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Fitch warns on political impasse

Continued stalemate may hurt sovereign rating

A continuation of the Thai political impasse through the latter half of the year would be credit-negative, and likely to prompt a review of the country's sovereign rating, Fitch Ratings said yesterday.

This is in line with the guidance Fitch gave at the time of its March review of Thailand's ratings.

Meanwhile, a local mutual-fund firm expects the SET Index to fall to 1,300 points because of the political upheaval.

The Stock Exchange of Thailand's main index yesterday dipped 1.65 points to close at 1,377.37, on thin trading volume of Bt26.1 billion.

As Fitch highlighted in its March review, failure to establish a functioning government by midyear would have a major impact on medium-term capital investment, consumer confidence and fiscal planning.

Domestic demand is already expected to be soft this year, resulting in a forecast growth rate in real gross domestic product of 2.5 per cent.

The resulting drag of protracted political uncertainty on the economy would bring Thailand's long-term growth rate further below its "BBB" range peers, placing negative pressure on its sovereign credit profile, said the ratings agency.

Political risk is heightened by Wednesday's Constitutional Court decision to remove caretaker prime minister Yingluck Shinawatra and nine of her senior ministers from office, and the decision the following day by the National Anti-Corruption Commission to indict her on dereliction-of-duty charges.

Pro- and anti-government street rallies are scheduled in the coming weeks, and the judicial decisions are likely to act as a focal point for pro-government supporters. Should elections scheduled for July 20 be delayed or cancelled, it would significantly increase the probability that Thailand will not have a fully functioning government for the remainder of the year, Fitch said.

Such a scenario could also increase the risks to the Kingdom's basic political stability, it added.

Prolonged political drift risks a broader negative effect on Thailand's credit fundamentals. Fitch estimated the country's potential growth rate may have slackened to about 3 per cent in its March review - a very low rate for a country at Thailand's income level, and related to repeated delays in strengthening key infrastructure.

Nation held back

This in turn holds the nation back from breaking free of the low-investment "middle-income trap" equilibrium in which it has languished since the Asian financial crisis in 1997, said the ratings firm.

Win Udomrachtavanich, chief executive officer of mutual-fund operator One Asset Management, said the SET Index's moving range over the next two weeks would be 1,300-1,450 points.

"If the political situation intensifies during the next few days, the stock market will be hit and will fall nearly as low as 1,300 points," he said.

On the other hand, if the situation eased - that is, the anti-government protesters led by the People's Democratic Reform Committee were to stop their activities and the current Cabinet members agreed to resign - this would be reflected by the market positively, which could push the SET Index up to 1,450 points.

"New foreign inflows are expected to be stable until a new government is formed," said the CEO.

However, in the year to May 8, foreign investors were still net buyers to the tune of Bt16.74 billion in the bourse, according to SET data.

Meanwhile, BBL Asset Management said it would take this opportunity to adjust its investment portfolios by giving more weigh to auto-parts stocks.

The fund firm believes the sector is close to bottoming out and will rebound over the rest of the year, said managing director Peerapong Jirasevijinda.

Suphin Mechuchep, managing director of JLL, an international property services and consultancy firm, said increased political uncertainty would damage Bangkok's real-estate market further, although property prices were unlikely to fall in the short term.

Increased political uncertainty will generally have a negative impact on investment sentiment in the real-estate market as it has dampened investor confidence, she said, adding that it is also expected to affect demand negatively in different property sectors.

For example, demand in the Bangkok hotel market is likely to soften further as news in international media reporting fears over new political violence in the capital could affect visitor arrivals to the city.

The Bangkok office market is likely to feel the least impact, as tenants are locked into multi-year lease agreements and there has been no clear sign of companies with offices in the city downsizing or shutting down operations.

However, growth in demand from new business set-ups will continue to slow, Suphin said.


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