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Moody's wary of political deadlock but notes strong fundamentals

Moody's Investors Service warned yesterday that Thailand's political deadlock, if extended into the second half of the year and if conflicts escalate, could trigger a downgrade in the country's credit ratings.

The rating agency affirmed Thailand's sovereign credit ratings, as the political turbulence that has occurred since 2006 has not affected the country's credit fundamentals.

Five factors are highlighted as possible triggers for a rating downgrade. These are prolongation of the deadlock into the second half; an escalation or proliferation of political conflict within Bangkok or proliferation outside Bangkok; an escalation of protests directed towards targets that have a direct impact on economic assets, and which have significant and potentially long-lasting effects on tourism or manufacturing; a significant rise in government funding costs related to domestic political uncertainty or a lapse in fiscal discipline; and a sharp deterioration of the balance of payments and significant loss of official international reserves.

Meanwhile, the rating could be raised upon the following three factors: progress in strengthening public-sector finances, which would include reducing the budget deficit and off-budget spending, as well as limiting contingent fiscal liabilities from populist measures; strengthening of the external payments position, including a return to current-account surpluses; and improvements in the political climate and governance that support long-term stability and government effectiveness.

Moody's affirmed the Thai government bond rating at "Baa1" with a "stable" outlook. Concurrently, it affirmed Thailand's short-term prime-2 debt rating, the (P)"Baa1" MTN/shelf issuance rating, and the "Baa1" Japan bonds/Thai bonds issuance rating.

In a related action, Moody's also affirmed the senior unsecured "Baa1" rating for the Bank of Thailand.

Moody's noted that political infighting and the episodic flare-ups in violent confrontation heightened the domestic political event risk score, which in effect restrains the upward bound of Thailand's indicative rating range.

"Moody's affirmation is based on the view that Thailand's credit fundamentals have withstood the political turbulence in the country since the September 2006 coup. The 'stable' rating outlook reflects the expectation that the recent resurgence in political infighting in Bangkok will not undermine Thailand's credit strengths to a material degree," the credit-rating agency said in a statement.

"Moody's sees that Thailand's credit fundamentals remain intact and are strong enough to weather cyclical pressures on the economy and recurring bouts of political instability."

The decision was influenced by four key drivers that reflect the country's credit strengths: favourable government debt structure; overall prudence of monetary and macroeconomic policy, as well as fiscal management; sustained external strength, despite erosion of the current account; and reasonably strong growth outlook.

On favourable government debt structure, it said the debt was mostly denominated in local currency (over 98 per cent at end-2013) while the maturity was comparatively long at 8.3 years. The rating agency also noted that though the ratio of direct government debt to gross domestic product had been on the rise since 2008 to 32.2 per cent as of end-2013, that was expected to stay at a manageable level, one comparatively lower than the median for similarly rated peers.

On monetary and macroeconomic policy, as well as fiscal management, it commended BOT's successful core-inflation targeting regime, which has helped keep government funding costs low and stable. Current and past episodes of political turbulence have not led to sharp rises in benchmark bond yields.

Thanks to strong anchors - the Fiscal Policy Office (FPO) and the Public Debt Management Office (PDMO) - fiscal-policy formulation and public-debt management are guided by explicit rules that provide checks against potential challenges to fiscal discipline from populist policies and increasing attempts to resort to off-budget financing.

On sustained external strength, Moody's expects small and manageable current-account deficits of below 1 per cent of GDP in 2014 and 2015.

The current account turned into a small deficit in 2012, which almost doubled to US$2.8 billion (Bt91 billion) in 2013 (0.7 per cent of estimated GDP).

Although the share of non-resident investors in the domestic local-currency government bond market has increased since 2009, it remains smaller than for other countries in the region, such as Malaysia or Indonesia.

In addition, ample domestic liquidity mitigates the risk of interest-rate volatility stemming from potential outflows, either from heightened political risk or the further normalisation of monetary policy in advanced markets.

Moreover, Thailand's external vulnerability indicator, which looks at short-term external liabilities in relation to official foreign reserves available at the end of the previous year, compares favourably with the rating peer group, Moody's said.

Moody's does not expect the recent political developments to have a significant impact on Thailand's medium-term growth outlook, which remains favourable when compared with similar-rated peers. While anti-government protests will keep real GDP growth in 2014 at around 3 per cent, assuming a return to political normalisation from the second half, the rating agency sees growth picking up again from 2015 onwards to average 4.5 per cent through to 2018.

This compares with projected average median growth rates of 3.7 per cent for the "Baa" rated peer group and 3.4 per cent for "A" rated peers.


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