This article was written by Michael Lawson, Daisy Mallett, Su Meng and David Phua.
On February 1, Myanmar’s military-owned Myawaddy TV announced that a state of emergency would be imposed in accordance with Articles 417 and 418 of the 2008 Constitution of Myanmar (the “Constitution”) due to alleged fraud in the voter list for the national election held last year. The state of emergency has been announced to be in effect nationwide for a period of one year. Under the current state of emergency, the legislative, executive and judicial powers of the Burmese government will be transferred to Min Aung Hlaing, Commander-in-Chief of the Burmese National Defense Force, and Vice President U Myint Swe will serve as the Acting President.
As of the date of this briefing note, a series of significant events have occurred in quick succession in Myanmar, including:
- the detention by the military of Myanmar President Win Myint and Counsellor Aung San Suu Kyi;
- the assumption by Myanmar Vice President U Myint Swe of the acting president role and announcement that the military has taken over power in accordance with the Constitution;
- widespread disruption and then gradual resumption of the communications network in Myanmar;
- suspension of trading by the Myanmar Yangon Stock Exchange;
- suspension of all domestic flights in, and international flights to and from, Myanmar;
- an announcement by the Myanmar Banking Association of suspension of domestic banking operations; and
- the military’s statement of plans to hold a new general election and announcement of a large-scale government restructuring.
The military has indicated that following a new general election it intends to hand over state power to the newly elected political party and potentially put an early end to the state of emergency. However, the overall situation in Myanmar remains unclear. For some time to come, there will be a high degree of uncertainty around the domestic situation and the international relations between Myanmar and foreign countries. Naturally this will give rise to material risk concerns for foreign investors across all sectors of Myanmar’s economy. This brief note highlights several key risks emerging at this early stage of a fast-developing situation.
1. International sanctions risk
Myanmar has a long history of being subject to sanctions by Western countries. Currently, the United States and certain other countries maintain in effect targeted sanctions against the Burmese military and related persons and businesses. The recent arrest of Aung San Suu Kyi and others has drawn strong opposition from the United States, which has determined that the military’s seizure of power amounts to a coup and at the same time threatened to impose more severe sanctions on Myanmar. In light of this incident, the EU, the UK and Australia have all also condemned the Burmese military for its actions. In addition, the UN Secretary-General has voiced “grave concerns” over the actions of the Burmese military, and the UN Security Council has held closed-door video consultations on the current situation in Myanmar. In Asia, reactions have been somewhat mixed but have tended towards greater nuance and avoidance of strongly worded rhetoric or condemnation.
Foreign investors will need to pay close attention to any developments in terms of new or amended sanctions imposed on dealings with the jurisdiction, relevant entities or individuals, and the scope of any such new or amended sanctions, particularly in view of their potential extraterritorial reach. With the renewed sanctions risk, it is crucial for investors to take appropriate steps to familiarise themselves with the sanctions impact on Myanmar and to ensure compliance in order to avoid breaching relevant sanctions laws.
2. Potential changes in investment policy
As a result of the Myanmar economy being opened following the lifting of the comprehensive sanctions by the United States, there has been a significant inflow of foreign investment, particularly in the oil and gas, power and infrastructure sectors. Although the Myanmar military has stated that it will continue to take measures to promote economic recovery, it is uncertain what changes (if any) the military or a future new government will introduce to the existing law and regulations on foreign investment. The military takeover in Myanmar is likely to have a significant impact on relations with certain foreign countries (particularly Western countries which have already voiced their concerns on the legitimacy of the military takeover), and foreign investors will need to closely monitor policy measures in Myanmar and assess their impact on the local business environment.
In any case, even prior to the state of emergency, there was substantial concern amongst international investors as to viability of their investments in Myanmar, especially in light of the impact of the COVID-19 epidemic which has yet to subside. Coupled with the latest turn of political events and the potential changes in investment policy (which may be driven in part by foreign relations), Myanmar's economic recovery may face additional obstacles and the risk of further deterioration.
3. Project interruption and force majeure
The state of emergency and other related risks could very well lead to delay and disruption in various commercial transactions and projects, for reasons which might include delay in receiving permits/approvals, difficulties in obtaining investment funds or imposition of new international sanctions.
In keeping with other common law jurisdictions, force majeure in Myanmar and under Burmese law is a creature of contract. Whether the state of emergency and related events might constitute “force majeure” (and the effects of any such “force majeure”) excusing a contractual party from performance of an obligation owed to its counterparty will depend on the particular obligation affected, the event said to be preventing its performance, the governing law of the applicable contract and the specific terms of that contract. Even if the event falls within the scope of "force majeure" as defined in the contract, it is still necessary to consider the extent to which the event is actually preventing performance and, then, what rights the contract grants a party to delayed performance or other relief measures (including termination of the contract).
It is not uncommon for certain contracts (e.g. construction contracts and power purchase agreements) to have specific and detailed force majeure clauses. Myanmar’s PPAs are no exception to this and usually include a specific limb for “governmental force majeure”. Conceivably, if the state of emergency leads to a party being unable to fulfil its contractual obligations, this could fall within the scope of that limb (noting that other limbs may also apply depending on the precise nature of the event which is actually said to be preventing performance). Foreign investors and contractors should carefully review the scope and formulation of their "force majeure" clauses and comply with the contractual procedures (such as sending a notice of force majeure in a timely manner) in order to maximise the protections afforded under their contracts. Perhaps a silver lining of the ongoing COVID-19 situation is that our clients and business in general are now more alive than ever to the operation of force majeure regimes in their contractual arrangements – a review will be second nature for many!
Apart from strict legal actions, foreign investors and contractors should actively engage with their transaction counterparties and seek commercially appropriate solutions to mitigate the risks and potential losses arising from the recent events. While force majeure clauses can be a useful means of alleviating the risk of performance failure, it is also important to bear in mind that commercial discussions can (and will often) proceed in tandem with, or in preference to, claims for strict legal relief.
4. Public debt and foreign exchange risks and disruptions in banking system
The declaration of a state of emergency and resulting government instability (or perception thereof) could lead to a precipitous decline in Myanmar's sovereign debt rating. This in turn would reduce the country’s ability to issue public debt, and place pressure on Myanmar's foreign exchange reserves. If it eventuates, this scenario could lead to losses not only for the debt investors but also for foreign investors whose counterparties are Myanmar sovereign entities or whose transactions rely on Myanmar sovereign credit, who are the beneficiaries of Myanmar sovereign guarantees or who receive proceeds denominated in Burmese Kyat. Assuming they are willing in the near term to commit to Myanmar investments in the current environment, foreign investors should seek to minimise currency and sovereign credit risk exposure (for example, by requiring credit support from international banks and, to the extent possible, denominating their transactions in foreign currencies).
The political situation in Myanmar may also cause fluctuations in the exchange rate of the Burmese Kyat against foreign currencies. Foreign investors and contractors whose proceeds are denominated in Burmese Kyat should closely monitor the exchange rate situation, particularly if those arrangements are not hedged. Naturally, a depreciation of the local currency would have a material and adverse impact on their earnings. Again, to the extent permitted by the particular circumstances and contractual arrangements, foreign investors should seek to mitigate their exposure to local currency risk and obtain payment denominated in foreign currency (or look at hedging options) where possible.
As at the date of this note, there is also still uncertainty as to the full reopening of banking operations in Myanmar and potential further disruptions. The suspension or disruption of local bank operations may result in the inability to conduct normal fund payments, or to undertake exchange or settlement operations for projects or transactions in Myanmar, resulting in the inability of enterprises to operate in the usual course. Among other things, foreign investors should examine the terms of relevant contracts (e.g. financing documents) to consider whether there are any clauses which would allow a party an extension of time to perform payment obligations due to delays arising from a disruption in the banking system which is outside of the control of the party.
5. Communication disruptions
Although communications have now been restored in most parts of Myanmar, the previous disruptions led to the suspension of banking operations and stock exchange trading (among other things) in Myanmar. The fallout from these disruptions should be closely monitored by those for whom it is relevant. Continuing communication disruptions may also affect the service of legal documents and the effectiveness and progress of judicial proceedings. As a practical point, foreign investors would be well advised to confirm with the recipient the receipt of relevant documents or instructions by other means as far as possible, and also be prepared for potential delays to communications and legal proceedings.
6. Political risk and insurance
For foreign investors and creditors who have taken out political insurance, now may be a time for careful review of those policies (coverage and exclusions), in anticipation of potential issues and (similar to force majeure considerations) so that they are mindful of measures which should be taken to mitigate the risk of losses being excluded (or coverage reduced) due to breach of the insured's obligations.
Equally, for investors that have already made investments in Myanmar, it may be possible to take advantage of one of Myanmar’s investment treaties to bring claims directly against Myanmar for breaches of any promised investment protections under the relevant investment treaty or free trade agreement. Myanmar has investment treaties with Japan, Thailand, Laos, China, and the Philippines which all permit investor-state dispute settlement, such that an investor may be able to claim damages directly against Myanmar for a reduction in the value of its investment as a result of Myanmar’s acts (including acts attributable to the state – i.e. those of the armed forces, the police, the courts or most other instrumentalities of the state). In addition, Myanmar is a party to the AANZFTA, which gives investors from Australia, NZ, Cambodia, Indonesia, Singapore, Laos, Malaysia, Philippines, Thailand, Vietnam separate rights to bring claims against Myanmar for breach of any of its investment commitments in AANZFTA. Each of the investment treaties and free trade agreements has unique provisions, such that they must be individually consulted to determine the scope of recourse an investor might have.
Given how recent, uncertain and dynamic the events of this week have been, foreign investors should carefully follow ongoing developments with an awareness that the political and commercial environment in Myanmar may continue to change rapidly and with little to no warning. Due to the fundamentally political and sovereign nature of the situation, straightforward solutions to individual investors’ predicaments may be in short supply. Foreign investors should carefully review their existing contractual arrangements and proactively consider potential risk mitigation measures available to them, whether through legal recourse or commercial discussions with counterparties or relevant authorities.
Please contact any of the key contacts listed on this page or your usual KWM contact if you would like to discuss the article or the issues raised in it. This publication is intended to provide a high-level overview of the current situation in Myanmar. It is provided for general informational purposes only and should not be construed as legal advice. King & Wood Mallesons has a foreign law practice in Singapore and is not qualified to advise on Myanmar law. We work closely with local lawyers to support our clients’ needs in Myanmar and other parts of Southeast Asia.