Thailand’s political instability has once again come into the limelight with the recent takeover of some ministerial offices by anti-government demonstrators. But widespread disturbances, especially in and around Bangkok, have become an ongoing feature of the political landscape since 2006 without gravely threatening underlying economic or financial stability, says Fitch Ratings.
A degree of political volatility is factored into the ratings. It would take a major impact on growth or investor confidence to trigger negative rating action – which Fitch does not expect to happen.
Growth fundamentals have withstood recurrent political and external shocks relatively well, including the massive floods of late 2011. GDP growth has averaged around 3% year-on-year from 2008-2012, higher than the ‘BBB’ peer average of 2.6%. Moreover, the volatility of GDP activity over a longer time horizon is 3.2pp, only 10bp higher than for Thailand’s rated peers.
Financial fundamentals have also remained resilient
Previous episodes of political upheavals in recent years did not result in discernible outflows of domestic- or foreign-owned capital. Nor did they widen sovereign credit spreads to the extent of hurting government debt dynamics.
All of this does not imply that the credit profile is unassailable. Fitch believes political instability has retarded progress on infrastructure development – and thereby constrained Thailand’s growth and inhibited convergence with its higher-income peers.
Moreover, political noise could increase investor skittishness as the US Fed’s tapering of Quantitative Easing draws closer (even if the timing remains uncertain). Amid the recent emergence of a small current account deficit, Thailand has a combination of above-trend (although slowing) activity, near-zero real interest rates and an anticipated rise in its budget deficit.
The combination of rising financing requirements amid an unsettled political environment and an onset of Fed tapering could thus place potentially greater strain on the sovereign’s credit profile than currently anticipated. But the country’s net external creditor position offers a significant buffer.
Fitch expects the recent political disturbances will dissipate in the run-up to the king’s birthday on 5 December. However, the upshot is that the recurrence of periodic bouts of political instability pressurises the sovereign credit profile to some degree, and constrains any prospect of uplift. But it remains difficult to conceive of an escalation in ongoing disturbances to a scale where they pose a clear and present danger to overall growth or financial stability.