Moody's wary of political deadlock

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

Five factors are highlighted, as possible triggers for a rating downgrade, including: (1) a prolonging of the current political deadlock into the second half of 2014; (2) an escalation or proliferation of political conflict within Bangkok or proliferation outside Bangkok; (3) an escalation of protests directed towards targets which directly impact economic assets, and which have significant and potentially long-lasting effects on tourism or manufacturing; (4) a significant rise in government funding costs related to domestic political uncertainty or a lapse in fiscal discipline; (5) a sharp deterioration of the balance of payments and significant loss of official international reserves.

Meanwhile, the rating could be raised upon (1) 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; (2) strengthening of the external payments position, including a return to current account surpluses; (3) 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, Moody's has 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 rating action, Moody's has also affirmed the senior unsecured Baa1 rating for the country's central bank, the Bank of Thailand.

Moody's noted that political infighting and the episodic flare-ups in violent confrontation heightened domestic political event risk score, which effectively 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 is mostly denominated in local currency (over 98 per cent at end-2013) while the maturity is comparatively long at 8.3 years. The rating agency also noted that though direct government debt to GDP ratio has been on the rise since 2008 to 32.2 per cet at of end-2013, that is 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 Bank of Thailand's successful core inflation targeting regime which has helped to keep government funding costs low and stable; indeed, 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), the fiscal policy formulation and public debt management is guided by explicit fiscal rules, which 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 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, like 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 favorably to the rating peer group, Moody's said.

On the growth outlook, 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 to 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 of 2014, the rating agency sees growth picking up again from 2015 onwards to average 4.5 per cent through to 2018 from 2014.

This compares to 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.