Inconclusive Thai Elections Leave Tensions Unresolved

Thailand's inconclusive elections of 2 February have failed to ease the recent escalation in political tension. Fitch Ratings feels that much further prolongation or intensification of the five-month political stand-off could raise the risk of a lasting negative effect on economic performance and financial stability relative to its rating peers.


Political turmoil is not new, and a degree of volatility is factored into the sovereign rating. The Thai economy has withstood the political rupture since 2006, and other shocks including large-scale flooding in late 2011. GDP growth has averaged 2.9% between 2008 and 2013, slightly higher than its ratings peer average of 2.6%.


Nonetheless, Fitch thinks political tensions are already weighing on economic activity - evident from a contraction in manufacturing output of around 7% yoy in 4Q13. Meanwhile, retail sales growth, along with consumer and business confidence, have plumbed to levels last seen at the onset of the extensive flooding in 4Q11.


Slackening activity has prompted a substantial (200bp) reduction in the authorities' GDP growth estimates for 2014 to around 3%, and the maintenance of an "accommodative stance" in monetary policy.


"We expect the Thai economy will bounce back when political tensions eventually ease, underpinning our expectation of 3.5% growth in 2014," says the ratings agency. "But more prolonged and intensified political confrontation could eventually impair Thailand's economic performance relative to its rating peers, and which could undermine this credit strength."


A much sharper and more prolonged slowdown than Fitch currently expects could hurt the banking system via a deterioration in asset quality. The backdrop is a recent sharp increase in private sector leverage. Household debt rose to 80% of GDP 3Q13 from 56% at end-2008. Fitch acknowledges the banking system has strengthened its buffers in recent years. On a system-wide basis, Thai banks have improved their Tier 1 capital ratio to 12.4% of risk-weighted assets, up from 10.8% in 2008. But a significant and sustained undershoot of growth relative to expectations could start to erode these buffers.


Thailand's external position remains credit-supportive, with liquid external assets at well over twice the level of liquid external liabilities (including non-resident holdings of local-currency debt), and which compares favourably against the 'BBB' ratings median. For these reasons, the risk of political turmoil leading to pressure on external liquidity remains remote.


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