Bangkok--4 Dec--Moody's
Moody's Investors Service has today changed the outlook on Thailand's Baa1 foreign- and local currency government ratings to negative from stable. Thailand's A3 foreign currency bond country ceiling and Baa1 foreign currency deposit ceiling also have a negative outlook. The rating action has been prompted by the adverse effects that the current heightened political uncertainty are having on the Thai economy, which could undermine the government's creditworthiness if not checked.
"The inability of the country's judicial and executive branches to prevent civil disobedience from causing major dislocations, not only with regard to the occupation of Government House, but also the airport seizures of the past week in Bangkok, suggest that Thailand's institutional strengths have become compromised," says Tom Byrne, a Moody's Senior Vice President based in Singapore.
"Additionally, political polarization in the country has widened and may not be easily cauterized by the Constitutional Court's decision forcing Prime Minister Somchai Wongsawat to step down from office and politics,"
says Byrne, also the author of a Moody's special comment released today on the outlook for Thailand, entitled 'Thailand's Dysfunctional Politics Are Creating Economic Challenges and May Raise Event Risk,' which can be found at www.moodys.com.
While the risk of a sudden, sharp fall in Thailand's Baa1 government bond rating has been considered to be low, the ongoing political discord suggests that event risk may be rising. At the least, the recent events add to downward pressures on the country's economic prospects coming from the global financial crisis. This could adversely affect Thailand's credit fundamentals if its institutions are incapable of defusing a dysfunctional and destructive political dynamic.
Thailand was not highly exposed to the financial shocks coming from abroad over the past year—external debt has been substantially repaid and official foreign exchange reserves built up in response to the financial crisis a decade earlier. More recently, monetary policy has helped eliminate high inflation and the exchange rate has not been as volatile as other regional currencies, despite the political turmoil.
As a result, Thailand's credit fundamentals have held up fairly well so far, but the deepening global recession is starting to have a corrosive effect on Thailand's trade-dependent economy. Domestic political discord will exacerbate the negative effect. Moody's has therefore lowered its economic growth forecast and adjusted downward the balance of payments outlook for Thailand in 2009.
Should political turbulence continue, Thailand's hobbled government may not be able to fashion an effective policy response to the challenges presented by the deepening global recession, with the Thai economy possibly sinking into recession as a result.
Moody's said that further negative rating movement would be prompted by heightened political instability that significantly undermines confidence.
This could be reflected in a collapse of FDI inflows or a sharp drop official foreign exchange reserves, or in an assessment that Thailand's economic strength would be fundamentally weakened.
The last rating action with respect to the Kingdom of Thailand was in September 2006 when we affirmed all ratings and maintained a stable outlook following the September 19th coup. The last rating action changing the ratings was in November 2003 when the government foreign-currency bond rating was raised to Baa1 from Baa3, with a stable outlook.
The principal methodology used in rating the government of Thailand is Moody's Sovereign Bond Methodology, which can be found at www.moodys.com in the Credit Policy & Methodologies directory, in the Ratings Methodologies subdirectory. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Credit Policy & Methodologies directory on Moody's website.
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Singapore
Thomas J. Byrne
Senior Vice President - Regional Credit Officer Sovereign Risk Group Moody's Singapore Pte Ltd.
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Singapore
Aninda S. Mitra
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Singapore Pte Ltd.
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