Deep political polarisation since 2006 is adding to structural challenges to Thailand's competitiveness, and reform delays could eventually lower the sovereign credit profile, which has largely remained immune to the country's political disturbances, warns Moody's Investors Service.
Moody's feels the May 22 coup has likely, at least for now, halted the deteriorating consumer and investor confidence. But progress in structural economic reforms is likely to hinge on continued lower political uncertainty, or else competitiveness and economic growth could erode further in the medium term, it said in a report entitled "Thailand: Political Polarization Adds to Structural Competitiveness Issues".
The report points out that Thailand's diversified and competitive economy is a credit strength for the Baa1 sovereign government bond rating. Moody's assessment of the country's economic strength is supported by its manufacturing competitiveness. Furthermore, growth remained resilient during politically turbulent periods in 2006, 2008 and 2010.
However, Thailand's growth trend has slowed sharply, with the anti-government protests between November 2013 and May 2014 negatively affecting new investments and implementation of long-term economic measures. Thailand's lead over regional competitors has also been eroding since the September 2006 coup.
Moody's report states the experience during the most recent political unrest shows Thailand's sovereign credit profile has remained largely immune to episodes of political disturbance. Nonetheless, improved political stability is likely to provide a more favourable environment for foreign and domestic private investment, which in turn is needed to complement public investment.
In the meantime, Thailand's credit default swaps (CDSs) have declined 28 basis points to 105.5 basis points from 133.5 basis points on May 22, when the army staged its latest coup, indicating that foreign investors' view of the Thai economy is improving, Bank of Thailand spokeswoman Roong Mallikamas said.
CDS rates of neighbouring countries have also declined but at a slower pace than Thailand's. Malaysia's CDS rate dropped 11.8 basis points and the Philippines' 7.2 basis points.
"A CDS is like an investment fee. A lower CDS rate reflects higher confidence in investment. It illustrates that foreign investors have a better investment view in Asia, particularly Thailand. Typically, such a view results from the baht's strength as fund flows return after their recent sell-off," Mrs Roong said.
However, the baht is the second-strongest currency in the region after Indonesia's rupiah. It has this year risen 3% against the US dollar as of Wednesday.