Fitch Upgrades Thailand Ratings – Baht stable

Thailand’s Credit Rating has been upgraded to BBB+ after being achieving political stability. Fitch lowered the ratings back in 2009 after the clashes between supporters of opposite political parties forced the South-East nation to imposed emergency rule and called off a regional summit with SEA leaders. Current Prime Minister Yingluck Shinawatra has managed to ease political tension after her brother, former Prime Minister Thaksin who has been ousted in a coup, and brought with her stability and progress. Thailand grew 6.4% in 2012 under her reign, one of the highest in Asia, underlying the economic benefits stable political and social climate can bring to a nation.

Daily Chart

The upgrade by Fitch will attract more foreign funds into Thailand, which will help Yingluck’s Government to raise 2 Trillion Baht (US$67 Billion) needed for transportation infrastructure expansion.

Baht strengthened slightly after the upgrade, but otherwise remained mostly muted. Nonetheless, we can see the strength of Baht against the Greenback with the increased economic well-being of the Thais. After breaching 30.50, price has been stuck within 29.70 – 29.90. Technical studies suggest that we could sse another potential break lower with falling trendline and Kumo adding downside pressure. However, this is a double edged sword with Kumo looking on the verge of performing a “twist” on the upside after thinning significantly. Similar, the descending triangle formed with 29.7 floor may squeeze price lower, but failure of which may see price trading above the Triangle to ignite bullish momentum.

Fundamentally, a higher rating will decrease borrowing cost for Thailand as default risk decreases. This will help boost foreign inflow of funds which will prop Baht higher on the long-term. Bank of Thailand is aware of this, but is shackled by rising inflation brought about by the growing economy. Without the risk of rate cuts, foreign funds will have 1 less risk when they hold baht, making bonds and Thai assets even more attractive beyond the rising economy. However, downside risk for Baht remains. A BBB+ rating is still considered a Lower Medium Grade bond, the lowest of “investment grade” bond. As such, if Europe and US continue on their recovery path, funds may wish to exit Thailand back into the developed economy that may have slightly lower alpha but lower risks at the same time. This will result in upward pressure on USD/THB, potentially setting price up for a revival towards 30.0.

Whatever the future may hold, it is obvious that Yingluck is doing a good job right now. Therefore, it is highly likely that she’ll maintain current stance on policies, which may spur Bank of Thailand to steady the ship rather than embark on new policy directions.

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