Myanmar’s democratic transition was brought to an abrupt halt following an early morning coup on 1 February that led to a dramatic change in government and the arrests of key civilian leaders of the ruling National League for Democracy (NLD), including State Counsellor and de facto country leader Aung San Suu Kyi. 

The coup, led by commander-in-chief of the armed forces Senior General Min Aung Hlaing, was described by the military as a ‘constitutional act’ in response to months of disputes over the November 2020 elections, from which the NLD emerged with more than 59% of the country’s 664 parliamentary seats. The military has been contesting the legitimacy of the elections for the past three months, denouncing the NLD’s landslide victory as election fraud. The military imposed a one-year state of emergency to ‘resolve’ the alleged electoral irregularities. 

Several NLD-appointed state and regional ministers and key members of the NLD central executive committee were detained on 1 February, although some have since been released and put under house arrest. It is widely anticipated that the military will continue to detain more opposition activists and important NLD party members. 

Over the course of the week, the military established a 16-member State Adminsitrative Council (SAC) with Gen. Hlaing as chair and comprising eight military officers, and two former NLD members - Thein Nyunt and Khin Maung Swe – who parted ways with the NLD in 2010. 

The military also formed an interim government under newly appointed acting President Myint Swe of the Union Solidarity Development Party, a military-backed political party founded by former Gen. U Thein Sein in 2010, which won about 5% of the parliamentary seats in the November 2020 elections. The Thein Sein administration was in power from 2011 until Aung San Suu Kyi assumed power following general elections in 2016. 

A major cabinet reshuffle was announced, with two dozen deputy ministers being removed from office, and 11 new officials added to the cabinet. Many of the new cabinet appointments were familiar exmilitary faces from the Thein Sein administration. 

Although election fraud was the proximate pretext for the coup, the military figures in the SAC and the new cabinet clearly believe they can improve on the performance of the NLD administration, especially in terms of economic management. Our contacts in Myanmar say the new administration intends to portray a business-as-usual image and will be signalling that business-sector reforms will proceed and that decisions on investment projects will be accelerated. 

Part of the signalling comes from bringing back into power members of the Thein Sein administration who were lauded for initiating a series of economic reforms prior to the 2016 elections which brought Aung San Suu Kyi to power. Examples include U Win Shein, a former Deputy Minister and Chairman of the Myanmar Investment Commission, and U Than Nyein, the former Central Bank of Myanmar Governor who returns to the same post. 

Also worth noting is the appointment of U Aung Naing Oo as Union Minister of Investment and Foreign Economic Relations (MIFER); Naing Oo held several posts in the NLD government, serving as Permanent Secretary for the Ministry of Investment and Foreign Economic Relations and Director General of the Directorate of Investment and Company Administration. He was also the Co-chair of an OECD Taskforce updating the Policy Framework for Investment.

Whatever message the SAC is trying to send with its personnel moves, the new regime seems to be badly underestimating the likely impact of the global reaction to the coup and the degree to which that reaction will undermine whatever acceleration of reforms the SAC and its cohorts may be able to bring about domestically. For one, foreign lenders will look at the overall risk in Myanmar much differently in a post-coup context compared with any time in the past decade. 

On a case by case basis, corporates will need to carefully weigh the reputational risk from continuing to operate in Myanmar. As the first – but not likely to be the last – example, on 5 Feburary Japanese company Kirin announced that it will end its joint venture with the military holding company Myanmar Economic Holdings Limited (MEHL), with which it co-owns Myanmar Brewery and Mandalay Brewery. 

Steps the new regime will inevitably feel obliged to take to enforce its state of emergency will also undermine whatever performance legitimacy it thinks it will obtain by speeding up economic reforms. As examples, moves this week to charge Aung San Suu Kyi for violating the Import and Export Law and NLD President Win Myint for failing to comply with the Natural Disaster Management Law come across as wholly arbitrary, and call into question the outlook for the transparency and predictability needed to maintain and attract foreign investment. 

The international business community is girding for new sanctions being put on Myanmar in response to the coup, although the extent of those sanctions remains unclear four days after the coup. The Biden administration has strongly condemned the Tatmadaw’s actions, and called for the military to relinquish power. The US is likely to impose direct sanctions on the military as well as the MEHL and another military-linked holding company, the Myanmar Economic Corporation (MEC), if the situation continues. Several members of the SAC are either directors or shareholders of MEC and MEHL. 

While targeted sanctions are almost certain to be forthcoming, we do not anticipate sweeping trade sanctions or concerted efforts being made to isolate Myanmar. For one, any significant retraction in trade relations with the US, or with advanced Western markets more generally, runs the significant risk of strengthening Myanmar-China economic and political relations, a consideration that would be all too familiar for several Biden administration officials who were involved in unwinding economic sanctions during the Obama administration. 

The response so far from Japan, a major aid donor with longstanding close ties to Myanmar, has been nuanced. Japan has called for the release of Aung San Suu Kyi and members of her civilian government as well as a restoration of democracy – while at the same time warning that democratic governments cannot risk breaking ties for fear of strengthening Chinese influence in Myanmar. China has said little about the coup, and prevented an initial UN Security Council statement denouncing the coup on 2 February. For its part, Brunei, as the current ASEAN chair, issued a Chairman’s Statement calling for a ‘return to normalcy’ in Myanmar, but the ASEAN grouping itself has issued no formal statement. 

There is also a recognition that widespread trade sanctions would wreak havoc on Myanmar’s economy and still nascent private sector, while directly hurting a population already struggling mightily from from the Covid-19 pandemic. Many trading partners are therefore likely to seek a balance between condemning the military coup while allowing at least some private sector activity with Myanmar to continue. 

This week’s events demonstrate the fragility of Myanmar’s transition to democracy absent meaningful constitutional reform. The NLD, for the past five years, has operated under the constitution drafted by the military in 2008. All its attempts to reform the constitution have failed. The 2008 constitution requires that any constitutional amendment receive 75% or more of parliamentary votes, a virtual impossibility when 25% of the parliamentary seats are reserved for the military.