Saturday, April 10, 2010

Ongoing conflict threatens Thai credit rating

Growth outlook for Thailand clouded by the political situation, and any violence will only make it worse

The ongoing political turmoil is taking a toll on Thailand's credit-rating outlook. On Thursday, the Japan Rating Credit Agency decided to downgrade the Kingdom's local currency long-term senior debt from A plus to A. However, it kept the country's foreign currency long-term senior debts unchanged at A minus, albeit with a negative outlook.

The downgrade came after the growing political chaos forced Prime Minister Abhisit Vejjajiva to declare a state of emergency - or martial law - covering Bangkok and its neighbouring provinces. The government is struggling to restore calm as the red-shirt protesters continue rallying for the government to dissolve Parliament immediately.

Still, the Japan Rating Credit Agency believes that Thailand's competitiveness remains strong, as evidenced in its external account, the robust export sector and the manufacturing sector, which have all gained support from direct foreign investments.

However, the agency warned that if the political scene further deteriorates, it would affect the government's ability to manage economic and public policy. Therefore, the rating agency will continue to keep an eye on:
l The government's ability to restore stability;

l The impact of the global economy on the Thai economy;
l The sustainability of Thailand's fiscal policy;
l Improvement of environmental laws that are conducive to the country's development.
Moody's Investors Service has also come out with a similar warning. It says that the fundamentals of Thailand's credit rating are "darkening" due to the escalating political protests. Moody's is concerned that a worsening situation would affect the effectiveness of government policy as well as economic recovery. It puts Thailand's debt rating on a negative outlook.

The ongoing unrest instigated by the red shirts has so far been bloodless. However, if the protest turns violent, it might reach a point of no return, prompting the rating agencies to downgrade Thailand's credit worthiness.

A poorer credit rating would translate to it becoming more expensive for Thailand to borrow money from overseas. In addition, the interest rate on both government and corporate bonds would have to become higher in order to accompany the higher-risk premium.

Already, the cost of protecting Thai government bonds from default rose to a two-week high after the state of emergency was announced. The credit default swaps on Thai sovereign securities was quoted at a bid rate of 101 and offer rate of 106 basis points by the Royal Bank of Scotland in Singapore. Credit default swaps protect bonds against default and traders use them to speculate on credit quality.

Clearly, the growth outlook for Thailand is certainly clouded by politics. The political situation has become unpredictable and volatile since the state of emergency was imposed. Fortunately, the government has been careful not to crack down on the pro-Thaksin Shinawatra protesters as any eruption of violence would erode the legitimacy of the administration. Instead, it took the red shirts' People Channel off the air and blocked access to 36 websites, many of which have been relaying live broadcasts of the demonstrations.

These actions made the atmosphere even more tense and protesters yesterday stormed the Thaicom station in Pathum Thani. Besides, they've been causing traffic chaos in downtown Bangkok after having taken over the Rajprasong intersection since Saturday.
Yet, despite the growing political risk, the economy is likely to grow by at least 4.5 per cent this year. The Nation, Bangkok

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