Thailand's Coup not an Immediate Ratings Trigger

The military takeover of Thailand's government on 22 May is not in itself a negative sovereign ratings trigger, Fitch Ratings says.

The key factor for Thailand's sovereign credit profile is the speed at which the country can move towards installing an effective, fully-functioning government without sparking a further escalation in political stability. The coup underscores the ongoing political uncertainty, while it does not present an inherent challenge to the establishment of a new process to revert to stable government.

The political reaction to the coup is a short-term wild card. Broad acquiescence to a new military (or military-backed) government, followed by a transparent process towards fresh elections, could ultimately be positive for political and economic stability.

That said, rejection of the coup by key political groups - leading to more intense confrontation - would risk further undermining investor and consumer confidence. If a process for political stabilisation is not in place by early in H2, then we would expect more lasting damage to the economy from ongoing events - that could ultimately be negative for Thailand's sovereign credit.

Fitch expects to revise down its forecast of 2.5% growth for 2014 on the back of the ongoing political uncertainty and weak first quarter data showing that the economy contracted by 0.6% yoy. The government has already cut its growth forecast to a range of 1.5%-2.5%, from an initial 3%-4%.

Thailand's economy is reasonably well-positioned to rebound quickly from short, negative shocks, and this is a factor in the sovereign's 'BBB+' Long-Term Foreign Currency IDR. Macroeconomic buffers are sufficiently robust to withstand stress in the short term, though Thai markets have underperformed their regional peers since the intensification of instability in November, and experienced an outflow of capital. Buffers include a substantial net external creditor position of 35% of GDP, moderate government debt of 32% of GDP, and the track record of the Bank of Thailand in

delivering relatively low and stable inflation.

A key issue for Thailand over the long term is whether the country can overcome deep social cleavages and become governable. Without a stable government able to implement policies promoting growth to break the economy out of a "middle-income trap", Thailand risks slipping behind its regional peers in terms of growth potential and development - the trend growth rate may have slipped to 3%-3.5%, which is low for an economy at its stage of development.


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