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Thailand's credit is good


June 25, 1999 -- FITCH IBCA, the London-based international rating agency, has raised the sovereign rating of Thailand to investment grade, citing a marked improvement in the country's external debt and liquidity conditions.

Fitch IBCA's rating upgrade for Thailand yesterday is in sharp contrast to the report issued by Moody's Investors Services on Tuesday. This gave a highly negative view of the country by stating that all Thai banks were ''heavily insolvent in true economic terms''.

Paul Rawkins, director of sovereign ratings for Fitch IBCA, told The Nation from his London office that the decision to upgrade Thailand's sovereign rating to investment grade reflected the agency's view that the country had made significant progress in improving its external account, had settled all its foreign-exchange swap obligations and had strengthened its external-debt position.

''These were all positive factors when we did our forecast on Thailand,'' Rawkins said. ''The balance of payments remain strong, driven by foreign direct investment, portfolio investment or by non-debt flow of capital.''

Fitch IBCA has upgraded Thailand's long-term foreign currency rating from 'BB+' to 'BBB-' (BBB minus) and the short-term foreign currency rating to 'F3' from 'B'.

Fitch IBCA's move to upgrade the sovereign rating indicates that international rating agencies are divided over Thailand's ability to service its external debts.

Standard & Poor's and Moody's, both US rating agencies, still keep Thailand's sovereign rating below investment grade, putting all the debts issued by the Thai government in the same class as junk bonds.

The implications of the rating upgrade is that it will pave the way for Thailand to return to the international financial markets in full stride, helping the Thai government and subsequently Thai corporates to borrow at cheaper costs from international lenders and investors.

Moreover, foreign investment funds or foreign banks, which have restrained themselves from investing in or lending to countries with a junk rating, are likely to start returning to Thailand to rebuild their presence.

In its statement, Fitch IBCA said: ''Improving external debt and liquidity indicators, combined with the government's unblemished debt-service record, support the uplift in the sovereign long-term foreign-currency rating to investment grade.

''External debt is set on a declining trend and short-term debt as a share of total debt fell to 27 per cent in 1998 from 50 per cent in 1995. Disbursements from an IMF-led financial rescue package have facilitated the unwinding of some US$20 billion of forward foreign-exchange obligations.''

Based on the present trend, Fitch IBCA projected that Thailand's foreign-exchange reserves, which stand at about US$31 billion, could rise to US$50 billion by the end of 2000.

This, it added, can be attributed to the current-account surplus by 7-10 per cent of gross domestic product and by a strengthening of the capital and financial accounts.

Notable in Fitch IBCA's assessment is a recognition of Thailand's decision to tackle the economic and financial woes through market-oriented approaches rather than through heavy government intervention.

''This policy stance is in keeping with its longstanding tradition of limited state intervention, but has sometimes given the impression that the government is dragging its feet,'' the agency said.

''However, Fitch IBCA believes that the government remains unstinting in its pursuit of structural reforms: bank recapitalisation is well advanced and the successful passage of key legislation through Parliament has set the stage for an acceleration of corporate restructuring. Nonetheless, very high levels of non-performing loans indicate that this process still has some way to go.''

Fitch IBCA's rather positive view of the Thai banking sector contrasts with Moody's, whose negative report on Thai banks drew acute criticism from local officials and analysts.

Dr Supachai Panitchpakdi, the deputy prime minister, said Moody's report might be aimed at signalling more caution to investors as capital starts flowing back to the region.

''Moody's may want to create a balance by cautioning against too high capital flows to Asia. If the capital shifts quickly it could create an impact on the market similar to the way in which the US stock market might be affected by the seemingly imminent rise of interest rates,'' he said.




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