Thailand looks for its upgrade

Finance professionals in Thailand are waiting on Moody''s decision on whether to reinstate the country''s investment grade status or not.

Thailand is hoping that it will regain a long-coveted investment grade rating from Moody's once the US agency completes its sovereign review of the Kingdom's Ba1/B1/Not prime credit initiated on April 3. Having placed a country on review for possible upgrade, the agency typically reports back within three months, implying that the Kingdom should know one way or the other by mid-June.

For many analysts, an upgrade is regarded as a fait accompli. Indeed Moody's own sovereign analyst Vincent Truglia told that when a country is on review, "there is a 70% chance that the rating moves in the direction of the review."  Both Fitch and Standard & Poor's already rate Thailand at the lowest investment grade threshold (BBB-) and indeed, the latter never dropped the rating into junk status at any point during the Asian crisis.

For Thailand, full investment grade status will prove a huge psychological boost and enable the country to access the whole gamut of investment grade funds. Coinciding with its exit from IMF tutelage later this month, the move should also provide the government with a firmer platform to contest national elections, now being rumoured for early autumn.

"There has been a bit of a chicken and egg situation going on here," says Lertchai Kochareonrattanakul credit analyst at Merrill Lynch. "Moody's didn't really want to initiate a review until after national elections, but the government doesn't want to call elections until it gets the upgrade and has been waiting to make sure that it does."

Lertchai is of the camp which believes that the Kingdom deserves to be lifted back up. "Maybe debt restructuring has been slower than people wanted, but we believe that we are on our way. Non-performing loan (NPLs) should also drop from 37.24% to about 20% by the end of this year as banks aggresively step up their transfer of bad debt to AMCs."

Moody's Truglia says that he has been particularly encouraged by improvements in the sovereign's liquidity position and figures from the Institute for International Finance (IIF) show that short-term debt has been aggressively cut. From a peak of $41.5 billion at the end of 1995, it had fallen to $14.4 billion by the end of 1999 and is forecast to fall to $5.6 billion at the end of this year. From comprising almost half of overall debt prior to the Asian crisis, short-term debt now stands at a far more healthy level of just under 20%.  

"If IIF's projections are even half right, then the fall by the end of 2000 will be very impressive," says Steve Taran, Salomon Smith Barney's global head of sovereign credit research. "And I definitely think that these projections are plausible.

"Firstly, corporates are restructuring and in the process either paying down their total debt, or doing debt-to-equity swaps. Secondly, corporates are changing the currency composition of their remaining debt. They now borrow in baht, buy dollars in the spot market and then pay off their foreign currency debt as it comes due."

In addition to a more balanced external debt mix, the sovereign has also re-built its reserves to more sustainable levels. From comprising 88% of short-term debt in 1995 ($36 billion), reserves rose to 2.5 times at the end of 1999 ($34 billion) and will in the view of the IIF at least, rise to six times by the end of 2000 ($32.7 billion).

The only possible hiccup stems from concerns about an ongoing battle between the Ministry of Finance and Bank of Thailand over the use of reserves to pay down FIDF debt. Having pitched to use Bt300 billion, the MoF is now believed to have compromised on a lower amount of Bt150 billion.

However, in any sovereign analysis, Moody's now pays far greater attention to a government's contingent liabilities and in line with all the agencies, has moved away from a narrow definition of sovereign risk characterised simply by a sovereign's ability or willingness to pay. Consequently, although the country has won plaudits for bolstering itself against potential liquidity shocks, far greater attention is now being focused on the pace of long-term reform and restructuring in both the financial and corporate sectors.

This has led some analysts to believe that an upgrade can not be taken for granted. HSBC, for example, argues the counter case. Credit analyst Dilip Shahani explains: "The latest economic releases show that Thailand's recovery remains stuck in low gear as excess capacity and lack of speedy progress on the NPLs front continues to impede faster growth prospects."

The landmark restructuring of Thai Petrochemical Industry's (TPI) debt may have opened the door, but it still marks just the first step along a long, long road. So too, the equity market remains one of the region's worse performers this year, slipping 33% since January and closing yesterday at 327.6.

Some analysts have concluded that although Moody's may lift the rating, it is going to be a long while and only after considerably more progress that further upgrades will be considered.

"We expect Thailand to return to investment grade status before the summer solstice," Taran states. "External debt is falling like a rock and the government keeps doing the right things - strengthening bank supervisory functions and introducing bankruptcy law for example. Bank sector problems are also being whittled down, but they are still large enough to leave S&P's BBB- stable outlook on hold."


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