Thailand's inconclusive elections on Sunday have failed to ease the recent escalation in political tension, and much more prolongation or intensification of the political stand-off could raise the risk of a lasting negative effect on economic performance
Political turmoil is not new in Thailand, and a degree of volatility is factored into the country’s sovereign rating. The Thai economy has withstood the political rupture triggered by the 2006 coup, and other shocks including large-scale flooding in late 2011. Growth in gross domestic product averaged 2.9 per cent from 2008 to 2013, slightly higher than its ratings-peer average of 2.6 per cent.
Fitch thinks political tensions are already weighing on economic activity – evident from a contraction in manufacturing output of about 7 per cent year on year last quarter.
Retail sales growth, along with consumer and business confidence, have plumbed levels last seen at the onset of the extensive flooding in the fourth quarter of 2011. Slackening activity has prompted a substantial 200-basis-point reduction in the authorities’ GDP growth estimates for 2014 to around 3 per cent, and the maintenance of an "accommodative stance" in monetary policy.
The economy is expected to bounce back when political tensions eventually ease, underpinning Fitch’s expectation of 3.5-per-cent growth this year. But more prolonged and intensified political confrontation could eventually impair Thailand’s economic performance relative to its rating peers, and could undermine this credit strength.
A much sharper and more prolonged slowdown than Fitch currently expects could hurt the banking system via deterioration in asset quality. The backdrop is a recent sharp increase in private-sector leverage. Household debt rose to 80 per cent of GDP in the third quarter of last year from 56 per cent at end-2008.
The banking system has strengthened its buffers in recent years. On a system-wide basis, banks have improved their Tier 1 capital ratio to 12.4 per cent of risk-weighted assets from 10.8 per cent in 2008. However, a significant and sustained undershoot of growth relative to expectations could start to erode these buffers.
Thailand’s external position remains credit-supportive, with liquid external assets at well over twice the level of liquid external liabilities, including non-resident holdings of local-currency debt. This compares favourably against the "BBB" ratings median.
For these reasons, the risk of political turmoil leading to pressure on external liquidity remains remote.