Monday, October 24, 2011

Moody's: Thai govt finances in good order despite severe floods

KUALA LUMPUR: Moody's Investors Service says the Thai government will have ample fiscal capacity to absorb flood-related costs without prompting a permanent deterioration in its debt ratios.

It said on Monday, Oct 24 Thailand's worst floods in half a century have exacted a significant toll in terms of lives and economic costs. Floodwaters have claimed the lives of more than 300 people while causing extensive destruction to property and disruption to economic activity.

'Although credit negative for Thailand (Baa1 stable), we do not expect the deluge to undermine the government's creditworthiness,' said the ratings agency.

In Moody's weekly credit outlook, it said water now covers 4 million acres (1.6 million hectares)'a third of Thailand's provinces'in the north, northeast and centre of the country, disrupting industry and displacing families.

The floods have significantly affected agricultural and manufacturing production, as well as distribution networks and commercial activity in affected areas.

Supply chains have been disrupted, notably among automobile manufacturers, while around a quarter of the current crop of rice has been destroyed. Thailand is the world's largest rice exporter.

It said Thailand's central bank previously estimated the damage to industry and property at more than THB120 billion (US$3.9 billion) or roughly 1.2% of GDP.

However, the potential for flooding to spread to Bangkok poses upside risk to these projections and we assume the economic costs of this natural disaster will exceed THB200 billion (2% of GDP). Combined with the deterioration in the outlook for external demand, real GDP growth in the second half will slow significantly.

The Bank of Thailand has indicated 2011 economic growth may be lower than 3% as compared to the 4.1% pace it previously forecast, while Finance Minister Thirachai Phuvanatnaranubala has indicated growth might barely reach 2% owing to the magnitude of disruption.

'We expect real fourth-quarter GDP to contract in annual and quarterly terms, and estimate full-year GDP growth at 2.8%,' it said.

Last week, the Bank of Thailand chose to hold interest rates steady, effectively completing its tightening cycle in order to support an economy facing a double-whammy from the floods and softening external demand.

Moody's said this crisis does not represent a structural break in terms of the country's productive capacity, and economic growth should climb back toward its trend rate of over 4% in 2013.

However, the floods will affect government finances, increasing expenditure and depressing revenue.

'In addition to disaster relief, we anticipate a ramp-up in government spending on flood management and mitigation over the duration of the current administration's remaining four years in office.

'However, fiscal rules will mitigate the risk of a significant or permanent deviation from the cautious approach that has led the central government's fiscal deficits to average around 1.5% of GDP over the past 10 years,' it said.

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