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Populism, political conflict hurt Thailand credit rating

Publication Date : 14-01-2013

 

Thailand is convinced it deserves an "A" sovereign credit rating, but several fiscal measures and renewed political tensions are now clouding the prospects of an immediate upgrade.

Deputy Prime Minister Kittiratt Na-Ranong, who is also finance minister, will today brief analysts from Moody's Investors Service on the country's economic picture and fiscal policies, Ekniti Nitithanprapas, deputy director-general of the Fiscal Policy Office, said yesterday.

The international ratings agency is conducting its annual review of the Kingdom's sovereign rating.

Thailand's long-term foreign currency rating has been downgraded by Moody's from "A2" in 1989 to "Baa1" currently, and by S&P from as high as "A" before the 1997 financial crisis to "BBB+". Fitch Ratings has assigned the country a "BBB".

Thailand is ready for a promotion, given its ability to withstand global economic weaknesses, Ekniti said. Its foreign reserves stand at 48 per cent of gross domestic product (GDP), while countries with an "A" rating from Moody's are at only 18 per cent.

Thailand's foreign debt is only 6.9 per cent of its total public debt, and public debt was at a modest level of 43.27 per cent of GDP as of October.

"High foreign reserves and low foreign debt support economic stability," he said.

However, a source said rating agencies are now concerned about Thailand's generous populist policies and rising political friction.

The agencies' analysts fear that fiscal discipline may be compromised. Public debt is low now but could surge in the future due to the policies as well as massive infrastructure investment.

The rice-pledging scheme, which the World Bank expects will cause a 115-billion baht (US$3.7 billion) loss from the 2011-12 harvest, is a red flag. Since several populist policies are implemented through state-owned banks, rating agencies are also alarmed about off-budget liabilities.

Virabongsa Ramangkura, the economic adviser to Prime Minister Yingluck Shinawatra, has suggested that the government reduce its holding in PTT so that it would no longer count as a state enterprise and its debts would not have to be included in public debts. This would give the government more borrowing capacity without pushing public debt above the threshold of 60 per cent of GDP, he has said.

Political strife is viewed by rating agencies as possibly intensifying and jeopardising the country's credit rating, the source said.

The Pheu Thai-led government is pressing ahead with a constitutional amendment, while some patriots are mobilising public support as Thailand's chances of winning the international court case on the Preah Vihear Temple grow slimmer.

"Compared with its peers [countries with the same rating], Thailand has demonstrated impressive growth and resilience. Yet, on its own path, Thailand has not yet shown stark improvement," the source said.

Tan Kim Eng, Standard & Poor's Ratings Services analytical manager for sovereign ratings in Asia-Pacific, noted that Thailand's government debt is essentially lower than that of its peers, but political instability remains high, which poses problems for public investment projects.

Higher credit ratings equal lower default risks, allowing countries to issue bonds at reduced cost.

 

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