Sovereign rating at risk, says Fitch

The warning from the creditrating agency echoes earlier alerts made by other international rating agencies.

On September 2, Standard & Poor's Ratings Services said the possibility of the Kingdom's sovereign credit ratings being lowered had risen following the events of the previous two weeks.

A senior executive from Moody's Investor Service said last week that mounting political uncertainty definitely posed a threat to both the government and longterm economic stability.

Meanwhile, a UN official also said yesterday that Thailand would do much better in terms of economic and social development if its political conflict could be resolved.

Speaking at Fitch's annual conference yesterday, James McCormack, the company's head of Asia Sovereigns, expressed his concern over the political instability, saying there is no clear direction of where the country is heading.

"Unique in Asia, all of Thailand's governance indicators are deteriorating over time," McCormack told participants, referring to World Bank 2007 indicators.

He warned that tourism had been adversely impacted and if the effect were to spread to the broader economy, it would begin to impinge on the nation's economic fundamentals.

"While sovereign credit fundamentals remain sound, ongoing political uncertainty may eventually undermine the country's ratings, particularly if economic growth were to slow significantly, capital flows were to accelerate, or economic policymaking were further disrupted," he said.

He warned that if country's ratings were to be downgraded, it would probably sharply push up the cost of overseas borrowing for both the government and private firms.

The Finance Ministry recently reported that borrowing costs had already risen by 0.4 per cent due to the political turmoil. McCormack said this was, however, a small rise and costs had the potential to jump much higher.

Fitch will conduct a full review of the country's sovereign rating during January and February, he added.

The USbased agency currently rates Thailand as investment grade, BBB+ with a stable outlook.

McCormack is worried about high inflation in Thailand and the rest of Asia, as regulators previously responded slowly to the issue. The Bank of Thailand kept the policy interest rate too low in the past, he said. However, he does not expect the central bank to raise its rate again due to the bleak economic outlook for the second half of the year.

McCormack does not believe Thai exports can remain strong for long amid a slowdown in the global economy. Nor does he foresee domestic demand substituting for an export slowdown. Lower export growth would reduce consumer purchasing power, he warned.

Thailand and the rest of Asia cannot decouple themselves from the economic slowdown in the United States. Consumer spending in the US is so important for the world economy, he said, but the US now faces negative employment growth and a continued fall in house prices.

The US economy may not recover until the end of next year, he added.

Vincent Milton, head of Fitch's Thai office, said that if political troubles continued it could impact the ratings outlook next year.

However, MR Pridiyathorn Devakula, a former finance minister, was optimistic that farmers' rising incomes, derived from the high prices of major agricultural products, would maintain domestic consumption.

At a separate event, Noeleen Heyzer, under secretarygeneral of the United Nations and executive secretary of the Economic and Social Commission for Asia and the Pacific, said Thailand was ahead of many countries in terms of poverty reduction, universal public health and education services.

"[However] the country could do much better if the political conflict could be resolved," she added.