Myanmar's foreign investment inflow could be dragged by unrest: Moody's

This could make it harder for Myanmar to finance its current account deficit.

The United Nations (UN) recently released a statement expressing concern over reports of serious rights violations in Myanmar’s northern Rakhine state.

Moody's Investors Service Singapore opined that the reported violations could have a negative impact on the sovereign credit profile if they jeopardize the continuity of foreign investment that is critical to finance much-needed infrastructure development.

It added that it would also exacerbate balance of payments pressures.

Here's more from Moody's:

A spokesperson for the Office of the United Nations High Commissioner for Human Rights said it had received reports of extrajudicial killings, arbitrary arrests and sexual violence, as well as a spike in hate speech. The spokesperson urged Myanmar’s government to ensure its attempts to restore security following attacks on three Border Guard police posts in the state in October were “firmly grounded in international human rights laws and standards.”

On 1 December, Myanmar’s President Htin Kyaw announced the formation of an investigative committee to look into the incidents.

Myanmar has attracted substantial interest from foreign investors since 2010, when the authorities kicked off a series of reforms that led to the removal of many international sanctions. With an improving business environment, Myanmar’s largely untapped natural resources wealth and liberalization of sectors like telecommunications have drawn in foreign investors. Total foreign direct investment (FDI) inflows accelerated to $4.1 billion in 2015, from $2.2 billion in 2014. But compared to regional peers, FDI flows into Myanmar remain low, relative to nominal GDP.

The reforms also opened the door to increased financial support from bilateral and multilateral donors. Most recently, Japan’s (A1 stable) Prime Minister, Shinzo Abe, pledged ¥800 billion ($7.0 billion) of funding to Myanmar over five years, including ¥40 billion to support minority group reconciliation, with the rest for infrastructure development. The Asian Development Bank (Aaa stable), the European Union (Aaa stable) and the World Bank (IBRD, Aaa stable) are also among those providing financial assistance.

Tensions between Myanmar’s Buddhist majority and Muslim Rohingyas have a long history. A renewed worsening in strains, along with a lack of evidence that the authorities were taking tangible action to address them, could make international lenders reconsider their financial support.

Local tensions could additionally stymie plans to develop a Special Economic Zone at Kyauk Phyu, which aims to take advantage of Rakhine’s strategic location close to China (Aa3 negative) and India (Baa3 positive).

Given the Myanmar government’s constrained financial means and the absence of a sizeable domestic private sector to take on essential infrastructure investment, a freeze or withdrawal of foreign financial and physical investment would have a significant negative impact on the economy. Myanmar ranked 134th out of 140 countries for quality of infrastructure in the World Economic Forum’s Global Competitiveness Report 2015-16.

Additionally, a fall in international inflows would make it harder for Myanmar to finance its current account deficit, which stood at an elevated 8.9% of GDP in 2015, and put pressure on the country’s balance of payments.