Bad credit rating or not, the outlook doesn't look good

Moody’s officials have been visiting Thailand over the past months. They have specifically raised concern over the cost of the rice price-pledging programme and the political stability of the Kingdom. 

Like many others, Moody’s is confused and concerned by the potential losses of the Thai government from the damaging rice-price scheme. Fresh estimates have implied losses of Bt200 billion for the 2011-2012 harvest year. The World Bank earlier put the losses at Bt115 billion. But the Finance Ministry has sought to play down the losses, saying that they could range between Bt70 billion and Bt100 billion. The Thai government so far has ploughed more than Bt600 billion into the policy of buying every single grain of rice from farmers at prices significantly higher than the market rates.

The losses from the rice scheme have aroused concern from Moody’s that the Thai government might not be able to balance its budget by 2017. “The Thai authorities appear committed to maintaining the scheme unchanged. These recent losses, and any future losses from the unmodified rice buying scheme, increase the difficulty of the government’s task of reaching its goal of a balanced budget by 2017, and are credit negative for Thailand,” Moody’s said.

Deputy Prime Minister Kittiratt Na Ranong has been taken aback by the sudden Moody’s announcement. Finance Ministry officials can no longer sit still. Kittiratt, in particular, has been banking on economic success via relatively high gross domestic product growth and a stock market boom. A Moody’s change of outlook for Thailand could complicate the economic management strategy. Both the Bank of Thailand and the Thailand Development Research Institute have come out to warn that a Moody’s downgrade could result in higher borrowing costs for the Kingdom as a whole.

On Tuesday, Prime Minister Yingluck Shinawatra said she had instructed the Finance Ministry to closely monitor Moody’s analysis, and confirmed that the government was ready to provide the agency with complete information prior to a rating downgrade.

Asked why the government did not clarify the rice scheme’s loss to the public, the premier said the figures were still unofficial. Even Yingluck does not know the actual potential losses from the rice scheme. A TISCO report played down the concern of a downgrade. It said: “Thailand’s current rating is Baa1 with stable outlook by Moody’s. We think in the worst-case scenario Moody’s is likely to downgrade the outlook (not the rating) before a rating downgrade, as Moody’s usually does. There are some cases when a rating downgrade came before an outlook downgrade, such as Greece and Egypt, due to their potential defaults. However, this should not be the case for Thailand.” 

Regarding the risks of the commercial banks’ subordinated debt, Moody’s said it has put the outlook for the banks’ subordinated debt to negative because regulars in Thailand and the region are more reluctant to provide a 100 per cent bailout for the financial system, like in the past. The banks whose subordinated debts are under review are Bangkok Bank, KasikornBank and Siam Commercial Bank.

While Moody’s power to sway the emerging markets remains strong, the question is whether we should continue to heed its warnings. The role of the credit rating agencies is very controversial. All the major rating agencies – Standard & Poor’s, Moody’s and Fitch Rating – failed to predict the Wall Street crisis that resulted in the collapse of US markets in 2008. They failed to warn investors about the true risks of the credit default swaps of Wall Street banks and AIG. Standard & Poor’s has run into a brick wall following its downgrade of the US government sovereign outlook, threatening to remove the triple A status of US government debt.

The rating practices of the credit rating agencies have raised questions about their credibility. Many euro zone countries are facing abnormally higher unemployment, banking crises, unsustainable sovereign debt and negative GDP growth, but the ratings assigned to these countries remain relatively high compared to the emerging-market countries.

Although we should exercise caution about the rating assignments of the credit rating agencies, this does not mean that the Thai government is doing a fine job with its fiscal management. The losses from the rice price-pledging scheme, the future debts associated with the water management programme (of Bt350 billion) and the infrastructure projects (of Bt2 trillion) – not to mention the losses of the state-controlled banks – will certainly put the country’s fiscal position under pressure and raise the country’s public debt. The outlook for Thailand, with or without Moody’s warning, is negative indeed.