Myanmar: Rakhine state violence raises risks for investors

02 October 2017

Violence in Myanmar’s Rakhine state is unlikely to be resolved in the coming months, given State Councillor Aung San Suu Kyi’s reliance on a positive relationship with the military to implement policy. Commercial interests are unlikely to be violently targeted, although reputational risks will rise.

Security Environment

Since 25 August 2017, fighting between Myanmar’s military and the Arakan Rohingya Salvation Army (ARSA) in western Rakhine state has caused at least 370,000 Rohingya Muslims to cross the border into Bangladesh. The violence has spurred widespread condemnation from the international community, with accusations that the military has targeted civilians. Around 400 people have been killed and at least 26 villages burnt.

A resolution to the violence is unlikely in the coming months, despite international pressure on Suu Kyi to take action. The military remains influential in Myanmar, retaining a quarter of parliamentary seats. As a result, Suu Kyi and the National League for Democracy (NLD) rely on a positive relationship with the military to implement their legislative agenda. Reaching a peace agreement with various armed ethnic groups remains an NLD-priority. Given a lack of domestic pressure on the Rohingya issue, Suu Kyi will be unwilling to jeopardise the peace process by criticising the military over violence in Rakhine state.

As a result, sporadic violence is likely to continue in Rakhine state in the medium term outlook. Commercial assets are unlikely to be directly targeted in any incidents, as ARSA’s principal targets will be the security forces. Military bases in Maungdaw, Buthidaung and Rathedaung will be probable targets in improvised explosive device (IED) and small-arms attacks.

Trading Environment

Myanmar’s economy will experience robust growth in the coming quarters, with real GDP growth forecasted at 7.5% in 2017, up from 5.4% in 2016. Growth will be driven by accelerating foreign investment in the country, as the government continues to open up the economy. Foreign direct investment (FDI) inflows reached USD 3.1 billion in 2015, up from USD 1.4 billion in 2014. Following decades of underinvestment, infrastructure projects will be a priority area for the government and the value of the construction sector is forecasted to grow by 18.2% in 2017. If successful, improvements to Myanmar’s infrastructure could stabilise the inflation rate, which was estimated at 9% in 2016, by facilitating more efficient goods imports.

Despite significant growth potential, Myanmar’s weak banking sector poses downside risks. State-owned banks dominate the sector, limiting competition and the availability of financial products for private entities. However, the NLD is reportedly planning to lift restrictions in 2018 that prevent foreign-owned banks from operating in retail banking. Foreign banks will support increased lending; encouraging increased domestic demand for consumer durables. As a result the retail sector should see continued expansion, providing investment opportunities for foreign firms.

Investment Environment

The NLD government has worked to improve Myanmar’s business environment, in an effort to attract foreign investment and unlock the country’s significant potential. A new Investment Law, which came into force in April 2017, abolished investment permits, unless the project is strategic, large or has environmental impact. The law also incorporates tax incentives for firms who re-invest in the country.

Despite this, contractual agreement repudiation risks are elevated for environmentally-sensitive power projects. For example, the Chinese-led USD 3.6 billion Myitsone Dam project was suspended by the transitional government in 2011 following local environmental concerns. A commission is currently reviewing the project, with the possibility that it will be cancelled completely. Environmental protests could cause delays/cancellations to future power sector projects.

Violence in Rakhine state will pose reputational risks to foreign firms operating in Myanmar, particularly for those with a significant presence in Muslim-majority countries. There have been protests in a number of countries over the treatment of Rohingya in recent weeks. On 5 September 2017, several thousand people protested outside the Myanmar embassy in Jakarta, Indonesia. However, renewed United Nations, United States or European Union sanctions on Myanmar in response to the violence are unlikely. The international community remains committed to the democratic transition and will not want to undermine Suu Kyi’s position vis-à-vis the military.

Myanmar: Rakhine state violence raises reputational risks for investors

* The London market has limited experience in Myanmar and Myanmar is not rated by major credit rating agencies. As such, there are significant swings in pricing. Our CPS team in Singapore is well-placed to provide competitive pricing

In this month's Risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for China, Ukraine, Mexico and Democratic Republic of Congo, all of which have been the subject of recent enquiries from JLT's client base.

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