Bangkok--11 Jul--Moody's Investors
On 3 July, the Pheu Thai (PT) party won a majority in Thailand’s (Baa1 stable) parliament, securing 265 seats in the country’s general election and achieving a simple majority over the second-place Democrat party, which won 159 seats. That the PT party was the victor is not as important as the margin of victory, which in and of itself is credit positive since it lays to rest concerns about legitimacy that accompany a close election. Legitimacy, in turn, is particularly important for national reconciliation: political instability since 2006 has constrained the upward trajectory of Thailand’s sovereign rating.
The convincing margin of victory, a lack of electoral violence and the military’s acquiescence to the poll results provide the PT party and Prime Minister-designate Yingluck Shinawatra with a clear mandate to govern that will be very difficult to overturn. In addition, the PT party’s proposed coalition with four other parties further bolsters its broad base of support.
Over the next few months, Thailand’s election results will lead to more investment spending and portfolio inflows, as well as further improvements in market indicators: a day after the election, the benchmark SET Index rose more than 4% and was up around 5% by week’s end, while government bond yields fell and the Thai baht appreciated against the dollar.
There is a general consensus among political observers that fiscal and economic policies are likely to take a decidedly populist turn given the myriad spending promises made by the parties leading up to the election. In particular, many of the PT’s critics presume that expenditures under Yingluck’s administration will emulate the spendthrift policies of her brother, deposed Prime Minister Thaksin Shinawatra. However, full-calendar-year national government deficits under Thaksin from 2001-06 never exceeded 2.5% of GDP, while his government-recorded primary surpluses (excluding interest payments) for five of his six years as premier.
Nevertheless, as the new PT-led government tries to make good on its campaign platform, we expect a worsening of fiscal balances without a severe increase of government debt. Moreover, onshore capital markets can easily absorb additional government debt issuances as evidenced by the government’s sole reliance on baht-denominated debt in recent years. The Bank of Thailand, the central bank, is also likely to offset price pressures arising from a fiscal impulse by preemptively tightening monetary policy, thereby maintaining inflation expectations and the government’s low cost of funding.
Hector Lim
VP/Communications Manager
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+61 400 355 441 mobile
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