In Thailand, a country plagued by tremendous political uncertainty, one thing looks certain: its capital markets are poised for a quiet second half.
On Wednesday Thailand's constitutional court ordered prime minister Yingluck Shinawatra and nine of her cabinet members to step down, charging her with an abuse of power after she replaced the country's national security chief in 2011 with a relative.
Yingluck is the third prime minister to be removed by Thailand’s judiciary, which has sometimes acted on seemingly trivial offenses. Back in September 2008, Samak Sundaravej was ousted as prime minister for hosting a television cookery show and receiving payment after the Thai court deemed it a conflict of interest.
Thailand has been in a state of political flux for months, ever since Yingluck tried last year to introduce a controversial amnesty bill. Thailand's sovereign credit rating has shown resilience in the face of this turmoil but the economy has slowed down, with economic growth more than halving last year to 2.9% from 6.5% in 2012.
And on Thursday, both Moody's and S&P described Yingluck's removal as a “credit negative” event, while maintaining Thailand's Baa1 and BBB+ credit ratings.
"We think that overall it is credit negative due to the prolonged political uncertainty and a higher likelihood of violent clashes, both of which could be negative for confidence," Singapore-based Moody's analyst Steffen Dyck told FinanceAsia. Moody's forecasts that Thai economic growth will be a tepid 2.7% this year and 3.2% next year.
Reflecting the nonchalance investors have so far shown towards the Thai political rumblings, Thai credit default swap spreads actually tightened by 3bp early Thursday to 117bp amid a generally improved mood in credit markets. Yields on Thai sovereign dollar bonds also barely flinched, rising by an average of just 3bp to 5bp.
However, Thai capital markets have fared less well. According to Dealogic data, the total equity capital raised in Thailand so far this year is $1.3 billion compared with the $7 billion raised over the whole of 2013. One Bangkok-based banker said that a fall in local stock market trading volumes has made it difficult to execute block trades.
Thai debt issuance year-to-date is $7.7 billion, which also leaves it well off the pace set last year when $24.5 billion was raised, Dealogic data shows.
The country is expected to hold elections in July but with little clarity on how soon or when the political turmoil will be resolved, few expect foreign investors to make big-ticket acquisitions in Thailand. “We are not seeing any uptick in inbound M&A into Thailand, as external investors continue to adopt a wait-and-see attitude,” said Chua Soon Ghee, managing partner for Southeast Asia at consultancy firm AT Kearney.
Indeed, potential M&A deals such as ING’s sale of its stake in TMB Bank remains on ice.
One bright spot for bankers, perhaps, is that Thai companies are likely to keep looking overseas as they seek to diversify away from their home country risk. “Thai companies, however, are continuing to see the value of internal market consolidation as well as regional expansion, so we are likely to continue to see domestic or outbound M&A happening unless it involves government approvals,” Chua said.
Another potential mitigating factor is that compared with the Asian financial crisis of 1997, Thailand now has far lower levels of external debt. “Thailand’s share of foreign currency-denominated government debt is very low – about 2% of the total government debt,” Moody’s Dyck said.