Previous Quarterly Editions
Expropriation Risk: 58 58 58 59 Political Violence Risk: 49 50 52 52 Terrorism Risk: 45 45 45 47 Exchange Transfer and Trade Sanction Risk: 58 62 63 64 Sovereign Default Risk: 42 42 42 42
TREND ▲ OUTLOOK ▲
During the first months of 2019 the manufacturing sector continued to see an increase in new orders, enabling it to add jobs. However, while growth has been rising in recent years, reaching 6.8% in the fiscal year 2017-18, the momentum may begin to slow in the second half of 2019 as evidence of the government’s low level of infrastructure spending coincides with a drop-in investor confidence. The single largest downside risk to the economy is the ongoing humanitarian crisis in Rakhine state, which shows no sign of abating. The government’s reaction to the crisis is partly dictated by the large military contingent that continues to sit in parliament after the army returned the country, as the military implemented a system that leaves it with considerable political power. However, the ruling NLD’s lacklustre response has not been viewed sympathetically by the international community and is imperilling Myanmar’s current trade preferences that enable it to export to the EU and other areas while paying little or no duty. Were these to be withdrawn, then a sharp drop-in foreign direct investment (FDI) inflows is likely, and concessional financing from the international development community would also be affected. One consequence would be to push Myanmar towards closer economic reliance on China. At the same time, the NLD faces national elections in 2020 and is under pressure to deliver greater improvements in living standards. While it is widely expected to retain power next year, its parliamentary majority could be reduced by the resurgence of some ethnic and regional parties since 2015. As the NLD finds itself under both domestic and international pressure, its relationship with the military is also likely to come under additional strain. In early 2019, the NLD proposed a parliamentary committee that would look at amending aspects of the country’s 2008 constitution. This reserves 25% of seats in Myanmar’s bicameral parliament for military personnel, so enabling the army to veto any constitutional change, and guarantees military control of the interior, defence and border affairs ministries. The NLD knows that any concerted attempt to reduce the political power of the military could potentially trigger a coup. However, having made constitutional reform one of its 2015 election pledges, and seeing the risk that the military’s operations against the ethnic Rohingya in Rakhine state poses to the country’s economy and international standing, it is likely to push for some degree of change in the coming months. The release in May of two Reuters journalists jailed for breaching the Official Secrets Act when reporting from Rakhine suggests that the military is susceptible to concerted international pressure.
TREND ▲ OUTLOOK ►
Investors in Myanmar must still contend with a legal system that is incapable of preventing powerful vested interests from contravening or circumventing the country’s commercial laws and regulations, many of which are outdated. In addition, enterprises owned by the military and the state continue to distort aspects of the business environment. As the government remains unwilling or unable to address the plight of the Rohingya, the prospect of sanctions is an additional deterrent to investors as they increase the economic and reputational risks of doing business there. However, the government continues to take small steps towards opening up the economy, awarding licences to five foreign insurers in April to establish life insurance activities in Myanmar.
TREND ► OUTLOOK ▲
The release in May of two Reuters journalists jailed for seven years after investigating killings by the military in Rakhine state followed strong international lobbying on their behalf. However, it is not expected to result in any relaxation in restrictions on the media. In late 2018, Facebook conceded that its platform had been used for hate speech and to foment violence within Myanmar, where it is used by over 20 million people as a source of information. Even so, it is still expected to play a key role in the run-up to national elections in 2020. Fighting continues in Kachin, where the country’s lucrative jade mining is conducted, and in northern Shan, where the contest is primarily over control of narcotics production and smuggling. Clashes between the military and the Arakan Army, which claims to represent Rakhine's ethnic majority and demands greater autonomy for the region, have increased recently in the northwest of Rakhine state, and also along the border with Chin state.
The harsh treatment of the Rohingya, many of whom now live in refugee camps across the border in Bangladesh, has the potential to radicalise parts of the Muslim community in Myanmar, where underlying tensions across the country between the Buddhist and Muslim communities is fed by latent extremism on both sides. A terrorist attack in a major urban centre by Islamist militants linked to one of the international groups such as Islamic State is a possibility, particularly if no progress looks possible in relieving the plight of the Rohingya.
With the kyat not freely convertible outside the country, foreign exchange liquidity risk is an issue for investors operating in Myanmar. Despite widespread acceptance in the international community that the current government has virtually no authority over the military and its actions, the evident reluctance of Daw Aung San Suu Kyi and the NLD party to acknowledge or condemn the treatment of the Rohingya means that the resumption of economic sanctions and/or the loss of trade privileges remains a possibility.
While the NLD-led government’s approach to public spending has largely been seen as prudent, its reluctance to invest in infrastructure may soon begin to constrain growth. The IMF’s report on the economy in April noted that the fiscal deficit remains modest despite a shortfall in government revenues during the fiscal year 2017-18. Even so, there is 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. Recent steps towards liberalisation of the domestic insurance sector should help in the development of a domestic debt market, as insurance firms will have a need for long tenor paper in which to invest.
Return to contents Next Chapter