Moody's upgrade raises confidence in Thailand

June 23, 2000

AT long last Moody's Investors Service Inc, the powerful US credit-rating agency, has nudged up the long-term sovereign debt of Thailand from "junk" status to investment grade.

By doing so, it provides a major vote of confidence in the Thai economic recovery process, giving the Democrat Party a political boost in the run up to this year's general election.

More importantly, it vindicates the Chuan government - and Finance Minister Tarrin Nimmanahaeminda, in particular - after all the venomous criticism that the Democrats have administered the wrong medicine to the ailing Thai economy.

Moody's upgrade of the Thai sovereign risks, as well as an upgrade to the long-term debt and deposit ratings of 12 Thai banks and financial institutions, marks the end of the beginning of Thai efforts to put the country's economic and financial house in order. To Tarrin, this is a defining moment, one that he has been anxiously awaiting for over the past two-and-a-half years.

The Moody's upgrade reinforces Tarrin's belief that he has taken the country on the best possible course of financial stabilisation, structural reform and economic recovery. Given the slow progress in the economic recovery, there have been initial doubts whether Tarrin and the International Monetary Fund have done additional harm to the Thai economy through their stringent measures. That has been an academic debate, at times marred by political overtones. Eventually, Moody's is the one who makes the final judgement.

Politically, it is a double play for the Democrats. First, they can claim that they have successfully guided the country out of the IMF support programme. It was the New Aspiration Party that took the country into the IMF's custody. And it was the Democrat Party that rescued the country from the crisis and helped Thailand to graduate from the IMF programme.

Second, with the Moody's upgrade, the Democrats can go to the election later this year with a vindication that they have cleaned up most of the financial mess. The remaining task ahead is to address financial-sector reform, corporate-debt restructuring and to lay down the foundation of the country's competitiveness.

Why is the Moody's upgrade so important? Most institutional bond holders and foreign banks rely on the Moody's credit-rating service before investing in a country. Thailand's credit rating was downgraded by Moody's to junk status in December 1997 at the height of the financial crisis. This verdict cut the country off from access to international capital markets. Thailand has had to rely on official money from the IMF support programme, the Miyazawa Fund and export earnings to turn around its current account from a huge deficit to a comfortable surplus.

Moody's focus is on Thailand's ability to service its foreign-currency debts. It does not factor in Thai political instability, as many have feared. Rather it pays closer attention to Thailand's balance of payments or its external accounts. Obviously, Thailand's credit standing should improve drastically because of a massive turnaround in the current account, which makes it less vulnerable to external shocks.

Prior to the crisis, Thailand had been running a huge current-account deficit. That meant that it had to rely on foreign savings to finance its over-investment. This foreign financing, a large part of which was short term, was unsustainable, leading to radical adjustments in the Thai external accounts as well as an abrupt change to the foreign-exchange regime.

In 1997 Thailand ran a current-account deficit of US$3.1 billion (Bt120 billion). But in 1998 it began to rack up a current-account surplus of $12.8 billion and in 1999 $9.1 billion thanks to the export sector. This year, the surplus should continue at $7.7 billion, before easing to $5.4 billion next year, according to an estimate by Salomon Smith Barney.

However, Moody's still keeps the short-term foreign-currency ceilings for notes and deposits as junk status. This is a note of caution that Thailand remains vulnerable to external shocks or abrupt outflows of short-term capital.

Overall, Thailand should be satisfied with the rating, after the crisis. The abrupt change in the credit-rating outlook of the country gives a lesson that in the future the authorities will have to, as noted by Moody's, "maintain prudent and flexible policies that will prevent a re-emergence of imbalances that characterised Thailand's pre-crisis economy."

BY THANONG KHANTHONG