Violence threatens sovereign ratings

Standard & Poor's Ratings Services said the probability that the sovereign credit ratings on Thailand could be lowered was increasing, following the events of the past two weeks.

"Thailand has been expected to maintain its current sovereign ratings in the next one to two years in the absence of serious widespread violence," said S&P credit analyst Kim Eng Tan. "This reflects the above-average credit strength of the sovereign within the 'BBB' ratings category."

In a special comment released on Tuesday, Thomas Byrne, the Singapore-based senior vice president at Moody's Sovereign Risk Group, said: "Escalating political uncertainties - in view of the stand-off between protesters and the country's coalition government - do pose a threat to not only the democratically elected government of Prime Minister Samak Sundaravej, but also to long-term economic stability."

While Tan's concerns involved the developments in the past two weeks, Byrne said the rise in political uncertainty over the past couple of months - coupled with a mixed economic performance - was clouding the economic horizon, making a restoration of investor confidence doubtful even in the near future.

"The occupation of Government House and the siege of the Phuket and Krabi airports by the so-called People's Alliance for Democracy calls into question not only the viability of democracy in Thailand, but also the political neutrality of the court system, which has failed to enforce its own injunction against the actions of the PAD," Byrne said.

"If counter-demonstrations by the ruling party-friendly Democratic Alliance Against Dictatorship match the intensity and disruptiveness of the PAD, then a polarisation could intensify to the point where political stability is jeopardised, thus raising the spectre of intervention again by the army."

S&P noted that an outbreak of serious widespread violence in the country would cause a sharper deterioration of credit factors. Political risks would escalate to worsen the policy environment further.

Moody's added that more stress seemed to be building up on Thailand's external payments position compared with what happened in the wake of the September 2006 coup. Official foreign exchange reserves are declining from their May peak, although they are still large enough to cushion against any shocks related to foreign creditor confidence in the near term.

Economic growth could fall markedly as domestic demand weakens further. Inbound tourism and foreign direct investment would also decline. Even as revenue is expected to fall in this scenario, pressures for spending will increase.

The stability of current and future governments is now less predictable, given the precedence of extra-constitutional measures and the reliance on interventions from the monarchy, Byrne said.