Myanmar continues to implement gradual economic reforms that will open the economy up to foreign investment over the long-term. However, the security environment will remain fragile through 2019, as the military and ethnic armed groups engage in fighting.
The military-backed National League for Democracy (NLD) government is stable but is unlikely to secure a comprehensive peace agreement with ethnic armed groups in the one-year outlook.
Regular attacks and military operations are likely to continue, particularly in Kachin and northern Shan states.
Infrastructure projects are likely to be disrupted by nearby fighting. Stray bullets and artillery rounds also pose a risk of collateral injury to foreign nationals.
Frequent protests are likely against hydropower, mining, Special Economic Zones, and other infrastructure projects.
The risk is elevated where compensation and land rights are disputed, or where projects pose risks to the environment.
Protests are likely to disrupt operations, and in particularly controversial projects such as the Myitsone dam, are likely to cause project suspensions.
Real GDP growth is forecasted to average 6.9% per annum over the next decade with support from private and public investment in infrastructure and non-commodity sectors, such as light manufacturing and communications.
There has been a substantial shift in the composition of investor commitment towards the transportation and communication sector. Foreign Direct Investment (FDI) in manufacturing grew by 65% y-o-y in fiscal year 2017/18 and accounts for one-third of total FDI, suggesting continued favourable prospects for the sector.
Sovereign credit risks remain a major concern for investors. The government’s tax revenue base remains small at less than 40% of total revenue and a dependence on transfers from state economic enterprises (SEEs), particularly from the energy sector, exposes government finances to volatility in energy prices.
Myanmar’s debt-to-GDP ratio is low at approximately 16%, with total foreign debts of over USD 9.1 billion. However, almost half that amount is owed to China where interest rates on loans range from 0 to 4.5% dependent on project type.
Downside risk is further compounded by subsidies to loss-making SEEs, applying pressure to the government’s fiscal position.
Given its large population and strategic geographic location between India China, Myanmar is likely to continue to attract FDI. Investment in infrastructure, driven mainly by China’s Belt and Road Initiative will support the majority of growth over the next decade.
In addition, closer bilateral relations with Singapore and Vietnam at both private and government levels suggest a steady flow of investment from the Asia-Pacific region.
The development of three new Special Economic Zones at Thaliwa, Dawei and Kyaukpya will also help to drive investment in Myanmar’s rapidly developing manufacturing sector.
Despite the positive long-term outlook, a poor business environment and weak banking sector will present challenges to investors in the near to medium-term forecast. Contractual and expropriation risks exist for mining and construction projects, particularly where there is potential for environmental damage.
For example, the USD 3.6 billion Myitsone hydroelectric dam in Kachin state was suspended on account of potential environmental degradation risks. A small number of domestic companies, reportedly with close ties to the military, have notable influence over local authorities and will continue to benefit from preferential treatment with respect to the granting of land leases.
However, firms operating in the non-hydropower renewable power sector are likely to face reduced risks, particularly if firms are able to provide employment opportunities for the local population.
Corruption remains a significant operational risk to foreign firms in Myanmar, despite the introduction of a 2013 Anti-Corruption Law, which provides a minimum 15-year prison sentence for public officials found guilty of corruption.
In particular, foreign firms are likely to face bribery or ‘tea money’ demands in seeking permission for investments, the taxation process, applying for import and export licenses and real-estate negotiations.
The monthly Risk Outlook is supported by our proprietary country risk rating tool, World Risk Review (WRR) which provides risk ratings across nine insurable perils for 197 countries. The country risk ratings are generated by a proprietary, algorithm-based modelling system incorporating over 200 international sources of data.
5 Key Takeaways
- Myanmar’s security environment will remain fragile and presents a major risk to investors in 2019
- Project disruption and protest risks exist for foreign energy firms where land rights and compensation are disputed
- Myanmar’s economic dependence on high-interests loans from China raises long-term sovereign credit risks for investors
- Corruption remains a significant operational risk to foreign firms across all sectors
- Three new special economic zones (SEZ) will help to drive investment in the manufacturing sector.
A number of the countries in this month’s Risk Outlook are the recipient of elevated Chinese investment, with some participating in the Belt and Road Initiative (BRI). Increasingly, our focus is on the implications of BRI for the risk environment within emerging markets.
In this month's Risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for Djibouti, Peru, Senegal and Guinea all of which have been the subject of recent enquiries from our client base.
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TALK TO AN EXPERT
If you would like to talk about any of the issues raised in this article, please contact Eleanor Smith, Senior Political Risk Analyst on +44 (0) 121 514 8307.