Global Insight Perspective

Significance

Global Insight has conducted a reassessment of our sovereign credit assessment for Thailand, considering the impact of the 19 September coup.

Implications

Thailand’s external solvency and liquidity indicators remain sufficiently robust to absorb any temporary capital outflow and subsequent exchange-rate volatility in the uncertain aftermath of the coup. Political risk is also contained by continuing stability in the country reinforced by the crown's endorsement of the military’s actions.

Outlook

The rating will likely remain stable in the interim, barring any severe deterioration in the current situation. Conversely, implementation of an authentic and far-reaching reform programme could mitigate political and economic policy risks currently identified in Thailand’s profile, resulting in an improvement in the overall rating.

Risk Ratings

The medium-term sovereign risk rating for Thailand is affirmed at 35—Supportive Credit Fundamentals, equivalent to BBB on the generic scale. The outlook is also affirmed as stable.

Reassessment in the Wake of the Coup

Global Insight has conducted a review of its sovereign risk ratings for Thailand to assess the impact of the 19 September military coup. Following that evaluation it has been decided to leave the rating unchanged at 35—Supportive Credit Fundamentals, equivalent to BBB on the generic scale. The outlook is also affirmed as stable.

Outlook and Implications

External Balances Remain Robust

The decision to leave the ratings unchanged reflects the politically internalised nature of the coup and its expected limited impact on the external position. Thailand’s sovereign rating is underpinned by strong solvency and liquidity ratios. Foreign-exchange reserves stand at US$60.1 billion (as of 8 September) and are on a rising trend, providing ample import cover. The reserve position has been built up by recurrent current-account surpluses from 2001 onwards, which also allowed for a pay-down of foreign debt that surged prior to the 1997-98 Asian financial crisis. The external-debt-to-foreign-exchange-earnings ratio now stands at 32.6%. The structure of debt has also been fundamentally altered, with a sharp reduction in more volatile short-term debt stocks to less than a third of total liabilities. The debt-service-to-foreign-exchange-earnings ratio subsequently stands at just 8.7%. Further structural support to balance-of-payment stability is provided by the fully flexible exchange rate of the Thai baht.

The cyclical position of the current-account balance has also improved. The current account has moved back into surplus after falling into deficit in 2005. Import growth has slowed following the abolition of fuel subsidies and the slowdown in investment and consumption growth amid recent political uncertainty. Exports have grown strongly, boosted by rising tourism receipts and stable global demand, supporting a sharp narrowing in the trade deficit. Immediate uncertainty in the wake of the military intervention should continue to dampen domestic demand, while export growth is expected to remain robust, supporting further improvement in the net export position.

The improvement in the current-account balance should provide counterbalance to any short-term pressure exerted on the capital account in the event of any outflow of funds from Thailand. However, such a situation does not appear to be materialising, with the Thai baht stabilising following an initial drop after the coup. The Bank of Thailand, the central bank, also confirmed that it has not been forced to intervene on markets to support the currency, indicating relatively stable investor sentiment.

Political Transition Appears Stable

The political situation has to date remained comparatively stable and is underpinned by important recent developments. The coup has received the endorsement of the crown, which is hugely significant in terms of national unity and the legitimacy of any interim government that is to follow. The deposed prime minister, Thaksin Shinawatra, remains out of the country and at the moment marginalised from current proceedings. The temporary military leadership has committed to the appointment of a civilian prime minister within two weeks with an election to follow within a year to allow for the implementation of a sweeping reform programme aimed at fostering a more robust multi-party system, diluting the power of the prime minister, introducing greater transparency into the broad political process, and cutting the ties between politics and the corporate sector. These factors feature prominently in Global Insight’s scoring of Thailand in economic policy and political categories. If such wide-ranging and effective reforms are introduced by the interim administration and a more effective approach is adopted towards the insurgency in the south of the country, the policy and political framework would be strengthened, allowing for a possible positive review of such scores over the medium term.

Risks to the current outlook include any severe deterioration in the current situation that would destabilise investor sentiment. Critical is this regard is the honouring by the interregnum military government of its timetable for the transition to civilian government and the reinstatement, at least in part, of government institutions. The continued full support of the monarchy, the military, and the capital is also fundamental to maintaining the legitimacy of the new administration in the absence of due electoral process. Challenges could come from rural areas, which account for more than 80% of the overall electorate and formerly created a Thaksin voter stronghold. In this regard, the support of the king remains crucial, although a caveat remains in his current ill-state of health. Currently, however, such risks appear contained. Subsequently, Global Insight expects to leave its sovereign ratings on hold, underpinned by the economy’s sturdy financial position and strong economic fundamentals.

Contact: Raul Dary

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