Myanmar's infrastructure and power sectors at risk of losing FDI in wake of coup

Oil and gas is another sector that may see decline in foreign investment if Western democracies re-impose sanctions, Fitch Solutions says

Demonstrators hold images of detained Myanmar State Counsellor Aung San Suu Kyi during a protest against the military coup. Fitch Solutions says that foreign direct investment to the country is likely to take a hit in the wake of rising political risk. EPAShow less

The infrastructure, oil and gas, power and construction sectors in Myanmar are most at risk of losing foreign direct investments if sanctions are re-imposed in the wake of the coup that deposed the country's elected government.

The country, formerly known as Burma, could see further pressure on its growth if foreign investors exit due to the political turmoil, Fitch Solutions’ analysts said on Monday.

Fitch Solutions, an affiliate of Fitch Ratings, revised its real gross domestic product growth forecast for Myanmar to 2 per cent for the 2020-21 financial year (October to September) from 5.6 per cent. It expects the country’s GDP to grow at a similar pace in the following financial year, a downward revision from its previous estimate of 6 per cent economic expansion.

It is unclear how long the political uncertainty will last in the country, but if foreign investors decide to adopt a “wait-and-see approach to investments, this could be quite negative for growth”, Jason Yek, Fitch Solutions’ senior analyst for country risk, said.

“From a longer term perspective, we expect Myanmar to be a fast growing economy … [but] following this coup, this view is now very much at risk.”

Myanmar’s military last week imposed a state of emergency in the country and detained leaders including Aung San Suu Kyi. The move has drawn criticism from the US Security Council, the European Union and G7 countries including Canada, France, Germany, Italy, Japan, the UK and the US, demanding the immediate release of political leadership in the country.

The US has threatened to impose sanctions against Myanmar if it doesn’t return to democracy. Fitch Solutions' analysts said the severity and the nature of sanctions will dictate FDI flows.

“Even in the absence of sanctions, we are expecting a hit to FDI because of a rise in political risk,” Aurelia Britsch, head of commodities research said.

Myanmar's economic outlook is heavily dependent on FDI flows that accounted for an average of 4.5 per cent of the country’s GDP in 2018 and 2019. Projects in infrastructure and power sectors have been the major beneficiaries of foreign investment following the end of the military junta's rule in 2011. The two sectors received more than $21.8 billion, accounting for a fifth of overall FDI in the 2019-20 financial year, according to Fitch Solutions.

Key projects could be stalled or cancelled if foreign investors decide to pull the plug. Projects can be affected not only by the lack of FDI but also through lack of concessional loans, which make up a large part of total financing needs.

There may be less “institutional” financial help as development funds and multilateral lenders may reconsider financing options if the political uncertainty continues in the country, Ms Britsch said.

Myanmar, which also has significant gas reserves estimated at 23 trillion cubic feet, risks $2bn worth of projects not reaching a final investment decision, according to consultancy WoodMackenzie.

For the oil and gas sector, the situation is even more negative, as “the country needs all the production it can get”, Peter Lee, senior oil and gas analyst, said.

However, there is an obvious risk for foreign companies that are operating in the country and the situation has evolved at a time when Myanmar remains “in dire need of new exploration” and new oil and gas infrastructure investments.