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Rating agencies hold faith in Thailand’s fundamentals

28 Jan 2014

Major credit rating agencies are sticking to their stable outlook for the Thai economy, despite the rising political temperature. But strategic investors are becoming less patient.

International rating agencies believe the latest ructions in Thailand’s politics are not yet enough to damage the country’s creditworthiness, but their sanguinity is not being reflected by foreign direct investors, who look set to invest less in the country.

When asked by Asiamoney, Moody’s Investors Service, Standard & Poor’s (S&P) and Fitch Ratings each said that it would take a major disruption of the government’s functioning to affect a drop in the country’s sovereign credit outlook.

“The likelihood of violence becoming widespread in Thailand in a way that will severely disrupt economic activities remains small, even if they have risen recently,” said Kim Eng Tan, senior director, sovereign ratings at S&P.

But business sentiment is being affected by the turmoil, with FDI investors starting to reconsider their plans for the short term. “Investors are being more cautious compared to the [their reaction to the] 2006 protests,” said Steffen Dyck, an analyst in the sovereign risks Group at Moody’s.

The presence of strong competitors for investment in the region, including Indonesia and recently liberalised Myanmar, compounds the risk that protracted instability will indeed mean lost FDI opportunities for the country, despite it possessing a fundamentally healthy economy.

The declaration of the state of emergency in Bangkok on January 22 saw a further escalation of the political instability that has plagued the country over the past few years. Rating agencies note that their current ratings already incorporate this long-term political instability. However, “the situation is lasting longer than expected,” Dyck said.

The agencies concur that “the credit fundamentals are healthy. Public debt is comparatively low, a fiscal deficit at around 3% or 4% [per annum] is not out of control,” added Dyck.

Meanwhile, Thai banks have seen consistent improvements over the last five years on indicators such as Tier 1 capital holdings and non-performing loan ratios.

“It has been a good cycle for the sector” said Parson Singha, senior director for financial institutions at Fitch Ratings. “Rates are still quite low, the banks have the necessary liquidity, for now. But the situation is affecting both sides: banks are becoming more reluctant to lend and corporates are becoming more reluctant to invest.”

Simon Makinson, Allen & Overy’s managing partner in Bangkok added: “The instability could pose a risk to funding prospects although the underlying real economy remains strong. We are predicting that public markets capital raisings are likely to be down due to sentiment and, consequently, this will lead to more activity from banks on the straight lending side. The major Thai banks are well capitalised and likely to have a continuing appetite to lend to the better corporates.”

“There have been some cases of corporates offering higher yields. Still, demand is strong from domestic investors,” Dyck said, which could hold up the market through the current bout of political uncertainty.

The government has called for a snap general election on February 2, but the rating agencies do not see this as a likely solution to the stalemate.

“The government seems intent on proceeding with the elections scheduled for early February…however uncertainties over whether the elections will be successfully conducted remains significant. Moreover, the boycott of the elections by the main opposition Democratic Party means that threats to political stability could remain high even if a new government is elected,” said Tan.

“Elections will be bumpy and likely disrupted. How legitimate can any new government be?” added Dyck.

28 Jan 2014