Mizuho Flash – Myanmar’s Confiscation Risks

Vishnu Varathan, Head, Economics & Strategy, Asia & Oceania Treasury Department, Mizuho Bank, Ltd.,

Myanmar’s Confiscation Risks

In a Nutshell: Myanmar’s descent into violence amid the military’s unrestrained use of force is first and foremost a humanitarian crisis. This unfolding tragedy reveals dangers of confiscation, at various levels and on several dimensions. From inception, the military coup is but a confiscation of rights, including democracy. Beyond which, the civil unrest and military atrocities are a political confiscation of livelihoods and wealth. Livelihoods are clearly confiscated by tyranny and resultant unrest. But also more surreptitiously, and perhaps no less insidiously, by inflation. Disruptions to both production and flow of goods/services is a double whammy of adverse income shock and sharp escalation in cost; where basic access to goods and services are not impaired.

Finally, a dysfunctional financial system confiscates wealth on a frightening scale. This ranges from outright misappropriation by the powers that be to inevitable asset devaluation resulting from civil unrest. Notably, foreign exchange risks comprising forced exports surrender as well as the widening dichotomy between “official” and black market exchange rates favouring those in power to the detriment of the rest.

A Cascade of Confiscation Risks

The horrors of unrestrained military violence on its own people in Myanmar is an urgent humanitarian crisis above all. But concealed in the aftermath of the military coup is a pernicious cascade of confiscation risks that will have a profoundly adverse impact on the people and economy of Myanmar. And this simply cannot be ignored or dismissed as a passive by-product of civil unrest. Because it is by and large a considered, if not intended, political confiscation of rights, livelihood and wealth.

Confiscation of Rights: By definition, the military coup is a confiscation of rights, including that of democratic elections. That was enacted under the cover of the Constitution merely reflects parliamentary rights and political freedom undermined by military power. But confiscation of political power does not stop there, and spills over as with far-reaching economic impact.

Political Spill-over to the Economy: Specifically, exerting itself as a political confiscation of livelihoods and wealth. Fact is, economic misery from political oppression is undeniable; and tragically unfolding in real time.

Confiscation of Livelihoods

Tyranny of Economic Uncertainty: The military coup invariably escalates economic uncertainty in the aftermath of political upheaval. As the military’s brutal crackdown on the democratically-elected government evokes a spiral of escalating military brutality and more determined civil disobedience, lives and livelihoods are upended. No one can tell how long the showdown will last, keeping banks, government offices and many businesses closed nor can the full extent of international diplomatic repercussions (mostly sanctions for now) be anticipated.

Jobs: This economic uncertainty will inevitably have a negative impact on jobs; as the military is not averse to depriving people of their livelihoods to extract submission. And given the military’s extensive, if not overwhelming, economic reach – much of which is via Myanmar Economic Corporation (MEC) and Myanmar Economic Holdings (MEHL) that pervades down Myanmar’s economy – the military’s propensity and ability to confiscate livelihoods are a particular danger. Consequently, international sanctions unfortunately cut both ways. Especially as the intended blow to the military is blunted for a regime used to circumventing, whereas the military shows no compunction about inflicting disproportionate economic pain on the people.

Supply-Chains/Access: The misery of livelihoods confiscated is compounded by the disruption to both production and flows of goods (as well as services). This first and foremost imposes the threat of deprivation of access to the most basic of necessities. Beyond which, the double whammy of income loss and cost escalation amplifies the confiscation of livelihood from supply-chain disruptions imposed by the military coup and the consequent tyranny of oppression.

Confiscation of Wealth

Above all, for a military regime under international pressure, the ability to lay its hands on a ready source of financial means is perhaps most critical, leading to heightened risks of confiscation of wealth: the most efficacious means to acquire financial resources for those with force.

Resource Exploitation: The large scale exploitation of Myanmar’s resources (for illegal exports) in energy, timbre or precious stones/minerals by the military’s economic entities is a well telegraphed confiscation of the nation’s natural (wealth of) resources; which essentially deprives future generations.

Misappropriation: But the misappropriation of wealth can, and probably has, cascaded down to the private sector. The military’s threat to transfer deposits from private banks that do not open to state/military banks is an uncomfortably small step away from outright confiscation. On a more targeted basis those aligned with the democratic movement may be subject to the real dangers of having their assets confiscated by the military.

Inflation: A more surreptitious, but no less insidious, means of wealth confiscation will be due to extraordinarily high inflation that is typical in civil unrest; partly via supply-chain channels highlighted earlier. The larger point about inflation is that it erodes both income and wealth by eroding purchasing power. And to the extent that this is a result of the military usurping power and unleashing political and civil upheaval, income and wealth have been confiscated for the benefit of the military’s desire to hold on to power.

Dysfunctional Financial Markets: Add to that dysfunctional financial channels (asset market/banking sector) where liquidity has abruptly dried up and asymmetric information/access, even more wealth is unnecessarily confiscated by uncertainty; and sometimes to the benefit of those who wield power.

Asset Devaluation: Case in point being asset devaluation. Inflation risks ironically lead to asset devaluation (rather than an increase in price) as the economic and political chaos assault valuations while expectations of higher inflation diminish the present value of assets. And this mix of pressure on asset prices is further exacerbated by dysfunctional financial markets.

Confiscation via Foreign Exchange

Finally, the exchange rate channel may be where this confiscation of wealth/means proliferates most pervasively as MMK exchange rate plummets on prolonged civil unrest and consequent economic malfunction following the military coup. Apart from wealth confiscated by exposure to foreign debt (of firms network in Myanmar), a network of inflation, asset price alongside outright confiscation, by dichotomous markets favouring the “privileged”, threaten to render endemic confiscation of wealth.

First, the exchange rate feedback loop to (imported) inflation exacerbates the wealth confiscation from inflation as well as asset price channels.

Second, the inadvertent pressures for dollarization and chase for USD liquidity as the central bank’s reserves dwindle from sanctions may prompt imposition of exports surrender, requiring exporters to “lock-in” risks (and future losses) associated with MMK cash holdings.

Finally, and perhaps most perniciously, the likelihood of an artificially supported “official” MMK rate onshore (partly to control Dollarization instincts) in contrast to a significantly weaker MMK on the black market will diminish the value of inward remittances and investments. Meanwhile, the ability to access more favourable “official” rates to get foreign currency will probably be determined by “privileged access” while the rest struggle to buy USD on the black market. This dichotomous exchange rate market fractured by the military coup essentially confiscates wealth from the private sector on a large scale to the benefit of a select few.

That military elite resorting to wealth confiscation as a means to control is Myanmar’s tragedy. And to miss this forest of large-scale confiscation for the trees of piece-meal economic/political risks would be ours.