Election Woes In Bangladesh And Thailand Raise Risk But Don't Yet Undermine Sovereign Ratings

Primary Credit Analysts: KimEng Tan, Singapore (65) 6239-6350; kimeng.tan@standardandpoors.com Agost Benard, Singapore (65) 6239-6347; agost.benard@standardandpoors.com

Table Of Contents
The Storm After The Calm Nothing New Quick Resolutions Aren't Likely But Neither Is Widespread Violence Resilient Economies Underpin Ratings In Our Base Case Risks To Sovereign Credit Fundamentals Have Risen Related Research

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Election Woes In Bangladesh And Thailand Raise Risk But Don't Yet Undermine Sovereign Ratings
Political instability in Bangladesh and Thailand has been in the news since late 2013. The main opposition parties in both countries boycotted the respective elections called early in 2014, thereby weakening their legitimacy and undermining the strength of the democratic process. Standard & Poor's Ratings Services believes the Bangladeshi government and the next elected Thai government, if elections there are concluded, could face destabilizing challenges to their rule as a result. In our view, political pressures in both countries have been building up for several years. The issues--demand for political reform in Thailand and highly antagonistic politics in Bangladesh--are complex and difficult to resolve. For that reason, we believe political uncertainties will remain elevated. Overview We believe political uncertainties will stay elevated in Bangladesh and Thailand for some time. We expect relatively stable macroeconomic conditions to anchor sovereign creditworthiness in Bangladesh and Thailand over the next two years, in the absence of widespread and sustained violence. Growth in both economies has been resilient during previous political upheavals, and each country possesses strong external balances, relatively low debt and interest burdens, and low inflation. These attributes have helped to stabilize sovereign rating fundamentals amid occasional political volatilities.

Although these developments hurt investor confidence and weaken economic activity, we expect our sovereign credit ratings on the two governments to remain unchanged over the next two years. This assessment partly reflects our belief that the tensions will not boil over into prolonged and widespread violence. Such violence could exacerbate political instability and deal sustained damage to these economies, which have been resilient to past political turmoil. However, we could revise our outlook to negative or lower the ratings if we view the likelihood of widespread and prolonged violence in these countries to have risen to one in three, or higher.

The Storm After The Calm

Political instability has resurfaced in Bangladesh and Thailand after a few years of calm. In Bangladesh, a change in election arrangements sparked the turmoil. Unlike previous elections in the country since 1996, the 2014 election was not administered by a neutral caretaker government. Instead, the previous Bangladesh Awami League (AL) government remained in office to oversee the elections. The main opposition Bangladesh Nationalist Party was against this change and refused to participate in the elections. It also initiated strikes and protests before and after the elections, although these have died down more recently. In Thailand, mass protests in Bangkok erupted again in late 2013 after the Pheu Thai-led government attempted to pass a controversial Amnesty Law that some viewed could have allowed former Prime Minister Thaksin Shinawatra to

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Election Woes In Bangladesh And Thailand Raise Risk But Don't Yet Undermine Sovereign Ratings

return to Thailand. Under strong public pressure, the government agreed not to move ahead with the law. It subsequently called for an early national election, which was held early this month, in a bid to placate the protestors. However, these moves have not stopped the protests. Instead, the leaders of the protests demanded that the caretaker government make way for an unelected and supposedly neutral "People's Council" to implement political reforms before holding another election.

Nothing New
The current political tensions in the two countries are the result of longstanding domestic pressures. In Bangladesh, deep divisions go back to the country's birth in 1971, and center on the historical enmity between the two main parties: the ruling Bangladesh Awami League (AL) and the main opposition Bangladesh Nationalist Party (BNP). Adding to this tension is animosity between their two current leaders. In Thailand, the emergence more than a decade ago of a new group of political elites led by Thaksin Shinawatra was the genesis of the current political divide. Thaksin's attempt to centralize power during his time as prime minister ran into strong opposition from the traditional elites in Thai politics. These groups have long held sway over Thai politics and society, which Thaksin's rise threatened. Opposition from the traditional elites to Thaksin culminated in a September 2006 military coup. The three changes of government triggered by events outside of the normal democratic process since 2006, including the coup, are testimony to the deepening polarization of the electorate and the breakdown of the democratic mechanism.

Quick Resolutions Aren't Likely

Because the roots of these disagreements run deep, their resolutions are unlikely to be straightforward. We think challenges to political stability will remain an issue in the foreseeable future as a result. The election boycotts mean that both governments are likely to face questions about their legitimacy. In Thailand's election, it could even be declared invalid, requiring another election to be held. The Thai government faces more complications, including continuing street protests and legal uncertainties. The National Anti-Corruption Commission (NACC) is investigating more than 300 members of the last parliament for alleged misconduct in voting for a fully elected Senate last year. Prime Minister Yingluck Shinawatra is also facing an NACC probe for alleged negligence in implementing the government's beleaguered rice-pledging scheme. These investigations may cause these individuals to lose their rights to hold political office. Meanwhile, if the ongoing protests lead to violence, a military intervention remains possible. The Bangladeshi military could also play a bigger role in politics if uncertainties escalate markedly in the country, although it seems unlikely now. The military in both Bangladesh and Thailand see themselves as the final arbiter and guarantor of stability when the democratic process becomes unworkable. Both militaries have a long history of intervening, either overtly through military coups and episodes of military rule, or behind the scenes through deciding the appointment of non-military governments. The 2006 coup in Thailand ousted then-Prime Minister Thaksin. The Bangladeshi military also last intervened in domestic politics around the same time by backing a caretaker government

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Election Woes In Bangladesh And Thailand Raise Risk But Don't Yet Undermine Sovereign Ratings

that ran the country from January 2007 to December 2008.

But Neither Is Widespread Violence

The factors above suggest to us that a heightened degree of political uncertainty is likely to persist in both countries. However, we don't expect widespread violence or economic disruptions. In Bangladesh, the BNP's protests caused violence and economic disruptions that generated much unhappiness among the population. The party later ended the protests and has focused on calling for new national elections recently. We believe the Bangladeshi government has a reasonable chance of maintaining stability with popular support despite the controversial nature of the January elections. Although a number of small-scale violent incidents have occurred so far this year, we believe a major escalation is unlikely. Backers on both sides of the Thai political divide have strong economic interests in the country's stability, and we expect these interests to rein in their supporters and prevent serious economic damage. An example was the current protest leaders' reaction to a plan to disrupt air traffic over Thai air space in January 2014. After a faction of the anti-Thaksin camp announced its plans, the protest leaders quickly put a stop to them.

Resilient Economies Underpin Ratings In Our Base Case

We expect relatively stable economic conditions, in the absence of widespread and sustained violence, to anchor sovereign creditworthiness in Bangladesh and Thailand in the next six to 24 months. Growth in both economies has been resilient during previous political upheavals. In addition, each country possesses strong external balances, relatively low debt and interest burdens, and low inflation. These attributes have helped to stabilize sovereign rating fundamentals amid occasional political volatilities. Thailand's steady growth relies on a diverse and dynamic private sector with strong foreign investor participation. The mass protests of recent years have had little impact on the country's industries and exports. With the exception of 2008, when protestors shut down Bangkok's main airports for a week, disruptions to economic activities have been confined mainly to parts of the capital city. Tourism arrivals also rebounded soon after the protests ended. Average real GDP growth in 2006-2012 was 3.7% despite the global financial crisis and the massive flood damage of 2011. In Bangladesh, the country's typically strong agricultural sector complements an internationally competitive textile and garment industry to support consistent economic growth. Robust remittance inflows have also underpinned growth during past bouts of political upheaval. Recent disruptions caused by protestors are likely to drag real GDP for 2013 a bit lower than the average 6.2% annual rate in fiscal 2006-2012. Nevertheless, the 6.0% growth projection for fiscal 2013 remains solid by any standard.

Risks To Sovereign Credit Fundamentals Have Risen

While we don't expect a near-term change in the two sovereign ratings, political instability has weakened the credit profile for Thailand and Bangladesh somewhat. The policy setting in Thailand has become significantly more uncertain

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Election Woes In Bangladesh And Thailand Raise Risk But Don't Yet Undermine Sovereign Ratings

since 2006, as judicial rulings have challenged some government decisions and stalled their implementation. Governments since the military coup have also seen weaker fiscal performance, partly because of lower revenue growth and political pressure to increase social spending (the controversial rice-pledging scheme was one such measure). In this environment, it has been difficult for the Thai government to implement the needed infrastructure improvements and educational reforms. Economic growth prospects may have dimmed as a result. Bangladesh's controversial January elections may also reduce its flexibility to implement new policies. Their negative impact on economic growth should ease as protests die down and the country's export markets recover. But although the government has a parliamentary majority, the parties that boycotted the elections are likely to remain opposed to the government's policy initiatives, and we believe they will try to find opportunities to force a new election soon. Therefore, the government's ability to introduce major structural reforms to lift the country's economic potential may be limited. In our assessment, the risks of events that could trigger near-term negative rating actions have also risen in both Bangladesh and Thailand, although they are still below the one-in-three probability that we associate with a negative outlook. In Thailand, protestors may step up their disruptions to force a military coup or the removal of the caretaker government by other means. Such a move could bring the erstwhile passive Thaksin supporters onto the streets of Bangkok--increasing the potential for clashes. Radical factions on both sides of the political divide raise these risks because the mainstream leaders have less influence over these groups. These factions were likely responsible for sporadic explosions and shootings in Bangkok in early 2014, according to some local media reports. If widespread violence occurs, a political solution to the current impasse will become even more difficult and the country's security could deteriorate for a prolonged period, in our view. The resulting damage to Thailand's economic, fiscal, and external metrics could weaken sovereign credit support enough to bring about a rating downgrade. In Bangladesh, despite the recent calm, further violent street protests remain a possible destabilizing factor. The opposition parties could mobilize the masses to protest again if the ruling government's popularity wanes, such as if the government introduces controversial policy changes or ruling party politicians face serious accusations of misconduct. If the protests lead to prolonged violence, Bangladesh could find it difficult to meet the targets of its economic program (which has support from the IMF Extended Credit Facility), and its sovereign creditworthiness could weaken enough to warrant a negative change in either outlook or rating.

Related Research
Research Update: Bangladesh 'BB-/B' Sovereign Credit Ratings Affirmed; Outlook Stable, published May 30, 2013 Research Update: 'BBB+/A-2' Foreign Currency And 'A-/A-2' Local Currency Sovereign Ratings On Thailand Affirmed; Outlook Stable, published Dec. 27, 2013 Bangladesh (People's Republic of), published June 27, 2013

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