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Fiscal situation threatens Thailand's hopes of rating upgrade

Publication Date : 14-01-2013

 

The Pheu Thai-led government is hopeful of an upgrade in Thailand's sovereign credit rating on the back of impressive economic indicators and political stability, but its own stimulus measures may culminate in the opposite result.

Fiscal fundamentals appear to be the most worrisome aspect when it comes to the outlook for Thailand's credit rating. Stimulus measures like rice pledging or the first-car-buyer scheme are believed to be the main reason, given that they involve both one-time revenue losses and contingency obligations.

Thailand's sovereign credit ratings were downgraded in 2009 because of political instability, which had led to the closure of Suvarnabhumi Airport in 2008 and resulted in riots in subsequent years.

Standard & Poor's Ratings Services has maintained "BBB+" for Thailand's long-term foreign-currency rating with a stable outlook. The third-lowest investment grade rating puts Thailand on a par with South Africa, Kazakhstan and Ireland.

Thailand is now assigned "Baa1" by Moody's Investors Service, indicating the medium grade, with some speculative elements and moderate credit risk.

In 1989, it won "A2", in the cate-gory of countries with upper-medium grades and low credit risk. In 1997, the Kingdom was downgraded four times, to as low as "Ba1".

Since April 2009, Fitch Ratings has maintained a "BBB" long-term foreign currency rating, after a one-notch downgrade from "BBB+" in December 2008.

Sovereign credit ratings usually reflect a country's political, economic, external, fiscal and monetary scores.

Politically, Thailand has demonstrated improved strength compared with 2006, when the military staged a coup d'etat. The situation has also shown marked improvement from 2008, when public protests dampened international investor confidence towards Thailand. Several economists agreed that the bloody protest in 2010, which resulted in more than 90 deaths, had less severe impacts than the 2008 incidents, given that the 2010 repercussions were locally contained.

The monetary score also appears positive, as inflation has been contained despite an influx of capital.

Externally, the Kingdom suffers from a shrinkage in the growth rate of the export sector, which contributes 70 per cent of the country's gross domestic product. However, economic-growth forecasts are as high as 5 per cent for this year, thanks mainly to stimulus measures that give a big boost to domestic consumption as well as the government's massive investment in infrastructure, which has led to a spike in private investment.

Ironically, however, it is these stimulus measures that could derail progress on all fronts.

Stimulus measures boost domestic consumption, but at a cost. The first-car-buyer scheme is estimated to cost a direct revenue loss of 90 billion baht (US$2.9 billion). The scheme to suspend farmers' debt is estimated to cost 280 billion baht, and another 52 billion baht is estimated for the debt suspension for low-income households with outstanding debts of less than 1 million baht, and 2 billion baht for the farmer-credit-card scheme.

But the hottest potato is the rice-pledging scheme.

In the first year of the programme, for the 2011-12 harvest year, the government spent more than 320 billion baht by guaranteeing about 20.57 million tonnes of rice at 15,000 baht per tonne for white rice paddy and 20,000 baht for Hom Mali rice. That was about 4,000  baht more than the prevailing market prices.

For the second year, the government set aside a budget of 240 billion baht for the programme. About 15 million tonnes of rice will be pledged.

The World Bank has estimated that the pledging programme could cost more than 100 billion baht in losses in the first year. That is about 30 per cent of the 350-billion baht budget deficit set for 2013.

These programmes are carried out by state-owned banks such as the Bank of Agriculture and Agricultural Cooperatives, Government Savings Bank and Government Housing Bank. Financed under the public service accounts, these off-balance-sheet losses will be assumed by the government at a later date. If this is no longer counted as off-balance-sheet debt, the government's debt could be higher than 43 per cent of GDP at present.

After Ireland's public debt skyrocketed in the wake of the financial debacle, S&P lowered that country's rating from "A" to "A-" and then to "BBB+". Thailand could face a similar event.

In 2010, S&P's rating for Thailand's foreign-currency long-term debt was on par with that of the Bahamas. The Bahamas' rating is now lowered to "BBB" on the expected increase in government debt from 30 per cent of GDP in 2009 to 40 per cent this year. 

Thailand's public debt will certainly rise once the government needs to borrow, to finance its infrastructure projects worth more than Bt2 trillion.

While public debts are on the rise, the government's revenue is shrinking, chiefly because of the cuts in corporate and individual income-tax rates.

Finance Minister Kittiratt Na-Ranong said in October that he did not care much about sovereign ratings, as the government has rarely borrowed from overseas lenders, which use the ratings as a benchmark. "But the sovereign rating is important, as it reflects on corporate funding costs. Credit-rating agencies should be updated that the Thai economy is solid and there is a chance for an upgrade," he said.

He may be encouraged by S&P's action last year to raise the sovereign rating of the Philippines to "BB" on rising fiscal flexibility and of South Korea to "A+/AA-" on reduced geopolitical risks. But ballooning public debt may delay such an upgrade. Worse, once the threshold debt level is breached, it could affect investor confidence as well as the government's mega-projects.

Notably, the global economy is still in a fragile condition. When in Thailand recently, David Riley, managing director of Fitch Ratings and head of global sovereigns and supranationals, said: "Thailand has a very strong external balance sheet, which will shield it from global shocks."

But when the day comes, will there be sufficient fiscal ammunition left in the Kingdom's arsenal?

*US$1=30.2 baht

 

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