Myanmar Squashes Frontier Status Aspiration

Just three months after its nascent stock exchange opened to foreign investors and days after the IMF delivered USD 350 million in emergency aid to help battle the coronavirus pandemic, Myanmar’s military leaders took power alleging the November election “unacceptable” and detained elected leaders including Aung San Suu Kyi as she was about to again wield the biggest party bloc in parliament. The IMF has sent Myanmar USD 700 million in emergency funding since the onset of the pandemic in its “no strings attached” facilities designed to help ensure economic and balance of payments stability by allowing the government to direct assistance to the most affected sectors and citizens. Reports indicate that money released by the Fund’s board has never been taken back when governments are overturned.

Adding to the political turmoil which may result in sanctions by Western governments, the governor of the Central Bank was replaced by a predecessor who last held the position after the 2007 military takeover.  The move is seen as dismantling central bank independence as its coffers hold less than 5 months of import coverage, with ongoing and planned foreign direct investment outside longtime ally China likely to dry up on sanctions imposition.  Already work has been suspended on a USD 1 billion industrial complex being developed by a Thai company, while Japanese car and parts makers have also stopped production.  At the same time, overseas portfolio investment, only about 13% of the USD 508 million, 6-company Yangon Stock Exchange, will also dry up.  Foreign investment was concentrated in First Myanmar Investment, a holding company operating in a range of sectors.  When the market opened three days after the military takeover, its share price sank more than 7%, while the local benchmark index was off 6%.

More broadly, the current account deficit was already expected to near 4.5% of GDP by the end of the current fiscal year in October, and expanded sanctions combined with lack of tourism will send it sharply higher.  Economic growth was already expected to fall from an estimated 3.2% in FY 2019/20 to 0.5% this year, according to the IMF, and now the economy is likely to contract.  In addition, concern about the health of the banking sector was already rising as the level of non-performing loans is thought to be high – although detailed data are outdated – with some financial institutions already under stress pre-pandemic.  In releasing the latest tranche of emergency assistance, the IMF noted that strengthening the banking sector’s stability “is key to underpin” economic recovery. The civilian government led by the National League for Democracy had committed to conduct asset quality reviews of systemically important banks and come up with a comprehensive strategy for NPL resolution and bank recapitalization, according to the IMF in January.

Prior to the military takeover, Western governments’ backing of Myanmar’s transition to democracy had already waned following the support Suu Kyi’s government of the army’s brutal treatment of Rohingya Muslims in the western Rakhine state in 2017 which resulted in a  massive refugee crisis as some 750,000 people fled to Bangladesh. A year ago, the International Court of Justice indicated there was evidence of breaches of the 1948 Genocide Convention and warned the estimated 600,000 Rohingya remaining in Myanmar were “extremely vulnerable” to further military attacks. With international flights banned through April under the generals, fear is growing that further atrocities will occur.

Although the generals who have taken over announced that they will only hold power for a year before new elections, Western foreign direct and portfolio investors are unlikely to re-engage. However, Asian neighbors are likely to take a wait-and-see stance. Just weeks before the takeover, China’s leadership met with both Suu Kyi and the military to discuss the “China-Myanmar Economic Corridor.”  Myanmar’s giant neighbor has major oil and gas pipelines in the country and a network of other projects.  While the scope of Western sanctions remains unclear, it is also unlikely that other major investors in the oil and gas sector – including Thailand’s PTTEP and Malaysia’s state-owned Petronas – would completely withdraw from major investment.  Even with ongoing trade and investment from Asian countries, needed structural reform, tourism and investment are clearly halted for the year. Almost ten years after political and economic transition began, this much hyped next-frontier market may not be under that consideration for another decade.