Thailand’s creditworthiness risks a downgrade unless long-term political divisions are resolved, say rating agencies.
Tom Byrne, senior vice-president for Moody’s, said the riots in Bangkok and provincial cities since Wednesday night have no immediate impact on long-term foreign currency debt rating, but reinforce a negative outlook.
“Our big concern is that the violence cannot be contained. Without a peaceful resolution, conflicts may continue to erupt from time to time. Even if the UDD ended its occupation of Bangkok, we will still maintain a negative outlook for Thailand,” he said.
Moody’s has maintained Thailand’s rating at Baa1 since 1996, when the country’s classification slipped from A2. But the agency revised Thailand’s outlook from stable – introduced with the coup in 2006 – to negative
when yellow- shirt protesters seized Bangkok’s two airports in 2008. Moody’s currently rates the overseas debt of nine local corporate issuers.
“Over the past week or two, foreign investors have become concerned about operating investment in Thailand, which could result in less investment in Thailand than ordinarily would be the case. There should be peaceful and constructive political resolution between the government and its opponents,” said Mr Byrne.
Thailand now has little need to borrow from the overseas market because of low public debt and high foreign reserves.
The government also has low exposure in the international market, as only 3-4% of government debt is held by foreigners, mostly the Asian Development Bank and the World Bank, he said.
Local funding costs are in line with countries in the region, but loss of confidence among local investors could cause the yield to spike.
Foreign direct investment has decelerated markedly in Thailand, but inflows should continue in 2009 and 2010 due to the secular trend to move production away from advanced economies.
Key risks to the outlook are political uncertainty and the timing of the withdrawal of fiscal and monetary stimulus. Increased political tensions may have a long-lasting impact on investment, and withdrawal of stimulus (in Thailand and the advanced economies) must be precisely timed to avoid macroeconomic imbalances (including new asset bubbles) while also ensuring that the recovery is on a sufficiently solid footing.
Automotive manufacturing in Thailand started 50 years ago after a Japanese company set up operations as an import substitution activity to take advantage of preferential tax and import duty treatment. Laws mandating local content were subsequently introduced, with the limits raised from an initial 30 percent to 40 percent and then 60 percent, to be abolished after the 1997-98 financial crisis.
All pickup truck production prior to the 1997/1998 financial crisis was intended for domestic consumption, but companies began exporting after Japanese pickup producers shifted production from Japan to Thailand at the turn of the century.