Thai riots weaken outlook

Standard & Poor's lowers its local currency rating for Thailand after anti-government protests turn violent.

Standard & Poor's yesterday lowered Thailand's local currency rating, saying that news footage of violent clashes on the streets of Bangkok were likely to spook foreign investors and cause further economic disruption. S&P dropped the ratings by a notch to A-, in response to the troubles of the holiday weekend, and affirmed its negative outlook.

"The rating downgrade reflects the latest deterioration in the Thai political situation, which has diminished further the prospects of a near-term return to stability," said Standard & Poor's credit analyst Kim Eng Tan. "We believe that investor confidence has been damaged significantly as a result of the latest developments, while in the near term, inbound tourism will also be affected negatively."

Thailand's political environment has been unstable since former prime minister Thaksin Shinawatra was ousted in 2006, and even before then, but the protests of this past weekend -- the culmination of a three-week siege of the prime minister's office -- were the first to really turn violent. Two people were killed, according to official government numbers, and prime minister Abhisit Vejjajiva was forced to declare a state of emergency on Sunday after Thaksin's supporters overwhelmed police lines and stormed a convention centre in Pattaya that was hosting a high-profile meeting of Asian leaders.

The levels of violence have prompted a backlash from the public, including many who initially supported the demonstrations, particularly as they came during the Thai new year celebrations of Songkran. The protest leaders yesterday responded to this by calling an end to the siege of Government House.

Until now, foreign investors had been sanguine about the political situation, preferring to view it as a stalemate rather than a tinderbox. Many still take that view, but pessimism is on the rise.

It has long been clear that Thailand is suffering from an intractable confrontation between its two main political parties -- one that is populist, pro-Thaksin and supported by the rural poor; and the other, which is elitist, anti-Thaksin and supported by the urban middle classes.

That confrontation was unremarkable so long as it was expressed at the ballot box, but the recent problems stem from Thailand's failure to solve its problems democratically. The mob of yellow-shirted protesters that took over Bangkok's main international airport last year won a pyrrhic victory -- toppling a legitimate government by causing mass chaos was never likely to be a good recipe for stable governance.

And so it has proved. In copying their rivals' tactics, the red-shirted Thaksin supporters have raised significant doubts about how Thailand can move beyond this impasse. The red shirts, who are more numerous than their opponents, are right to think that their democratic voice has been unfairly silenced. The yellow shirts are right to think that Thaksin was corrupt and that he and his allies buy votes with soft loans and open bribes. And never the twain shall meet.

"Thailand has been considered an attractive investment destination in recent years, but investors are now likely to factor in the negative implications of political uncertainty in making their decisions," said S&P.

So far, the sovereign credit rating remains unchanged at triple-B, supported by the fact that Thailand will have a projected $130 billion of foreign reserves by the end of 2009 and is not overly burdened by government debt -- S&P projects it will reach $70 billion by the end of the year -- combined with prudent fiscal management.

Even so, S&P's outlook remains negative on fears of a "serious and sustained worsening of fiscal and economic indicators".

The local currency downgrade has not affected the ratings of any of Thailand's banks, but the agency revised the outlook of its counterparty credit and financial strength ratings on three local insurers to negative from stable: Bangkok Insurance, Thai Life Insurance and Thai Reinsurance.

"As the companies hold a high proportion of domestic investments within their investment portfolios and their businesses are concentrated in the domestic market, they are not immune from the impact of the sovereign rating change," said S&P in a separate statement.

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