Bangkok--24 May--Moody's Investors Service
Tom Byrne, Senior Vice President - Regional Credit Officer, Sovereign Risk Group, Moody's Singapore Pte Ltd
** Below is extracted from "Moody's Weekly Credit Outlook", May 24, 2010 issue
The conflict in Thailand over the past several weeks led to a deadly confrontation between government and anti-government forces in Bangkok on 19 May. Although this political turmoil is credit negative for Thailand, it has yet to materially weaken investor confidence or the government’s core economic and financial credit fundamentals.
The credit implications for Thai banks depend on whether they open normally next week. A continuation of the emergency bank holidays would eventually cause chaos to the payments system. Beyond the very near term, there is likely to be an increase in non-performing loans, particularly in the tourism and hospitality sector, but with only a modest negative impact.
The Thai Sovereign. Near-term confidence-sensitive indicators have held up well over the past two months since anti-government “red shirt” protestors began their occupation of central Bangkok. The long-end of the yield curve on government bonds has actually shifted down, reflecting what elsewhere would be considered “safe haven” characteristics; the exchange rate has been relatively stable; and official foreign-exchange reserves reached a record high at the end of April. Moreover, contrary to some press reports, we do not foresee capital flight as a major problem.
Thailand, whose government bond rating is Baa1 with a negative outlook, will likely run a current account surplus again in 2010 and has relatively low dependence on global financial capital inflows; 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 credit default swap (CDS) market, have little bearing on government financing. Nonetheless, the recent trend in Thailand’s CDS spreads indicates that although there has been an uptick, it has in large part tracked global trends driven by concerns over eurozone sovereign debt. Thailand’s spreads remain broadly in line with other Baa-rated governments: 5-year spreads were 161 basis points on May 20.
Thai Banks. Our base case is for only a modest negative impact on asset quality as banks have steadily improved asset quality 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 drop in tourism and political conflict will result in a 2% reduction in the growth rate for 2010, at least. The outturn, especially if confrontations between the military and protestors flare up again, will likely be more severe, especially for investment in the economy. However, if the eurozone 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, perhaps around 4%.
The de-escalation of violence at the end of last week could be short-lived as the main points of contention have not been addressed. Deep political divisions in the country persist despite a return to calm. Statesmanship and leadership from all sides appear necessary to prevent Thailand from slipping into an economic abyss. That would happen if domestic investors’ confidence is undermined by resurgence of political conflict and violence.
Hector
Hector Lim
VP/Communications Manager
+61 2 9270 8141 tel
+61 400 355 441 mobile
[email protected]
Moody's Investors Service Pty Limited
Level 10
1 O’Connell Street
Sydney NSW 2000
www.moodys.com