Apr. 20--Recent downgrades by international ratings agencies reflect economic and political risks in Thailand. As a result businesses, especially those with weak financial status, need to do more to prepare funding plans for their long-term investments, according to Kasikorn Research Center.

The market has partially absorbed economic risk over almost the past four years, but Thailand has been facing protracted political tension as well, culminating in the violent street clashes last week.

In downgrading Thailand's ratings last week, both Standard & Poor's and Fitch said political risk and concerns about the stability and authority of the government would affect future economic fundamentals.

S&P downgraded the local currency issuer default rating for Thailand by one step, from BBB+ to BBB. Fitch downgraded the country's long-term foreign and local currency Issuer Default Rating (IDR) to BBB from BBB and to A- from A, respectively, and revised the outlook to stable from negative. It also downgraded the short-term foreign currency IDR to F3 from F2 and the country ceiling to BBB+ from A-.

Given domestic political instability plus the global financial crisis, credit default swaps (CDS) for Thailand stand at high levels about 2 percent over market benchmarks.

Government bonds with A ratings are currently quoted at an interest spread of about 1.39-2.59 percent. If the credit ratings are decreased to BBB, the interest premium will rise to about 3.21-3.71 percent.

In December last year, five international rating agencies: S&P, Fitch, Rating & Investment Information (R&I), Japan Credit Rating Agency (JCR) and Moody's Investors Service downgraded the country's rating outlook from stable to negative though they maintained the overall sovereign ratings.

Thiti Tantikulanan, head of capital markets at Kasikornbank, said new bond issuers, especially by private-sector issuers aiming to sell to institutional or retail investors in Thailand, may not feel much impact as they already resided in the country. However, foreigners are unlikely to buy Thai bonds as they will face a 15 percent tax.

Local corporations usually do not issue bonds in foreign currency because the cost would be around 200 basis points higher as the credit markets overseas lack liquidity.

According to Kasikorn Research, at the end of February, the Thai banking system has excess liquidity of around 1.02 trillion baht. Despite the ratings downgrades, the centre believes that the Thai government and state agencies will still be able to seek financial support or soft loans from international development finance institutions to finance megaproject.

However, in the medium or long term, increasing financial costs might affect businesses operations and funding plans for new investments by the private sector. As a result, businesses should prepare early based on the assumption that credit ratings would not be upgraded.

-----

To see more of the Bangkok Post, or to subscribe to the newspaper, go to http://www.bangkokpost.com.

Copyright (c) 2009, Bangkok Post, Thailand

Distributed by McClatchy-Tribune Information Services.

For reprints, email tmsreprints@permissionsgroup.com, call 800-374-7985 or 847-635-6550, send a fax to 847-635-6968, or write to The Permissions Group Inc., 1247 Milwaukee Ave., Suite 303, Glenview, IL 60025, USA.

A service of YellowBrix, Inc.