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A Moody's upgrade could boost the Democrats

June 9, 2000

LAST week, analysts from Moody's Investors Service Inc, the powerful US credit rating agency, were snooping around Bangkok looking for signs for an upgrade of Thai sovereign risks to an investment grade. Moody's is the only agency that still rates Thai sovereign debts as "junk bonds". Rival agencies Standard and Poor's and Fitch IBCA Ltd already rate Thailand at investment grade. Earlier there were reports that Moody's would decide by mid-June whether it would upgrade Thai sovereign risks to investment grade.

A sovereign upgrade from Moody's would have far-reaching economic and political implications for Thailand in general and the Democrat Party in particular. In its Market Focus, issued on June 6th, DBS Bank said that Moody's is likely to raise Thailand's credit rating back to an investment grade by the end of the year. It argued that a Moody's upgrade would be a reason for the Democrats to declare an election.

 

With its tenure waning fast, the Chuan government has been making last-ditch cosmetic changes to appease Moody's as the Democrats eye a political comeback.

"We also understand that the Thai government is exerting a lot of pressure on Moody's so as to improve its chances of a re-election," DBS Bank's Market Focus said. "Moral suasion is indeed a powerful weapon. The rating record of Moody's, when compared with S&P and Fitch IBCA, speaks volumes.

"Overall, we think it is prudent for Moody's to wait after the election before deciding on an upgrade as political instability is one of the risks. Thai elections have to be called soon and the Chuan government is trying to influence Moody's for its own agenda. We argue that while it is still too early to see a total transformation overnight (especially in the North where we think money politics will prevail), the momentum for a new change of government is gaining.

"This momentum may be a signal that Thaksin's (Shinawatra) Thai Rak Thai Party, which markets itself as the mouthpiece for Thais who want change, will be the only credible opposition to Chuan come the general election this year. The issue that we have with Thaksin is his fragmented party policies. How do you expect to run a country when you have close to 10 deputy leaders?"

Indeed, with its tenure waning fast, the Chuan government has been making last-ditch cosmetic changes to appease Moody's as the Democrats eye a political comeback. Moreover, a ratings upgrade would also coincide with Thailand's graduation from the International Monetary Fund support programme. These two events would give the Democrats a political boost during the campaign in the next general election. They would be able to go out to the voters saying that in December 1997 they stepped in at the height of the crisis to save Thailand from complete economic ruin and successfully put the country back on a growth path.

We witnessed Finance Minister Tarrin Nimmanahaeminda coming out strongly to assure that there would not be a second round of economic crisis as the stock market slumped to new lows. He worked hard to argue that the Thai economic recovery was on track. "Just be patient. We have been swimming for quite a while and soon we'll reach the shore," he said about three weeks ago.

Tarrin's PR efforts have been rather frantic ahead of the Moody's country visit to Thailand. Tarrin worked strenuously to bring Thailand's fiscal position under control. He risked his political popularity by moving to snap up Bt130 billion from the foreign exchange reserves to partially reduce the debt load of the Financial Institutions Development Fund, which is somewhere between Bt800 billion and Bt1.2 trillion.

Tarrin also established a framework for non-performing loans in the banking system to fall, by whatever means, from 36 per cent to about 7 per cent by the end of the year. He tried to push for the 2001 budget and passage of an amendment to the Bank of Thailand Act. He produced figures from the Board of Investment to show that applications for foreign direct investment in Thailand in the first five months of this year grew by more than 60 per cent. He accelerated the sale of Siam City Bank.

As Dr Ammar Siamwalla, the well-known economist, used to note, it is "politically incorrect" for anybody to associate with the finance minister, given the economic crisis weighing on the country. But he said he sympathised with Tarrin, given all the constraints and the hard decisions that the finance minister had to make over the past three years as he dealt with a series of economic and financial crises.

For now, sentiment appears to be improving. The baht has been firmer against the US dollar after initial volatility. The stock market, which dipped below 300 points at one time, has been staging a technical rebound. But Thailand is still beset by structural problems, ranging from excess capacity, high public debt, and a weak banking system.

The major risk weighing on Thailand is a slowdown in the US economy, because Thailand exports about 25 per cent of its manufactured goods to the US. If there is a global slump, as the Bank for International Settlements has warned, it will hit Thailand rather hard. Moreover, with government debts climbing to more than 50 per cent of gross domestic product, there will be less room for it to resort to fiscal stimulus if there is a global economic meltdown.

But that is the future. For now the Democrats are betting that if they get support from the Moody's upgrade, they can at least gain some sympathy for their track record in tackling the economic crisis. Unfortunately, they are facing an electorate that is growing hostile. That again raises the spectre of political uncertainties for a struggling Thailand three years deep into the crisis.

BY THANONG KHANTHONG

 

 

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