Thailand's foreign currency rating cut

Thailand's foreign currency rating cut

TOKYO (AFP): The Japan Bond Research Institute downgraded yesterday Thailand's long-term foreign currency rating, affecting 90 billion yen (US$800 million) worth of samurai bond issues.

In lowering its rating from "AA-minus" to "A-plus," the institute said Thailand's economic slowdown was being driven by the same factors which triggered the bursting of Japan's bubble economy in the early 1990's.

"Thailand's strong economic fundamentals, which have underpinned its creditworthiness in the past, will be affected adversely by the recently-started economic slowdown, proceeding with asset deflation caused by excessive investment," a statement said.

"Economic growth will recede faster than expected because of a number of structural problems," the institute said. "Substantial time will have to transpire before recovery sets in.

"The reason for this is that Thailand is being faced with the same sort of asset deflation experienced by Japan at the start of the 1990s, which was characterized by the collapse of the real estate and stock market booms and a subsequent long period of dull markets."

While Thailand can be expected to achieve higher growth than Japan, "the government has only a limited scope to implement the fiscal and monetary policies necessary for economic recovery, as at least in the short term its priority remain the stabilization of the external balance."

"For example, in order to secure the inflow of external funds, the government will have to maintain interest rates at high levels," it said.

The institute welcomed government efforts to address external imbalances rather than stimulate the economy but noted that Thailand had experienced three waves of speculative attacks on the baht over the past ten months.

"It is expected that unstable overseas capital movements, including currency speculation, will persist for a considerable time," it warned.

"To avoid foreign currency liquidity risks and to give the government greater scope for its monetary policy, the external financial situation must be stabilized by restoring international confidence in the strength of Thailand's domestic economy and the efficacy of the government's policies.

"Also, a stable currency is important in attracting foreign direct investment which has played a major role in forming the industrial export base of the country," the statement said.

The institute said government policies were "bearing fruit" with the current account deficit narrowing, the growth of short- term debt "under control" and foreign exchange reserves remaining at a "high" level.

"Nevertheless, if recovery is delayed, dissatisfaction with the government's present policies could grow, placing the government in a difficult situation," it said. "So the government does not have much time on its hands."

The institute also assigned a first-time short-term foreign currency rating of "A-1" to the country, noting that short-term borrowings accounted for 43.6 percent of Thailand's external debt at the end of 1996.

Such an exposure had left Thailand's foreign currency liquidity more vulnerable to international fund movements than that in other Asian countries.

"However, most of these short-term funds are procured through the Bangkok International Banking Facility," it said.

"In addition, a large proportion consists of finance provided for the local investments of foreign companies through the local branches of foreign banks, and as such comprise funds borrowed from the headquarters in the relevant country.

"Therefore, only some 50 percent to 60 percent of short-term borrowings are unstable, so the problems regarding this debt structure are not as great as they might originally appear. In addition, such short-term borrowings can be covered adequately out of foreign exchange reserves," it said.