Coup-hit Myanmar, which has seen investment activity from overseas investors come to a virtual standstill, is beginning to see a similar approach adopted by local and regional players.
“The local economy is depressed as it is reliant on international markets for its agricultural produce, garments, tourism, and gas sales, and also on worker remittances,” said Vicky Bowman, director of Myanmar Centre for Responsible Business.
“It’s fair to say that there is little fund and/or investment company activity, though we have heard there are a few opportunistic investments driven by local and regional companies,” added a director of a Yangon-based private equity firm.
Since the Tatmadaw (the Burmese military) took control of the country in February this year, it has been reported that over 800 people have been killed in political and social unrest by May. The country has also reported restricted internet connectivity and businesses operating at a limited scale.
In such a scenario, it would be “too much [of a] risk” to make new investments, a representative from a venture capital firm told DealStreetAsia, on the condition of anonymity. The executive added that hardly any startup has been in the market looking for funding since the start of February.
The double threat posed by the military coup and the healthcare crisis has resulted in “tremendous business uncertainty, a cash crisis and a banking sector that is on the edge of collapse,” the VC executive added.
“Our portfolio companies are struggling to survive. Operations have reduced, staffing has been cut and sales are down significantly. The business environment has become almost impossible [to operate in],” the person said.
To add to the woes further, bank transfers into Myanmar have been suspended by international banks, making it very difficult to look at making investments, another venture capitalist told DealStreetAsia.
Meanwhile, local depositors have reportedly rushed to withdraw their deposits from banks, resulting in a cash deficit within the Central Bank of Myanmar. Subsequently, the country’s apex bank had to urge local lenders to apply a cap on withdrawals.
“There is a lack of trust in the banking system. Users were unable to use digital payments and have switched to cash,” Bowman said.
Local workers have also demanded their employers to pay their salaries in cash, while people who want to cash out might have to pay an additional fee for the same.
Confidence in digital payments, which were amongst the major drivers for Myanmar’s fast-growing economy in recent years, can be restored. However, it “requires wider confidence in the economy, which is lacking as a consequence of the coup,” Bowman added.
As a result of the lack of cash, the Myanmar banking system will be burdened with a shortage of credit and supposedly growing non-performing loans, she predicted.
“If you have a crippled banking sector, people not opening their businesses and not spending money to rejuvenate the economy, it’s difficult to invest,” said a PE executive. “It’s been five months since the coup happened, and nobody is getting a sense that things are going to be okay. So the wait-and-see approach is continuing.”
With no short-term solution to the crisis in sight, investors are largely preparing for “a long haul of economic contraction and operational difficulties,” according to Romain Caillaud, a principal at Tokyo-based advisory firm SIPA Partners and associate fellow at Singapore-based think tank ISEAS-Yusof Ishak Institute.
“It remains to be seen whether the current challenges will be transitory or long-lasting, with likely foreign investments being more significantly negatively impacted than trade flows,” Caillaud added.
Local investors committed but cautious
Even though local Myanmar funds have refrained from making fresh investments, they are not giving up on this market yet.
“We are a long-term investor, and remain committed to making a positive impact in Myanmar through our investments,” said another PE firm in the country.
While local investors work on different scenario modelling, they are stepping up focus on supporting their existing portfolio firms.
“We’re trying to help our portfolio companies preserve liquidity and value. We’re also trying to ensure that the best practices can continue so that people don’t roll back to the old ways of doing things,” an executive at one of the PE firms said.
A person from another PE firm added: “We believe that the best way to support the social-economic development of Myanmar and its people is by staying in the country, sustaining and creating employment, and continuing our goal to drive sustainable development through our work.”
In terms of future investments, at least half a dozen investors interviewed by DealStreetAsia expressed that there were ways to help fund operations of Myanmar companies, and they are keen to tap into those opportunities.
However, the challenge remains in building an investment business model in the new scenario.
“You have to ask yourself if a private equity strategy is still the right strategy in this environment. As the capital has to be more patient and long term, does it fit the PE business model,” a top executive representing a PE firm said.
Dismal macro climate
The macroeconomic landscape continues to look dismal and uncertain with concerns that the junta’s reported promise to organise re-election and to return to democracy within two years may not be delivered in the near term.
“It now appears increasingly unlikely that the military will hold elections any time soon, as it promised following the coup. If it does, those elections will be heavily manufactured to remove any credible opposition and will favour the military’s preferred party, the USDP,” wrote Hunter Marston, an associate at 9DASHLINE, a platform to voice issues in the Indo-Pacific.
In a recent global move, the EU on June 21, 2021, announced the third round of sanctions on eight individuals and four entities in Myanmar that are linked to the Tatmadaw. On the same day, the UK also applied new sanctions and asset freezes against the Myanmar Timber Enterprise, Myanmar Pearl Enterprise and the State Administration Council.
Earlier penalties in March were from the US government against the two largest conglomerates, Myanmar Economic Holdings Public Company Limited and Myanmar Economic Corporation Limited.
The Asian Development Bank forecast that Myanmar’s GDP would contract 9.8% this year, while it could not give a projection for 2022. The diminution is even larger than other ASEAN countries’ growth rates.
“For many of the investors in Myanmar, the risks have always been there in terms of assessing the business models and finding exits in the market,” said the PE investor quoted above. However, the executive highlighted that, with the coup, even local funds have to seriously think about the reputation and integrity of business partners.
Many overseas investors have to reassess their portfolios to prevent reputational risks. Lately, 77 global investors accounting for more than $3.9 trillion in AUM, led by Storebrand Asset Management, Domini Impact Investments and Heartland Initiative, called on companies across all sectors with business activities or relationships in Myanmar to undertake enhanced due diligence, in order to address human rights concerns.
On June 22, Norwegian pension fund KLP also said it was divesting from Adani Ports and Special Economic Zone Limited due to the Indian company’s links with the junta, which breach the fund’s responsible investment policy.
Foreign investors will also abandon Myanmar “if the government, economic and commercial policies return to the failed autocratic, statist policies of the previous military regime, and if they see a reversal of the economic liberalisation of the last 10 years,” Bowman commented.
Until the National League of Democracy came to rule, Myanmar had been under a dictatorship from 1962 to 2011 with sanctions imposed from the outside world.