Moody's: Thailand's Strong Rating Fundamentals Increasingly Challenged by Politics

Moody's Investors Service says that Thailand's Baa1 government bond rating with a stable outlook remains underpinned by the government's strong financial position, marked by low funding costs and a favorable debt structure, and also by limited external vulnerabilities.


In many respects, Thailand's credit metrics remain well positioned compared with its immediate rating peers.


However, if the current political deadlock in the country continues into the second half of 2014 or if the political conflict escalates and results in protracted negative consequences on the tourism or manufacturing sectors, such developments would be credit negative.


Moreover, a significant rise in government funding costs or a sharp deterioration in the balance of payments position and a significant loss of official international reserves would also be credit negative.


Nonetheless, while it remains unclear when a new round of elections in the country will be held, Moody's says that the anti-government protests and the ensuing political deadlock are not currently at a point where they would prompt rating downgrades, despite having a negative impact on the country's growth performance.


Moody's conclusions were contained in its just-released "Credit Analysis: Thailand, Government of" which serves as an update to investors and is not a rating action. Moody's looks at four factors and assesses them as follows for Thailand: economic strength -- moderate (+); institutional strength -- moderate (+); government financial strength -- very high; and susceptibility to event risk -- moderate (+).


The new report notes that Thailand's deeply polarized domestic political situation poses the main credit challenge, and heightened political event risk is and has been a key constraint for the country's ratings.


According to the report, the anti-government protests -- which started in late October 2013 -- are negatively affecting Thailand's growth outlook for 2014 and 2015, and could over time, erode its key credit strengths.


In particular, growth in 2014 and 2015 will be negatively affected by delayed public and private investment, and dampened consumer confidence. Moody's report says Thailand's GDP growth rates will likely slow to less than 3% on average for both years, well below the average of 3.8% growth over the past 10 years.


Moreover, Moody's anticipates cyclical pressures on Thailand's banking sector, driven by a challenging macroeconomic environment and the continued political crisis. According to Moody's, credit growth will slow materially, resulting in deteriorating asset quality in some areas.


Nonetheless, the report also points out that Thailand's core strength, its government debt carrying capacity, stems from pro-active and credible debt and monetary policy management. In addition, external vulnerabilities are limited by its high stock of official foreign exchange reserves in relation to short-term external debt payments.


Moody's report adds that while an upward rating movement is unlikely in the next 12 to 18 months, given the political situation in Thailand, any progress in strengthening public sector finances, which would include reducing the budget deficit and off-budget spending, as well as limiting contingent fiscal liabilities associated with populist measures would be credit positive.


Improvements in the political climate and governance that support long-term stability and government effectiveness would also be positive.


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