Index Trend Previous Quarterly Editions
Expropriation Risk: 55 Political Violence Risk: 56 Terrorism Risk: 49 Exchange Transfer and Trade Sanction Risk: 68 Sovereign Default Risk: 46
Risk Temperature 57 (Significant) +0
TREND ► ▲
Even before the COVID-19 outbreak, slowing credit growth, a decline in FDI inflows, a correction in real estate prices, and a rise in non-performing loans were coming together to weaken domestic demand in Myanmar. An IMF assessment of the economy issued in March 2020 put growth for the current fiscal year at 6.4%, which it described as “subdued” in the context of Myanmar, with the fiscal deficit rising to 4.5% and a trade deficit reaching 4%. The IMF figures do not factor in the impact of the virus, which did not begin showing up in official figures until the end of March 2020. The government had formed a task force to tackle the expected crisis in mid-March 2020. This initially instituted a two-week quarantine for arriving travellers but the government was not prepared for the speed with which tens of thousands of migrant workers returned from Thailand and Malaysia amid layoffs and fears of border closures. The economy quickly started to feel the impact as the hospitality, travel and tourism sector virtually ground to a halt by the end of the first quarter, and a steep drop in orders from overseas buyers hit employment in the country’s crucial garment sector. Many foreign residents in Myanmar have been encouraged to leave the country because of the limited capacity of its healthcare system. While the impact of the virus is not expected to have a disproportionate impact on Myanmar when compared to other countries, foreign investors are already aware of the reputation risks associated with its treatment of the Muslim Rohingya population in Rakhine state. The ongoing military campaign against the Rohingya has led to almost a million refugees living in squalid camps across the border in Bangladesh. In January 2020, while hearing an accusation of genocide against Myanmar’s military, the International Court of Justice (ICJ) in The Hague unanimously ruled that Myanmar’s government must take all measures to prevent acts deemed illegal under the 1948 Genocide Convention. The decision by Daw Aung San Suu Kyi to attend the proceedings in person late last year to put her country’s case was hugely popular within large parts of Myanmar itself, and appeared a calculated political move ahead of the elections scheduled for November 2020. Although there has been some understanding of her government’s limited influence over the army’s actions, its stonewalling before the ICJ has further eroded international patience with its inaction. The likely impact of COVID-19 within the Rohingya refugee camps will only increase Myanmar’s growing international isolation. With the full impact of the virus within Myanmar now imminent, in economic terms the main concern is for the banking system. Earlier this year, the central bank extended the deadline for commercial banks to meet minimum capital adequacy requirements and clean up their loan books, and it is not clear how much progress has actually been made. Myanmar might normally have expected China to assist in propping up parts of the economy but that now seems less likely, and condemnation of its position on the Rohingya may put it at the back of the queue for international aid unless there is a change in the government’s position. While Aung San Suu Kyi may well see the merits of compromising with the international community in exchange for external support, she has little room for manoeuvre given that this is still an election year and the support base for her party, the National League for Democracy (NLD), remains deeply opposed to any change in the government’s stance towards the Rohingya.
Expropriation Risk 55 (Significant) TREND ▼ ►
The government’s Myanmar Investment Promotion Plan (MIPP), launched in October 2019, is intended to attract 200 billion USD in investment over the next 20 years. However, its ability to approach this ambitious target will remain hampered by the weak institutional capacity of the judiciary to uphold contracts and the distorting effects on the business environment of the preference given to enterprises owned by the military. The NLD has been taking incremental steps towards liberalising the economy, but the pace of change has been slower than many outside the country had hoped or expected.
Political Violence Risk 56 (Significant) TREND ▲ ►
Armed clashes between the military and the Arakan Army (AA), which claims to represent Rakhine's ethnic majority in demanding greater autonomy for the region, persist in the northwest of Rakhine state and southern Chin state, and were enflamed further after reports that the AA had killed an NLD official at the end of 2019. Renewed attacks on security forces are also focusing attention on northern Shan, where conflict continues over the control of narcotics production and smuggling.
Terrorism Risk 49 (Medium) TREND ► ▲
Underlying tensions between elements of the Buddhist and Muslim communities in Myanmar are occasionally stoked by extremists on both sides. A terrorist attack in a major urban centre by Islamist militants remains a possibility, as does the potential for yet more mob attacks by Buddhist extremists on mosques, particularly in light of recent events in parts of India and the fact that this is an election year. The manufacture of the synthetic drug methamphetamine appears to be increasing in northern Myanmar as a crackdown in China forces drug syndicates to relocate their labs, raising the possibility of more narcotics-related violence.
Exchange Transfer and Trade Sanctions Risk 68 (Medium-High) TREND ▲ ▲
The reluctance of the ruling NLD to condemn or even acknowledge the army’s treatment of the Rohingya during ongoing proceedings at the ICJ means that the implementation of economic sanctions and/or the loss of trade privileges remains a distinct possibility in the medium term. Should any of the legal cases against Myanmar result in formal indictments, then EU countries, in particular, are likely to come under pressure to consider the end of Myanmar’s trade privileges under the ‘Everything but Arms’ scheme, and even a resumption of sanctions.
Sovereign Default Risk 46 (Medium) TREND ▲ ▲
The country is estimated to be running a current account deficit of around 3.5% of GDP, with foreign exchange reserves of about 6.5 billion USD. The total external debt is relatively modest at about 25% of GDP but, despite this, any future borrowing on the international financial markets will be constrained by Myanmar’s current international standing. It is increasingly unlikely that major financial institutions will wish to incur reputational risks by significantly scaling up their exposure in the country. On the domestic front, there is clearly a need to reduce the extent to which the budget deficit is financed by the central bank by making greater use of market-based financing of public debt. Until now, the NLD’s fiscal prudence, which has included a reluctance to rush into spending on the country’s dilapidated infrastructure, has mostly won plaudits. However, the temptation to spend heavily in an election year may be irresistible, particularly given the need to cope with the impact of COVID-19.
