military-backed opposition at the elections held in November was clearly a step too far, prompting a putsch based on spurious allegations of voting fraud.

The indiscriminate killings of civilians, including children (now likely to number more than 600), are clearly a major concern for regional stability and asset safety, causing a spike in risk which clearly puts Myanmar off the radar for the time being – but for how long?

Uncertain future

Free and fair elections are promised in a year’s time, yet it is neither clear that the timetable will be respected nor that the NLD will be allowed to take part. It is not certain either if Myanmar can even get to the same stage as in Thailand where law and order was restored and a new constitutional process advanced.

Euromoney’s latest quarterly survey has been conducted amid the turmoil, and the preliminary results only serve to underline the country’s extreme risks.

Myanmar’s risk score has been downgraded by more than three points and is one of the largest negative quarterly shocks in this survey – along with Gabon and Namibia – undoing some of the improvement tied to the reforms in recent years that had put Myanmar on a gradually ameliorating long-term trend.

The country now has a total risk score of less than 30 out of 100 points and is ranking 153^rd out of 174 countries, crashing 10 places in the first quarter of 2021 – which makes Myanmar a similar risk to Iran, Cambodia, Liberia and Iraq:

Max Schieler, a senior country risk specialist at RobecoSAM and contributor to Euromoney’s risk survey, is fearful of the situation. He notes that, two months after the military coup, there is a growing risk of more violence and bloodshed, or even civil war, underlined by the fact that all of Myanmar’s political risks have increased across the board – its institutional risk most of all.

“Protests have grown in recent weeks, provoking the military to respond with increased violence, intimidation and repression,” he says.

“Considering the determination of the vast majority of the population not to give in to military rule, the regime’s violent tactics to end the protests and restore a kind of normalcy is prone to fail.”

The outlook is highly uncertain, he believes, and the situation could easily plunge into a downward spiral with no clear indications of the potential outcome, which will undoubtedly put off investors and make those who are already committed increasingly anxious.

Schieler outlines several possible scenarios, including a return to a new era of junta rule, a kind of “hybrid” government with military veto power, the failure of the coup and a civilian government starting a new transition towards democracy, or a prolonged crisis where neither side can gain the upper hand.

Economic impact

The crisis will also undoubtedly exert a huge toll on the economy at a time when the coronavirus pandemic has already undermined economic growth and put pressure on state resources. So far, Myanmar has racked up more than 142,000 cases of Covid-19 and incurred more than 3,200 deaths, with the turmoil now contributing to its spread and complicating the vaccination process.

The economic impact is clear. The IMF has just released its latest World Economic Outlook, showing real GDP contracting by 8.9% in 2021. The survey’s economic risk factors have all been downgraded too, with not one scoring more than four points out of 10.

The crisis has increased currency risk with the kyat depreciating and causing inflation. Foreign capital is diminished and the state’s access to $1 billion of foreign currency reserves held in New York has been blocked.

The civil disobedience movement is a crucial element of the worsening economic outlook, with resistance to the military causing many to ‘down tools’, leaving key economic infrastructure such as banks, customs and transport at a standstill.

“Recognizing their inability to match the generals’ firepower, protestors are attempting to resist the Tatmadaw in novel ways. One has been to boycott the many businesses that are operated by the Burmese junta,” says Owais Arshad, a global economic sanctions and geopolitics expert at RBC, who is also a contributor to the survey.

“Entities such as the military-controlled MEC (Myanmar Economic Corporation) are active in all sectors of the Burmese economy, including food, alcoholic beverages, transportation, hotels, telecommunications, finance and mining.

“It is argued that a successful domestic boycott of these businesses could significantly disrupt the economy and pressurize the generals into making concessions.”

It is argued that a successful domestic boycott... could significantly disrupt the economy and pressurize the generals into making concessions 

 - Owais Arshad, RBC

Arshad notes that some of these commercial military entities operate joint ventures with South Korean, Japanese, Vietnamese and Singaporean businesses. The Japanese businesses have faced particular pressure to withdraw or suspend their projects in the country and some have signalled their intent to pull out.

The US has also targeted the larger military conglomerates, such as MEC and Myanmar Economic Holdings Ltd (MEHL), in coordination with the UK and Canada.

“This will further increase the wariness of foreign investors in terms of dealing with such companies and constrain their ability to access foreign financing,” Arshad says.

As such, he believes the country may be headed for a period of prolonged economic isolation, unless a political settlement can be brokered between civilian politicians and the military.

Schieler adds that even though the country has not been subject to general, comprehensive sanctions so far – apart from some specific ones targeting the military – there is a visible adverse impact from foreign reactions to the current situation.

“Foreign (especially Western) companies are concerned about the potential reputational damage of remaining active in Myanmar,” he says. “There is also an increasing overall business risk. Foreign investors may suspend or cancel investment plans, hitting foreign direct investments. International financial assistance might be cut and revenues from tourism – already down from Covid-19 – will not recover, all of which will adversely affect external liquidity and the current account and thus impact on the relevant country risk indicators.”

Schieler believes the biggest negative impact on economic activity is from the civil disobedience movement. This is most visible in the banking system, as it is not possible to receive and make payments – hurting production, supply chains and trade.

“The longer this situation continues, the bigger the humanitarian and socioeconomic crisis and the more poverty will spread. Already now one can observe a steep increase in prices for key goods such as rice or fuel,"  he says.

“Therefore, one can expect a deterioration in relevant country risk factors such as banking system stability, inflation, unemployment and GDP growth.”