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CREDIT RATING

Moody's upgrades Thailand ratings outlook

By The Nation

Moody's Investors Service has changed the outlook on Thailand's Baa1 local and foreign currency government bond ratings to stable from negative.

Moody's decision to change the outlook was prompted by the robust economic recovery and the stabilisation of government finances despite continuing domestic political turmoil. "The government of Thailand has capably steered the economy through a major external economic shock, and a potentially destabilising domestic crisis," said Christian de Guzman, assistant vice president and Moody's lead sovereign analyst for the country.

In a related action, the country's foreign currency bond ceiling was increased by one notch to A2, with a stable outlook, while the outlook for the Baa1 foreign currency deposit ceiling was changed to stable from negative. The move to a higher bond ceiling is motivated by an assessment of lower moratorium risk.

"The change in the rating outlook back to stable reflects our view that the recent improvements in economic fundamentals adequately compensate for the political uncertainties going forward," de Guzman said.

"Thailand's government finances have stabilised following the implementation of large fiscal stimulus programs at the outset of the crisis, while its improved external payments position provides an ample cushion against volatile capital flows," he added.

The Thai government was able to fashion an effective counter-cyclical policy response without an outsized deterioration in fiscal balances, allaying concerns over policy responsiveness reflected in the prior change in outlook to negative in December 2008. Revenues have risen in line with the cyclical recovery, while expenditures have fallen due to the expiration of key elements of the stimulus packages. Moreover, as deficits have reverted to pre-crisis levels, the central government's stock of debt is expected to stabilise around 28 percent of GDP in 2010.

Since 2006, foreign exchange reserves have nearly trebled to US$169 billion dollars in mid-October 2010 on the back of persistent current account surpluses and large capital inflows more recently. External debt levels have remained manageable as both the government and the private sector have largely been able to meet their financing needs onshore.

Downside risks persist as the economy continues to be heavily reliant on external demand for its goods exports, as well as tourism receipts. There are also a number of potential triggers for further political turmoil in the near to medium-term, including forthcoming court decisions, key anniversaries of political violence, and parliamentary elections to be held before November 2011.

However, aided in part by the government's emphasis on order and security, these risks to political stability are unlikely to translate into a deterioration in government finances nor into a weakened balance of payments, which would have meant an increase in default risk.

On raising the foreign currency bond ceiling to A2, Moody's said that it generally indicates the highest rating that can be assigned to a foreign-currency denominated security issued by an entity subject to the monetary sovereignty of that country. The ceiling assesses the likelihood of a system-wide moratorium on foreign currency debt payments in the event of a sovereign default. The moratorium risk assessment is lowered, taking into account the following factors: the Thai economy's high degree of trade and investment integration into the global system, recent policies aimed at the liberalization of capital outflows, and the government's low reliance on external financing.

The last rating action on Thailand was taken on December 4, 2008, when Moody's changed the outlook on the government's Baa1 ratings to negative from stable.

-- The Nation 2010-10-28