Political ghosts haunt Thailand's sovereign ratings, Fitch says

Sep 1, 2011, 9:13 GMT

Bangkok - Politics is casting a shadow over Thailand's sovereign credit ratings despite a better-than-expected economic performance in 2010 when the kingdom was wracked by violent protests, Fitch Ratings executives said Thursday.

Fitch raised its A- rating on the Thai currency from negative to stable in May, but the credit rating agency said it would continue to watch the country's political developments this year as its main consideration for sovereign risk.

In April to May 2010, Bangkok was rocked by anti-government protests that left 92 people dead and parts of the capital in flames.

The unrest, however, had little impact on the country's economy, which grew 7.8 per cent. Growth was driven by a 28-per-cent jump in exports, which accounted for about 70 per cent of its gross domestic product.

'It's fair to say that the impact on the economy and the public finance has been much less than previously expected,' said Andrew Colquhoun, Fitch's senior director and head of its Asia-Pacific sovereign team.

Thailand held an election on July 3, which passed off without violence or an adverse impact on its fiscal standing.

'In the public finance, we expected there would be more fiscal loosing before the elections, but it didn't happen,' Colquhoun said.

The spending habits of the next government remained under watch.

The polls brought to power the Pheu Thai Party, which romped to victory on a host of populist policies. They included promises to hike the minimum wage an average of 80 per cent nationwide, pay fixed prices for farm products, cut corporate taxes and waive taxes for first-time car and home buyers.

'Fitch will be watching carefully what fiscal strategies the new government pursues,' Colquhoun said. In particular, the credit rating agency would watch to see if public debt is on the rise.

The agency will also be on the lookout for more political unrest.

'The key rating weakness for Thailand is on the structural side and is essentially political risk. ... We can't entirely discount the risk of a downside outcome,' Colquhoun said of the political scene, which has been described as a looming showdown between the establishment and forces for change.

Another risk for the Thai economy comes from the growing economic instability in the United States and Europe, still critical markets for Thai exports.

'I believe that exports will continue to grow along with world trade as long as the EU and US slowdown doesn't create another global recession,' Bank of Thailand Governor Prasarn Trairatvorakul said at a Fitch Ratings presentatation on the country's economic outlook.

The central bank governor noted that over the past decade, Thailand had diversified its markets and products away from dependency on its traditional markets in the US, Europe and Japan.

Thai exports to these traditional markets fell from 50 per cent of the total in 1995 to less than a third at present, Prasarn said.