Thailand Rating Raised by Fitch on Yingluck Stability

Thailand’s credit rating was restored to BBB+ by Fitch Ratings four years after political turmoil prompted a cut, signaling confidence in Prime Minister Yingluck Shinawatra’s ability to maintain social stability.

The long-term foreign currency-denominated debt was raised one step by Fitch to three levels above junk on March 8, bringing the rating back in line with rankings by Standard & Poor’s and Moody’s Investors Service. The outlook is stable.

Yingluck has sought to avert political tensions since taking power in 2011 by shelving measures that would bring back Thaksin Shinawatra, her brother who was ousted as prime minister in a coup seven years ago. The upgrade comes as her government prepares a bill to spend 2 trillion baht ($67 billion) by 2020 on high-speed trains and mass-transit networks.

The upgrade “adds more to the attractiveness of the country, and equity markets will take it quite positively,” said Vikas Kawatra, head of institutional broking at Maybank Kim Eng Securities (Thailand) Pcl, the country’s biggest brokerage. “Things are going fine and there’s no need for Thaksin or Yingluck to make any radical moves.”

Yingluck last year raised minimum wages and unveiled incentives for car buyers and rice farmers to boost domestic demand and counter falling exports. Economic growth surged last quarter after a slump in the corresponding period in 2011, when the worst floods in almost 70 years disrupted production for manufacturers from Western Digital Corp. (WDC) to Honda Motor Co.

Improved Image

“This will benefit our country a lot,” Yingluck told reporters on March 8. “We can borrow at cheaper rates. Our credibility will be better. Our overall image will be better.”

Thailand’s local-currency debt returned 3.6 percent in the past year, trailing a 14 percent gain in the Philippine peso notes, 11 percent advance for Indonesia and 3.7 percent gain for Malaysia, according to indexes compiled by HSBC Holdings Plc. Only Singapore, among five major Southeast Asian countries, returned less than Thailand at 2.3 percent.

Investors are paying less attention to the views of ratings companies and relying more on their own analysis. Yields on sovereign securities moved in the opposite direction from what ratings suggested in 53 percent of the 32 upgrades, downgrades and changes in credit outlook last year, according to data compiled by Bloomberg. That’s worse than the longer-term average of 47 percent, based on more than 300 changes since 1974.

The Thai baht is the best performer in Asia this year among the 11 most active Asian currencies tracked by Bloomberg. The benchmark SET Index (SET) has risen 13 percent in that time.

Appropriate Rating

Bank of Thailand Governor Prasarn Trairatvorakul said the rating is appropriate for Thailand’s economy and will mean lower borrowing costs for the government and private companies.

“Actually I want to see a higher rating,” Prasarn told reporters on March 9. “We should look into the rating agencies’ conditions and try to comply. Many have suggested that we should take care of our fiscal spending and political unrest.”

Thaksin has lived overseas since fleeing a 2008 jail sentence on charges stemming from a military-appointed panel after the coup. Yingluck has shelved proposals to pass a broad amnesty that would include Thaksin and change the constitution to give more power to elected officials.

Since taking office, Yingluck’s party has made inroads in the capital, which had been a bastion of support for the opposition Democrat party since Thaksin’s ouster. Bangkok Governor Sukhumbhand Paribatra, the Democrat incumbent, retained his post this month with a margin of less than 10 percentage points, the smallest in the past four governor elections won by his party since 2004.

Emergency Rule

“Fitch has revised its assessment of the risks to policy predictability and the investment environment from political and social tensions,” the ratings company said. “The government led by Yingluck Shinawatra has consolidated its position and has faced no serious extra-legal challenges since its election in July 2011.”

Fitch lowered Thailand’s rating on April 16, 2009, days after then-Prime Minister Abhisit Vejjajiva imposed emergency rule and called off a regional summit of Asian leaders. Protesters known as Red Shirts stormed the meeting venue calling for the resignation of Abhisit, a Democrat who had taken power five months earlier after a court used a clause in the post-coup constitution to disband a party of Thaksin’s allies.

In 2010, the Thaksin-backed Red Shirts regrouped for a 10- week occupation of parts of Bangkok that ended in a military assault, arson attacks and more than 90 deaths. The following year, Yingluck became Thailand’s first female prime minister after her party won a parliamentary majority in national elections by pledging to lift minimum wages and raising rural incomes through higher rice prices.

Resilient Economy

Southeast Asia’s second-largest economy has been “resilient to repeated shocks,” including the flooding crisis in late 2011, supported by flexible monetary and exchange rate polices, Fitch said. The investment rate has also accelerated in recent years, it said.

The Bank of Thailand held interest rates for a third straight meeting last month after the economy grew faster than estimated last quarter. The bank has resisted the government’s calls for lower borrowing costs to curb capital inflows that boosted the baht to a 17-month high in January.

“The Bank of Thailand has sustained consumer price inflation in the low single digits for more than a decade and the record of price stability compares favorably with ’BBB’ peers, enhancing the capacity of the economy to absorb shocks,” Fitch said.

Fiscal Discipline

Fitch said it expects the budget to remain consistent with the broader public debt to gross domestic product ratio remaining below 50 percent even with the government’s planned increase in infrastructure spending. The debt-to-GDP ratio was 30 percent at the end of the fiscal year on Sept. 30, it said.

Over the long-term, the government plans to invest in infrastructure to increase imports and reduce pressure on the currency, Finance Minister Kittiratt Na-Ranong said in a Jan. 24 interview. The government approved the 2 trillion baht infrastructure-spending plan last month, which will need parliament’s approval.

The Democrat party, while supportive of infrastructure investments, plans to oppose the government’s moves to borrow money through a special law because it’s unnecessary and leads to a lack of transparency, according to Korn Chatikavanij, the party’s deputy leader and a former finance minister. The party also estimates that Yingluck’s rice program will lead to losses of about 200 billion baht per year, he said.

“If all governments feel that they can have a budget in deficit and on top of that borrow without limits through off- budget bills such as this, I can tell you that fiscal discipline will go down the tubes,” Korn said by phone. “What looks like a sustainable level of debt can easily balloon.”

Thailand’s Cabinet last month approved a budget draft that calls for a deficit of 250 billion baht in fiscal 2014, narrowing from 300 billion baht in fiscal 2013.

To contact the reporters on this story: Shamim Adam in Singapore at sadam2@bloomberg.net; Daniel Ten Kate in Bangkok at dtenkate@bloomberg.net

To contact the editors responsible for this story: Stephanie Phang at sphang@bloomberg.net; Peter Hirschberg at phirschberg@bloomberg.net

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