The following is the conversation of Fitch Ratings Group' Matt Jamieson, head of Asia Pacific's Research in Fitch's Corporate Ratings Group, with Philip McNicholas in Fitch's Asian Sovereign Rating Team, and Lertchai Kochareonrattanakul in Fitch's Cor
Matt discussed with Philip the potential impact of the floods on Thailand's economy and sovereign ratings, and with Lertchai the likely impact on the operations and ratings for the 22 corporates rated by Fitch in the country. Excerpts of the street interview are provided by Fitch Ratings.
Matt: Philip, what impact do you think the floods will have on the overall Thai economy?
Philip: The impact will clearly be negative for 2011's economic growth. Although a degree of flooding in Thailand's Chao Phraya and Mekong River basins is common at this time of year, on this occasion the extent of the damage is considered the worst in 50 years. In addition to the disruption to Thailand's manufacturing industry, the destruction of rice crops will lower farm incomes and in turn negatively impact domestic consumption. Moreover, the floods may also apply upward pressure on food prices, which is likely to be felt internationally given Thailand's position as Asia's "rice bowl". Notably, Singapore and the Philippines import much of their rice from the Thai Kingdom.
Matt: I note that Fitch is currently forecasting 4 per cent real GDP growth for Thailand in 2011. Do you think this will stand?
Philip: The government believes the floods could shave 1 per cent-1.7 per cent points off 2011 GDP growth. While we believe it is too early to properly gauge the extent of the impact, the bias for our real GDP growth rate for 2011 is to the downside. The floods have disrupted manufacturing in central provinces as well as overall economic activity in Bangkok, which remains Thailand's economic centre, and this will clearly curtail the country's economic growth in 2011. The disruption to the supply chain now extends nationwide, as even manufacturers in the eastern provinces, which so far have been spared from the flooding, have been forced to halt production due to a lack of inputs from suppliers located in central provinces.
Matt: How about the 'BBB'/Stable rating Fitch currently has on Thailand?
Philip: In short we don't expect this to change. While economic growth in 2011 will be negatively impacted as government spending will be higher and tax revenues could take a hit, we don't believe the floods will have a substantial impact on sovereign creditworthiness as there is scope for the public finances to absorb some deterioration at the current rating levels. The medium-term conduct of fiscal policy and the question of whether recent encouraging progress towards political stabilisation can be maintained are more important rating drivers.
Matt: Looking beyond this year, is there a risk that Thailand's economic growth in 2012 could also be negatively impacted?
Philip: Actually we would suggest there could be upside risk to our GDP growth forecast for 2012 which currently stands at 4.5 per cent. This is because once the flood waters recede, reconstruction spending will kick in, manufacturing production will rebound and the current flooding could cause a potential lift to prices of rice crops in early 2012. That said, it remains too early to say when the flooding will peak in terms of damage or when it will start to recede. The local weather experts currently anticipate that October 27 and 28 will mark the peak high tides. In any case, we will be following events closely.
Matt: Thanks Philip. Turning now to focus on the corporates in Thailand, Lertchai can I ask you first of all what corporate sectors so far have received the most damage?
Lertchai: The floods are affecting areas where a number of electronics and auto part manufacturing facilities are located. For example the core plants of major digital single-lens refector (DLSR) camera makers, Nikon and Sony ('BBB'/Stable) were directly damaged by the floods. We understand that the floods have caused Toshiba Corp ('BBB-'/Stable) to halt production at nine factories that make products including hard-disk drives, solid state drives, chips, and household electronics. Also Western Digital had to close two of its hard-drive manufacturing facilities, and subsequently guided for a consequential loss in Q4 and that its normal capacity is likely to be significantly constrained for several quarters. In the auto sector, Honda Motor Corp ('A'/Stable) was forced to suspend operations at its automobile plant in Ayutthaya, and some of Toyota's Motor Corp's ('A'/Stable) facilities, specifically its Camry and Prius production lines, have been disrupted.
Matt: Can I ask more specifically how the corporates rated by Fitch in Thailand are faring?
Lertchai: Out of the 22 corporates Fitch rates in Thailand, two have operational sites in the affected areas, and we have already placed the ratings of SVI Public Company Limited (SVI, 'BBB+(tha)) on Rating Watch Negative.
Matt: Can you tell us more about SVI and why Fitch placed it on Rating Watch Negative?
Lertchai: SVI is an electronic manufacturing service company, making a number of high-end specialized electronic products including digital signal processing audio equipment used by radio and television stations. The company's facilities are located in the Bangkadi Industrial Estate and they were forced to suspend operations at three of its five manufacturing plants due to the flooding. While SVI has insurance for property damage and business interruption, the impact on its operations and financial position could be material. While difficult to quantify exactly, SVI is likely to face revenue disruptions before it is able to return to full production capacity.
Matt: And how about the second corporate which Fitch rates that is being impacted by the floods?
Lertchai: The second company is MBK Public Company Limited (MBK,'A-(tha)'/Stable), and specifically its golf courses and rice packaging facilities could be damaged by the floods However, in this case we don't expect any rating impact as these particular divisions are small contributors to MBK's overall operating cash flows. MBK primarily derives its revenues from the shopping centre business, which is only likely to be indirectly impacted by the floods in the short term.
Matt: Given that the floods are affecting 61 of the country's 71 provinces, wouldn't this suggest that certain corporates with assets spread across the entire country, such as the telecom operators and electricity utilities, are likely to experience a certain amount of damage and disruption to their services?
Lertchai: While it is true that some telecom and electricity transmission assets are likely to be damaged by the floods, Fitch believes the costs to repair or reinstall damaged telecom base station equipment and electricity transmission lines are rather immaterial, and will be partly offset by insurance they have taken out for property damage. However in the short-term, particularly the current quarter, revenue shortfalls are likely due to usage disruption in the flood-damaged areas and the overall economic slowdown.
The majority of mobile subscribers in Thailand are mid- to low-income pre-paid subscribers outside of Bangkok and other metropolitan areas. About 35 per cent-40 per cent of total subscribers are in central provinces of Thailand, where the floods are taking the greatest toll. Accordingly this could put pressure on the operators' revenues, particularly voice revenue, in the short term. For electricity utilities, electricity demand generally tracks economic growth. We expect demand, in particular for the industrial sector, to reduce in Q411 to Q112.
Matt: Finally then, given that you only anticipate the negative impact on revenues to last one or two quarters, will Fitch's ratings for corporates in the telecom and electricity sectors come under any pressure?
Lertchai: No we don't expect the credit ratings of companies in these two sectors to change. The telecom companies under Fitch's coverage (Advanced Info Service Public Company Limited ('BBB+'/Stable) and Total Access Communication Public Company Limited ('BBB'/Stable)) have strong financial profiles and hence flexibility to weather additional costs or lower revenues in the short term. Meanwhile, the dominant players in the electricity utilities are state power utilities, which have somewhat solid financial positions. We also expect the government to continue to provide implicit support for the state power utilities.