Coup d’état: What is the impact on international investments?

By Prof. Evelyn S. Devadason, University of Malaya

The recent Myanmar military seizing control of the country on February 1, 2021, and declaring a year-long state of emergency, has sparked some fears in Asia given that this region dominates the foreign direct investment (FDI) profile in Myanmar. This coup therefore has not only put Myanmar back in the headlines, after being ruled by the armed forces from 1962 to 2011, but it has also garnered close attention by governments and investors in Southeast Asia.

The above makes us rethink how investors would view such political situations, as coups are manifestations of political instability.  Arguably, a coup signals a riskier and growth inhibiting environment, and in the face of such economic and political uncertainties, it can depress investments.

The linkages between a coup and international investments are however highly debatable in the literature. The reason being, there is no uniform outcome of a coup on investments that has been observed in modern days. The effects of a coup, in fact, are found to have different implications for investments depending on the characteristics of the coup and the orientation and ideology bias of the new government.  

This includes, (i) bloodless or bloodshed (violence and chaos in the form of riots, assassinations, and lawlessness.) coups; and (ii) new investment-friendly regime for the coup-empowered government or a hostile regime that favours nationalization reforms.  As expected, a bloodless coup and a new investment friendly regime can have minimal impacts on investments.

It seems rather counterintuitive to expect a positive link between a coup and investments. There is this possibility if the existing government of a country is hostile to international investments and the positive expectation that the regime change will be more investment friendly.

This in turn, also depends on the investors’ expectations of the coup events, whether they will be successful or abortive (unsuccessful).  As such, the investment effects of a coup are not always easily explained.

Some international investors still favour democracies (civilian rule) over authoritarian (military) regimes. In that context, a coup that leads to a shift away from a democratic rule, reduces foreign support for the new leadership, and subsequently results in the dwindling of targeted or directed investments in that country.

A country with prior experiences of coups can also undermine investor confidence. Subsequently, failure to thrive in the post-coup era would further compound the negative image of that country as an attractive destination for investments. Of course, one could refer to Thailand in Southeast Asia as a case in point, of having had many coups since 1960 (even referred to as a coup-addicted country), and evidentially, economic growth held steady in the aftermath of some coups.

This shows that it is not only difficult to predict, but also difficult to analyze the economic aftershocks after a coup and its implications for international investments.

Coming back to the issue of the ‘bad’ coup in Myanmar, it should be a matter of great concern to the Association of Southeast Asian Nations (ASEAN). Usurping the democratic process coupled with the corresponding diversity in the regional responses and declarations to the coup across the ASEAN Member States (AMS), reinforces the lack of commitment of the bloc to uphold the democratic principles in the ASEAN Charter. 

This certainly does not inspire international confidence over the longer term, especially when the region is already reeling from a drastic 31 percent contraction in FDI. 

This coup could reduce ASEAN’s appeal as a consolidated market for investors outside the region, apart from slowing-down bilateral regional investments with Myanmar. In fact, investors, both regional and extra-regional are already reacting to the coup. Thailand has decided to halt its property project in Myanmar and Japan has announced its plan to terminate its joint beer ventures in Myanmar.

The reaction of the international community, particularly if economic sanctions are imposed by the United States (US) on specific local companies, will place further pressure on regional investors that have heavily invested in those companies. This again goes back to the extent and scope of the sanctions.

Political factors, undeniably, are at least as equally as important as economic incentives and investment facilitation measures for driving international investments. Having said that, investors and markets will still behave differently, and at times unpredictably, in the wake of a coup.

Prof. Evelyn S. Devadason, Faculty of Economics & Administration, University of Malaya, and Vice President of the Malaysian Economic Association.

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