Institutional investors and fund managers face a quandary with Myanmar; should they pull back entirely from a country that has suffered a coup after years of seeming political and economic progress, or should they bide their time?
Amid the violent suppression of protests that left over 500 citizens dead following the February 1 coup, the US has ordered non-essential personnel to leave the country.
The country’s change in circumstances is striking, compared to late 2020.
Ruchir Desai, the co-fund manager of our AFC Asia Frontier Fund at Asia Frontier Capital, told AsianInvestor that before the coup Myanmar had offered “a lot of long-term potential due to its large young population, untapped consumer markets and a big requirement for infrastructure investments and pre-pandemic GDP growth of more than 6%”.
Indeed, the country enjoyed GDP growth of between 6% and 8.4% between 2012 and 2018, although this plummeted to 2.89% in 2019 amid the country’s Rohingya genocide crisis. It also saw foreign direct investment flows of 6% of GDP in 2015, 4.89% in 2016 and 6.87% in 2017, before falling to 2.13% and 3% in 2018 and 2019, respectively.
Contrasting moves by international fund houses since the coup demonstrate the dilemma foreign investors face.
On February 16 US-based Eaton Vance reduced its stake in Myanmar conglomerate Yoma Strategic Holdings to 4.97% from 5.55%. The UK's Standard Life Aberdeen, meanwhile, on February 15 had upped its own position to 6.362% from 5.988%. Yoma's share price has halved to S$0.14 as of Wednesday (March 31) from S$0.28 on February 2.
Hugh Young, Asian chairman at Aberdeen Standard Investments, told AsianInvestor: "We’re keeping closely in touch with the situation given our holding in Yoma and other indirect interests. Initially [it] seemed business would continue as usual but obviously things rapidly took a turn for the worse."
One likely outcome of the coup is is that the crony capitalism that dominated much of Myanmar's economy for the past 30 years may regain ground. As a consequence, foreign investors will likely prove very cautious.
“Foreign investors will be hesitant to make any fresh investments until there is a sense of greater political stability in the country and more clarity as to how economic policy making shapes up going forward,” said Desai, who noted the AFC Asia Frontier Fund has a small exposure to Myanmar.
However, Peter Ryan-Kane, founder of PeRK Advisory and a veteran of several Southeast Asian economies, argues that experienced investors should take the current uncertainty in their stride and remember the reasons they put their money to work there in the first place.
“Investing in countries such as Myanmar have always, and will always, present a different set of risk and rewards – that’s the benefit," he told AsianInvestor. "The key is to understand the incremental benefit and weigh it against the risks.”
He adds that they should weigh the response to the latest developments in Myanmar on their processes and investing principles. Some investors, for example, might have put money into the country due to its commitment to “a path to democracy”; that might well mean Myanmar is no longer a place they wish to be exposed to.
Other fund managers may focus more on Myanmar's longer term structural shifts in its economy, which might mean holding off on any drastic investment changes for now – although they will need to consider the risk of further sanctions harming the country’s economy.
Investors who emphasise environmental, social and governance (ESG) considerations also face a difficult decision. As Desai notes, from an ESG lens exposure to the country is likely to be less appealing now, and there is also the danger of further economic sanctions could also potentially prevent further foreign investments into the country.
However, investors who seriously consider ESG also need to balance the trade-off of Myanmar’s return to autocratic rule with the daily impact that pulling their capital out will have on its people.
“Starving countries of capital is akin to economic sanctions and arguably not in citizens long term interests,” said Ryan-Kane. “While it might make individual investors feel better, perhaps it shouldn’t.”
The roots of the coup itself appear to lie less in economics than in politics.
To international politicians and agencies Aung San Suu Kyi, state councillor and de facto leader of the government, combined celebrity with reliability, as the daughter of the first post-imperial leader of Myanmar who had worked at the United Nations when young. However, the efforts of Suu Kyi and her party, the National League for Democracy, to open the country's economy after winning the last election in 2015 disturbed local vested interests.
“The instatement of Aung San Suu Kyi … was never really going to work, with deeply entrenched opposition and wide swathes of the previous administration impacted by the sudden internationalisation of the country and attempts to clean it up," said Ryan-Kane.
Suu Kyi is currently in custody and faces trumped-up charges including importing six radios and breaking Covid-19 quarantine. Her ouster is likely to cause a chilling effect on political support from the US and other western countries. That leaves Myanmar in a precarious place, vulnerable to the aspirations of other countries.
“It [is] exposed to the various winds of favour from international and multilateral participants, which rarely goes well,” said Ryan-Kane.
Joe Marsh contributed to this article.