Moody's affirms Thailand's Baa1 sovereign rating; outlook stable

Moody's Investors Service has affirmed Thailand's long-term issuer ratings at Baa1 with a stable outlook.

The affirmation is based on the view that Thailand's fundamental credit strengths remain largely intact despite ongoing political confrontations.

The stable rating outlook reflects the expectation that the recent military coup and the lingering political uncertainty will not undermine Thailand's credit strengths to a material degree over the next 12 to 18 months.

Concurrently with this action, Moody's has also affirmed Thailand's short-term Prime-2 commercial paper program rating, the provisional (P)Baa1 MTN/Shelf issuance rating, and the Baa1 Japan Bonds/Thai Bonds issuance rating.

Key drivers for the decision to affirm the rating at Baa1 are: the government's unimpaired ability to manage its finances; strong institutional anchors which are unaffected by the military coup; and sustained external strength.

In a related rating action, Moody's has also affirmed the senior unsecured Baa1 rating for the country's central bank, the Bank of Thailand.

Country ceilings

Thailand's country ceilings remain unchanged. The foreign currency debt ceiling is at A2/P-1, while the foreign currency bank deposit ceiling is at Baa1/P-2.

The country risk ceiling for local currency obligations also remains unchanged at A1. These ceilings act as a cap on ratings that can be assigned to the foreign and local-currency obligations of entities domiciled in the country.

Moody's sees that Thailand's fundamental credit strengths remain largely intact and are strong enough to weather cyclical pressures on the economy and recurring bouts of political instability.

Government's unimpaired ability 

The Thai government's demonstrated ability to manage prudently its debt through times of political turbulence remains unchanged, even after the May 22 military coup d'état, and even against a backdrop of weakened investment and economic performance.

Thailand's favorable debt structure mitigates foreign exchange and refinancing risks, given its reliance on local-currency denominated instruments and the comparatively long average time to maturity of the debt stock, at 7.9 years.

The share of foreign-currency denominated government debt as a portion of overall direct general government debt was below 2% at end-2013, indicating virtually no risk of a currency mismatch in light of the country's ample foreign currency reserves.

Moody's expects direct general government debt levels to stay manageable and comparatively lower than the median for similarly-rated peers.

Fiscal policy formulation and public debt management are guided by explicit fiscal rules, which provide checks against potential challenges to fiscal discipline from off-budget expenditure and financing.

Strong institutional anchors 

Moody's sees three entities as strong institutional anchors for Thailand's rating: the Bank of Thailand, the Fiscal Policy Office. and the Public Debt Management Office. The latter two entities are part of the Ministry of Finance.

For example, Bank of Thailand's successful core inflation targeting regime has helped to keep government funding costs low and stable. Indeed, current and past episodes of political turbulence have not led to sharp rises in benchmark bond yields

Sustained external strength

Moody's expects the current account to shift into surplus of around 1% of GDP in 2014, after small current account deficits in 2012 and 2013.

Although the share of non-resident investors in the domestic local currency government bond market has increased since 2009, it remains smaller than for other countries in the region, like Malaysia (A3 positive) or Indonesia (Baa3 stable).

In addition, ample domestic liquidity mitigates the risk of interest rate volatility stemming from potential outflows, either from heightened political risk or the further normalization of monetary policy in advanced markets.

Moreover, Thailand's external vulnerability indicator, which looks at short-term external liabilities in relation to official foreign reserves available at the end of the previous year, compares favorably to the similarly rated peers.

The stable rating outlook balances Thailand's fundamental credit strengths against challenges arising from polarized politics, rising government debt, and slow progress with regard to fiscal consolidation.

The stable outlook also reflects the fact that Moody's captures Thailand's heightened level of political uncertainty evident since the 2006 military coup d'état, which effectively restrains the upward bound of Thailand's indicative rating range.

Outlook

Moody's says a positive rating outlook or rating upgrade look highly unlikely at this time, but potentially credit-positive developments would include:

(1) an improvement in the political climate and transparent road-map for reforms, that clearly outlines the way from military rule towards a stable civilian government;

(2) progress in strengthening public sector finances, which would include reducing the budget deficit and off-budget spending, as well as limiting contingent fiscal liabilities from populist measures; and/or

(3) a return to pre-political crisis trend economic growth rates.

Factors that could trigger a negative rating outlook or a rating downgrade include:

(1) an escalation of conflict between the military and protesters, resulting in significant and potentially long-lasting effects on tourism or manufacturing;

(2) a significant rise in government funding costs related to domestic political uncertainty or a lapse in fiscal discipline; and/or

(3) a sharp deterioration of the balance of payments and significant loss of official international reserves.

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