Bangkok--24 May--Moody's
Moody's Investors Service is maintaining its negative outlook on Thailand's Baa1 rating, and has not taken a more severe rating action as the political conflict has yet to damage its core credit fundamentals to the extent that a more negative action would be warranted at this time. However, a protracted undermining of investor sentiment would have adverse effects on Thailand's longer term credit fundamentals.
"Moody's recognizes that the confrontation which occurred between government and anti-government forces in Bangkok on May 19 was deadly, but we also note that near-term confidence-sensitive indicators have held up well over the past two months, and since 'Red Shirt' protestors began their occupation of central Bangkok," says Tom Byrne, a Moody's Senior Vice President.
"In fact, against this backdrop, the long-end of the yield curve on Thai government bonds has actually shifted down, reflecting what elsewhere would be considered as 'safe haven' characteristics," says Byrne. "The exchange rate has also been relatively stable; and official foreign exchange reserves reached a record high at the end of April and remained almost as high into early May, although we do not know if intervention has helped baht stability during the two weeks."
"Moreover, unlike some press reports, Moody's does not foresee capital flight as a major problem for Thailand," says Byrne.
"Looking ahead, Thailand will likely run a current account surplus again in 2010 and it has a relatively lower dependence compared with most other investment grade governments -- on global financial capital inflows," says Byrne.
"The government does not need to borrow on the global capital market and has a very low level of foreign currency debt. As such, fluctuations in risk premia, as measured in the CDS market, have little bearing on government financing," says Byrne.
Nonetheless, the recent trend in CDS spreads indicates that an up tick has occurred, although it has in large part tracked global trends, which have in turn been driven by concerns over euro-zone sovereign debt.
Thailand's spreads remain in line with other Baa-rated governments.
As for the credit implications for the Thai banking system, it will be important to see the banks opening normally this week, and any continuation of the recent emergency bank holidays would eventually cause chaos to the payments system.
However, beyond the very near term, there is likely to be some negative impact on non-performing loans, particularly in the tourism and hospitality sector.
At the same time, Moody's base case is for only a modest negative impact on asset quality, given that the banks have steadily improved in this area despite the political upheavals of the past four years.
Over a longer time horizon, however, continued political turmoil will have a damaging effect on the real economy. The government has stated that the political conflict and drop in tourism will contribute to a 2 percentage-point reduction in GDP growth for 2010. The outturn, especially if confrontations between the military and protestors flare up again, will likely be more severe, especially for investment in the economy.
On the other hand, if the euro-zone crisis does not halt the global economic recovery, Thailand's export competitiveness should provide enough buoyancy to the economy to keep real GDP growth in positive territory this year, perhaps around 4 percent.
Moody's will continue to monitor events in the upcoming weeks closely and has concerns that the de-escalation of violence seen in the past few days could be short-lived as the main points of contention between the government and the Red Shirts have not been addressed.
Indeed, what seems necessary to bridge the deep political divisions in the country is a return to democratic elections, while statesmanship and leadership from all sides would be necessary to prevent Thailand's economic from suffering fundamental damage.
And such an outcome could eventuate if the confidence of domestic investors is undermined by resurgence in political turmoil and violence.
Moody's changed the outlook on Thailand's Baa1 rating to negative from stable in early December 2008.
The principal methodology that Moody's uses in rating the Kingdom of Thailand is its Sovereign Bond Methodology published in September 2008 and available on www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab.
Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodology sub-directory on Moody's web site.
Singapore
Thomas J. Byrne
Senior Vice President - Regional Credit Officer Sovereign Risk Group
Moody's Singapore Pte Ltd.
JOURNALISTS: (852) 2916-1150
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Singapore
Aninda S. Mitra
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Singapore Pte Ltd.
JOURNALISTS: (852) 2916-1150
SUBSCRIBERS: (65) 6398-8308