The BFD | The Economy Hits the Buffers

5^th March 2021

War Footing: Why Business May Never Return to ‘Normal’

The Frontier magazine has published another perceptive article on the state of Myanmar, looking at the economic consequences of the coup. I make no excuses for the length of today’s article, based on the Frontier piece, but it gives a valuable insight into what is happening in Myanmar that the MSM isn’t reporting. It isn’t bloody and therefore is not considered newsworthy.

The political reforms of the past decade enabled an accompanying economic liberalisation that saw the country slash red tape, update its legal framework and abolish lucrative monopolies. Sectors that were closed to foreign investment were opened up and entirely new industries were created. Sanctions were lifted, debts forgiven and new development lending commenced, as Myanmar welcomed tens of billions of dollars in foreign investment from all over the world.

Although the benefits have not been spready equally, Myanmar has become a wealthier, better educated and more connected society. These gains are now in serious peril.

I was close to the reforms that were going on and can testify to their success.

In his early speeches after the coup, Min Aung Hlaing emphasised the country would continue on the same economic path – if anything, he’s promised to be more pro-business than the NLD. Almost immediately, he invited business leaders to Nay Pyi Taw and appointed the popular bureaucrat U Aung Naing Oo as minister for investment and foreign economic relations. The senior general seems to have actually believed that continuity might be possible.

And perhaps it could have been, had the protests not escalated so dramatically. But business-as-usual is now a pipedream, particularly in the short term. The bigger question is whether it’s even possible to return to a stable business environment with the military in charge, or whether the coup will instead reshape Myanmar’s economic landscape.

Right now, the main challenge for many businesses is simply survival. Many were already struggling with the effects of COVID-19 when the protests and Civil Disobedience Movement brought much of the economy to a standstill. The most obvious manifestation is the closure of the banks, but when Frontier quizzed one foreign executive about the impact of the bank closures last week, he responded, “Okay, yes, there’s no cash – you can’t get money out of the bank. That’s bad. But for businesses that’s only like issue number three or four. The fact that they’re not doing any business is the number one problem.” Another businessperson whose firm has a contract with the government and is continuing to operate told Frontier they were worried whether the regime would still be able to pay them in two or three months.

But harm is being done in less visible ways, too. Exports have ground to a halt, with truck drivers, Customs agents and staff at the Union of Myanmar Federation of Chambers of Commerce and Industry (which issues certificates of origin for exporters) all joining the CDM. With their bank accounts inaccessible and the future so uncertain, people are – quite understandably – trying to hold on to cash, which only hurts businesses further.

Reverting to cash also stops the regime being able to snoop on internet-based transactions (when it is allowed to operate). Unfortunately, people and businesses are keeping more cash at there premises and this has tempted the Police into further actions of theft, robbery, and pillaging.

How long can this situation last? The resilience of the anti-military movement is an open question. Some have speculated that the banking shutdown will soon begin to bite, particularly if many businesses were unable to pay February salaries. So far, there’s no sign of that, and it’s not inconceivable the anti-coup movement in its present form – with tens of thousands on the streets of dozens of cities across the country, and many public and private sector employees refusing to work – could last for many more weeks, or even several months. Support networks for CDM workers who need financial or in-kind assistance are already sustaining thousands of families with donations from within Myanmar and abroad.

The level of anger at the military is such that for now people seem willing to endure the self-inflicted economic pain.

In the short term, businesses – particularly foreign investors – will put future plans on ice. Senior executives began fleeing the country weeks ago as protests grew. Even Woodside, whose CEO had idiotically made remarks sympathetic to the Tatmadaw on February 19, has done an about-face and said it will scale back operations. Some companies may pull out completely, like Kirin.

Both of these were reported earlier on The BFD and it is good to see the U-turn by Woodside.

But let’s assume that the military crushes the movement, or it simply runs out of momentum, enabling business activity to recover to some extent. Then what?

It’s too early to make any firm predictions, because much depends on the decisions that the regime and the people of Myanmar make, and to some extent what foreign businesses and governments do. But we do have some tentative thoughts on why a return to “normal” is a fantasy.

Frontier spoke to one investor this week who was on the verge of a deal with financing from US banks. “That deal is basically dead. If the US government doesn’t recognise the government, then forget about getting a loan here from a US bank – all of them will run away from you,” he said. “It’s the same for banks from other countries, too.” Since the coup, foreign businesses and business chambers have been at pains not to meet anyone within government, for fear it will be taken as recognition of Min Aung Hlaing’s administration.

A big question mark hovers over the position of Japan and its firms, which often go hand in hand, and to a lesser extent of South Korea. In recent weeks, they too (along with their businesses) have been scrupulous in avoiding meetings that could bestow legitimacy on the junta. Japan, in particular, wields great financial clout in Myanmar, having disbursed several billion dollars in official development assistance since resuming lending in 2012, and is considering suspending new ODA. Its businesses have also been among the leading investors here. For now, we’re hearing there’s a lot of anger and frustration, and a sense of betrayal – a feeling that the gains and hard work of the past decade may well have just evaporated.

But this isn’t just about what the world thinks. Both the regime and businesses operating in Myanmar will have to contend with what Frontier contributor Su Min Naing described as “chronic forms of resistance, led by a generation of young people who are more connected and more exposed to the world”.

One of these “forms of resistance” is consumer power. This is already being brought to bear in a range of ways, from boycotts of military products (such as Myanmar Beer and Red Ruby cigarettes) to naming and shaming of companies or organisations that have apparently pressured their employees to not join the protests. Businesses are being forced to choose between the regime and the people. And if they are consumer-facing – whether they’re in banking, retail or agriculture – they’re choosing the people.

At the same time, we could soon enter a period of macroeconomic instability. Myanmar has already been battered by the effects of COVID-19, but because of the coup is likely to endure a very rough economic patch for at least the next 6-12 months. The military regime faces a budget black hole that is likely to widen as a result of the World Bank ending disbursements on loans totalling $1.6 billion, and the United States and European Union cutting direct support to the regime. Revenues are likely to slide even further as the tax take dives, not only because of slumping earnings from businesses but also a refusal to pay income and commercial taxes, and a boycott of other revenue earners like the state lottery.

Under the NLD, the government was financing a growing proportion of the budget deficit through bond sales to private banks. But when the Central Bank sought bids on K200 billion of bonds on February 15, [as reported in The BFD]

it received just a single bid for K1.7 billion, at a higher-than-normal interest rate of 9.0 percent. The bond sale was the target of a boycott campaign by the NLD-led Committee Representing the Pyidaungsu Hluttaw, (parliament) which gained traction on social media. But currently banks don’t have the liquidity to participate anyway – they’ve actually been cashing in their existing bonds to stay liquid. If it’s unable to sell bonds, the junta will have no choice but to revert to money printing, which will lead to inflation and the weakening of the kyat. This will be exacerbated by a selloff of the kyat once people are able to access their savings and convert them to gold or US dollars. A weaker kyat could support exports, but as we mentioned above, the CDM has made it basically impossible to send goods out through the ports, which account for the majority of exports.

When the banks reopen there’s expected to be a flight of deposits, something the CBM has moved to head off by putting in place withdrawal limits indefinitely. What the future holds for them is unclear, but it’s worth recalling that the last time Myanmar faced a banking crisis, it took the best part of a decade to recover.

The military regime is now at war and will deploy whatever means necessary to win.

Source Frontier5th March 2021.