Moody's downgrades four country

Moody's downgrades four country

HONG KONG (AFP): Moody's Investors Service said yesterday it had downgraded the foreign currency credit ratings of Indonesia, Malaysia, South Korea and Thailand in a fresh blow to the struggling Asian economies.

"The East Asian financial crisis has exposed the vulnerability to changes in market confidence of a number of countries that had built up high levels of short-term liabilities," Moody's said in a statement released here.

The outflow of funds from those markets and resulting currency depreciations added to their existing banking sector problems including poor asset quality, it said.

The agency, one of the world's two major assessors of credit risk alongside Standard and Poor's, said weakness in the Japanese economy and banking system added a "further, negative backdrop to the prospects for the region."

"Slow growth in Japan limits the prospects for rapid export growth from the other countries while the problems of Japanese banks limit their ability to maintain lending activity in the region," Moody's said.

While prospects for East Asia in the year ahead were "very challenging," the medium-term outlook was for a return to more rapid growth on a sounder financial footing, it said.

Malaysia's foreign currency ceiling for bonds was downgraded to "A2" from "A1" and for bank deposits to "Baa1" from "A1" while the short-term ceiling for debt and deposits was dropped to "Prime-2" from "Prime-1."

South Korea's foreign currency ceiling for bonds was lowered to "Ba1" from "Baa2" and for bank deposits to "B1" from "Ba2."

Thailand's foreign currency ceiling for bonds was dropped to "Ba1" from "Baa3" and its "B1" ceiling for bank deposits was confirmed.

The action against South Korea was due to concern that its near-term foreign currency financing needs may be greater than first expected, "suggesting that the balance of payments support program led by the IMF may have less margin for error."

South Korea's available foreign exchange reserves had dropped below the gross level previously disclosed, Moody's said, urging the new government to implement economic reform and adjustment.

In Malaysia, the downgrade was caused by its increased vulnerability to financial instability in the region and potential problems in the banking sector due to slower economic growth, an overbuilt property sector and strains on corporate finance.

"The steep fall in the ringgit and in the country's stock market are exacerbating these problems," Moody's said, noting however that the "A2" rating reflected sound fiscal management and relatively low external debt.

Thailand's rating was cut due to concern over its credit and financial fundamentals, the agency said.

"The new government has started a long and difficult adjustment process," the statement said, "however, domestic political conditions may limit progress in this area."

Thai junk bonds

The news that the US-based agency had cut Thailand's foreign currency ceiling for bonds to "Ba1" from "Baa3" sent immediate jitters through the financial markets, speeding up the fall of the Thai baht.

"This means that Thai instruments are now junk bonds," an analyst at Vickers Ballas and Co. Pty Ltd. said in Bangkok.

"It is very bad news for the Thai economy as it worsens the macroeconomic outlook, making Thailand and especially Thai bonds far less attractive to foreign investors," he added.

The latest downgrade flung Thailand's debt issues from the last rung of investor grade status into the realm of junk bonds as the entire region is battered by a financial storm.

The move means that "nobody will want to buy Thai bonds which will cut off an important source of cash for the government and will further hit the already critical status of liquidity here," the Vickers Ballas analyst said.

Another expert at a major western bank said the move could also affect the crucial rollover of Thailand's short-term foreign debt as investors become increasingly nervous of the country's economic outlook.

"It is most certainly not good news for Thailand," he said, adding that some -- mainly US -- institutions were barred from buying any issues ranked lower than investment grade.

Thailand has US$37 billion in short-term official loans as well as $72 billion in private sector foreign loans.

Their rollover is crucial to Thailand, with both the public and the private sector facing an unprecedented liquidity crisis which is strangling importers, exporters, as well as the financial and banking sectors.