Casualties of War

G2

continued from yesterday
Where are the people
For people with resources or contacts, war will force them to move onto greener pastures as economic migrants in other countries. Almost every day, we hear news of illegal Myanmar workers being detained and captured in Thailand. Malaysia is clamping down further on illegals, and they have stopped the intake of overseas workers in the foreseeable future. Myanmar’s next generation is caught in a dilemma between staying at home in a war-torn country or becoming an illegal migrant and possibly an enslaved person in one of the neighbouring realms.
Going back to the mid-East, out of 3.1 million West Bank residents, 200,000 factory workers commute to work in Israel every day. They are all out of work now after Israel removed their permits. In Myanmar, too, employers are having to cherry-pick among the scarce supply of labour, limiting the selection to those who were neither involved in CDM nor terror activities. In addition to that, there is a recent outflow of youth amid fake news on military call-ups and forced enlistments, and businesses are caught between the devil and the deep blue sea, especially relating to IT personnel. Based on the hind side, the government could have killed two birds with one stone by excluding IT personnel from enlistment. Potential development of the digital economy while retaining IT talent at home!

Moribund Patient
WWI came as a shock. Until one week beforehand, prices in bond, currency, stock and money markets barely budged. Thus, everyone is caught unprepared for the worst to come. Right now, Russia-Ukraine, Hamas-Israeli, and other Middle East conflicts are keeping all the military powers occupied and their resources committed to these fronts. If China does decide to take advantage of and settle the Taiwan issue once and for all, America could go for three salient at once. WWIII then becomes a distinct possibility.
Even if investors expect a war, there is little that they can do to profit from it. How do you divest and unload your holdings within days or weeks, with the sudden closure of exchange banks and regulations changing for the worse? Think about the banking crisis of 2022 here. All depositors are caught with billions in local banks, having to fork out percentages in under-table fees in return for withdrawing their own money. Yet, no two crises are alike. Different wars have different winning and losing financial and investment combinations. Unscrupulous people in business adapt to taking advantage of shortages of essential commodities such as fuel, which ends up making the average Joe poorer through exorbitant pricing of indispensable goods. Hence, government action on gold, currency, edible oil traders and brokers for their exploitative behaviours seemed well justified.
The fog of war is thicker for investors than it is for military generals. Only in hindsight, future historians might wonder about the seeming insouciance of today’s investors because the fog would have been cleared by then. From 11 January, the US-UK warships started attacking Houthi strongholds in Yemen. Five days later, Israel fired a targeted barrage into Lebanon, targeting Hezbollah, backed by Iran. Neither the US nor Iran wants a full-blown war. Yet, actions are leading towards it. Before the Hamas attack, 1/5 of average Middle Eastern country exports, from Israeli technology to Gulf oil, were sent to somewhere else in the region. Now, routes that transport more than half of all goods are blocked. Intra-regional trade has collapsed. Myanmar is facing the collapse of a similar nature. The cost of shipping has risen because of continued attacks, sending many exporters operating on razor-thin margins out of business in months to come. The Red Sea used to handle 10 per cent of global shipping. Since Houthi began launching missiles and drones, shipping volumes have dropped to just 30 per cent of normal levels. The oil giant Shell has been staying away from the Red Sea since 16 January.
Because of continuing clashes, border trade routes got blocked, disrupting cross-border shipments and devastating local economies. Most productive industries are being battered. Growing hardship threatens to spark even more violence, corruption and abuse of power within fledgling civil service. This year, economic growth is likely to be negative, with a significantly reduced volume of official trade. Manufacturers no longer have the raw materials (imported) needed to operate their factories. Inadequacy in electricity supply has caused many to run at losses or cease production totally to avoid losses.
Those who rely on aid also suffer during war. Case in point – for crisis-stricken Sudan, the Red Sea is the sole entry point for aid, none of which has reached 25 million people in need since January of this year. Egypt is in financial ruin as it’s in danger of losing most of the US$9 billion revenue from tolls on the Suez Canal. Jordan suffering from forgone tourism, which contributes 15 per cent of GDP. Other Gulf states have seen tourist numbers dip. In the month after the Hamas attacks, international arrivals to Jordan fell by more than 50 per cent.
The rich may have resources and alternative income streams to persevere in the face of conflicts, but the poor, who are already on the floor of daily survival, cannot further downgrade their standards of living. Myanmar poor could end up having to survive on scavenging the trash in the worst-case scenario. Many people in the border regions have been displaced. Many people in industries such as tourism are out of jobs. Together with sanctions, foreign tourists have deserted Myanmar on the advice of their home governments. The inbound tourist figures remained at a minuscule percentage in neighbouring countries. Lack of international trade also means limited buyers even for the goods well demanded overseas. In Mandalay jade markets, local sellers have to accept rock bottom prices offered by the Chinese brokers with forced smiles.
Myanmar is becoming a weakling in the region in terms of infrastructure for years to come. Unending terrorist attacks on electricity towers, railroads and bridges resulted in the government having to defend against these attacks, prevent further onslaught and repair the damage, all at the same time. Repairs do not come cheap, either. They could not have come at a more inopportune time, especially when the country is facing a US dollar crunch.

For Whom the Bell Tolls
Kyat has sunk to its lowest level against the US dollar. CBM kept on selling foreign currencies to pop up the kyat, but with limited resources, it may not be able to hold out for long. A few remaining and struggling firms have cut growth forecasts and downgraded business opportunities in coming years.
Already the lowest per capita GDP in ASEAN since 2017, this civil war is taking a toll on each of us, as we are all bound together in this beautiful land of ours. Never-ending conflicts have transformed Myanmar from being the most well-off nation in Southeast Asia to now the poorest of them all. Wars and disputes did pose a serious threat to the economy. As an example, in the 1973 Yom Kippur War, the cost of weapons and drafting 200,000 reservists cost Israel 3.8 per cent of its GDP.
Essentially, the government has three vital challenges: employment, the collapse of private consumption and the financial cost of the conflict. With the whole armed forces on standby, plus calling upon young men who are the most productive workers of ideal ages, we are in uncharted territory where there are not enough skilled workers to fuel the economy. Hence, there is a tight labour market. Most of what we have left is extra low-skilled labour. For instance, most farm workers do not even know that they have to remove the plastic bag when transplanting the seedlings. Believe it or not!
The second challenge is the collapse of private consumption: Uncertainty, fear of repeated attacks, inflation, and increased cost of living have caused people to change their consumption patterns by staying at home, empty restaurants and shopping malls. Shops have few customers and lower spending. Tourism grinds to a halt. Border towns cleared out, putting a stop to many economic activities in border regions where terrorists camp especially. With more natural disasters expected during the rainy season, more handouts for families and displaced persons are expected, a further drain on government coffers.
Finally, the financial cost of conflict – rescuing businesses, paying enlistees, housing displaced population, plus an enormous increase in defence spending. The debt-to-GDP ratio is likely to increase. So would budget deficits as a percentage of GDP. Reduced government revenues are expected, with the tax base crumbling. More extended war means more destruction, and as mentioned above, reconstruction will not be cheap.
Even the mighty Russia did not go unaffected. President Putin had said, “Illegitimate restrictions imposed on the Russian economy in the medium term may indeed have a negative impact on it.” The casualties of war this time would have unprecedented consequences, including severe and long-lasting economic costs.
The government has to find ways to withstand the fusillade of sanctions. It has supplied enough men and materials for war so far. The decline in living standards is not yet so visible. Myanmar has survived long periods of sanctions before. Because of big holes in the sanctions regime and with a few good men (countries) to rely upon, Myanmar has found ways around some of the restrictions that initially harmed it.
Foreign governments have frozen millions in government accounts. So far, the government has found ways to rely less on the US dollar through settlements in currencies of neighbouring countries.
As Sun Tzu said, “Prolonged warfare drains the nation’s resources, dulls your forces and blunts your edge.” Finding enough people to keep the war effort going would become a challenge. The morale of the people and soldiers would become low. Specialist workers, IT, engineers and lawyers will become incredibly scarce. The only question would be how the general public maintains the living standards and how much the government has to fork out more to prop up whatever is left of the economy before finally handing over the ruins of the day to the next government after the elections in 2025!

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