Moody’s, rice pledging and the Thai govt’s communication crisis – Pt 1
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Moody’s, rice pledging and the Thai govt’s communication crisis – Pt 1

First, Bangkok Post and accuracy.

On May 23, the Bangkok Post reported:

Losses from the government’s rice pledging scheme for the 2011-12 harvest year are estimated to reach 200 billion baht [US$6.5 billion], far above the Finance Ministry’s earlier forecast of 70-100 billion baht, says a source.

The new estimate is based on the actual amount the government has received from rice sales and the estimated amount the government should receive by multiplying rice in stockpiles by the current market price, said the source, who is on a committee tasked with handling accounting for the scheme. During the harvest year, the government spent 320 billion baht to buy 22 million tonnes of rice from the first and second crops.

BP: This did receive some coverage in the Thai press, but it was not until the Moody’s June 3 report that it really became a big issue.

It is believed that the person who leaked this information to the Bangkok Post was Supa Piyajitti, a Deputy Permanent Secretary of Finance. The Bangkok Post in an editorial:

It was also reported to be the same issue confronted by then-finance deputy permanent secretary Supa Piyajitti when she decided to make a projection about the scheme’s losses without any updated input or cooperation from the Commerce Ministry.

Ms Supa’s figures were reported by the press and used by Moody’s as a reference, but the projection might not be accurate.

Having said that, in an on-the-record quote given to Reuters on June 6:

Supa Piyajitti, a finance ministry official who used to look after the intervention scheme accounts until she was moved aside this week, told Reuters on Wednesday the losses stood at 200 billion baht as of Jan. 31 and were probably higher now.

Although, the Finance Ministry committee, which Supa is (or was?) part of reported that total losses for 2011/2012 (main and secondary harvest) were 137 billion baht with losses for the main harvest of 2012/2013 being 84 billion baht for a total of 220 billion baht of losses.

BP: It is important to note that there is a big difference between the 2011-2012 harvest year (October 2011-September 2012) vs October 2011-January 2013. The reason is that as Bloomberg has noted, “Thailand’s October harvest accounts for about 70 percent of total output, and a secondary crop is harvested through to July”. If 70% is harvested in October, won’t a lot of this rice then be pledged by the end of January? So it is quite clear from the outset that the losses for the 2011-2012 harvest only were not 200 billion baht so the Bangkok Post report was incorrect. Later reports of estimates of 260 billion baht loss refer up until the end of May 2013 so this includes almost two main harvests and one and a half secondary harvests (with harvesting up until July).

Second, the Moody’s report.

Then on June 3 Moody’s issued a report (or here) entitled “Thailand’s Increasingly Expensive Rice Buying Scheme Is Credit Negative”:

On 23 May, the Bangkok Post reported that losses from Thailand’s (Baa1 stable) rice buying scheme in the harvest season 2011-12 are bigger than the Ministry of Finance originally forecast. At the same time, the Thai authorities appear committed to maintaining the scheme unchanged. These recent losses, and any future losses from the unmodified rice buying scheme, increase the difficulty of the government’s task of reaching its goal of a balanced budget by 2017, and are credit negative for the Thai sovereign.

According to the report, which we were unable to confirm with government sources, new estimates based on actual amounts received imply losses of THB200 billion from the 2011-12 harvest year. This is significantly higher than previous estimates by the World Bank discussed in our April Credit Analysis, which pegged losses at THB115 billion, as well as Thailand’s Ministry of Finance forecast losses of THB70-THB100 billion.

The overall budget deficit for the fiscal year ended 30 September 2012 reached 4.1% of GDP, revised slightly downward from 3.9% because of a larger-than-expected non-budgetary cash deficit. While financing of Thailand’s budget deficits is supported by the country’s deep onshore capital markets, the growing losses from the rice buying scheme and the potential need for additional government funding resulting from the continuation of the scheme increasingly jeopardize a reduced deficit, which we previously forecast will be 3.1% of GDP in fiscal 2013. In addition, this makes achieving a balanced budget by 2017 more challenging.

BP: This is only part of the report, which is subscription only. As you see their only source is the Bangkok Post news article BP quoted above. Understandably, additional annual spending would have been a negative.

This report was widely reported.

Third, reporting of the report:

Bangkok Post on June 3: “Moody’s: Rice scheme credit-negative”

Bangkok Post on June 4: “Credit rating stands at risk”

Bangkok Post in an editorial on June 6 entitled “Face the truth on rice scheme” stated in the opening paragraph “the government plans to counter Moody’s Investors Service’s warning about the perils of the rice-pledging scheme. The rating agency said the scheme’s higher-than-anticipated losses could hurt the economy and cause a downgrade of the country’s credit rating”.

The Nation on June 3 in an article entitled “Higher-than-expected losses negative for Thailand’s rating: Moody’s ” states “….in a statement, Moody’s said that on the implied losses of Bt200 billion in the harvest year, it is much higher than World Bank’s estimate of Bt115 billion and the Finance Ministry’s forecast loss of Bt70-Bt100 billion.

The Nation on June 5 with an article that stated “…counter a warning by Moody’s rating agency that the controversial policy could hurt the Thai economy and cause a downgrade of its credit rating”.

The Nation on June 6 with an article that stated “…a warning by credit-rating agency Moody’s about the government’s controversial rice-pledging scheme …the Bt260-billion loss estimate by Moody’s“.

The Nation on June 11 stated “…. leading to rating agency Moody’s threat to downgrade Thailand’s credit rating”.

BP: What BP finds odd is that the June 3 reports were completely accurate, but as each day passes they started talking of downgrades or incorrectly citing the 260 billion baht figure.* To say “warning” would be roughly accurate, but threat to downgrade or talk of downgrade does not match with the Moody’s June 3 report. If there was any doubt, Reuters on June 6:

Thailand’s credit rating is not in danger of being downgraded because of its rice intervention scheme, rating agency Moody’s said on Thursday, after it warned this week that losses from the scheme might threaten the goal of a balanced budget.

The rating is not under threat. If you look at the credit analysis that we published in late April, there are a lot of factors that support the rating at the current level of Baa1, and that’s also why we have a stable outlook,” Moody’s sovereign risk analyst Steffen Dyck told Reuters.

BP: Moody’s was never going to downgrade based on a newspaper report and despite the clusterf*ck performance of the Commerce Minister in the press conference on Friday, all the figures show that the losses for the 2011-2012 harvest were not 200 billion baht. The Finance Ministry committee figures show the loss is around 137 billion baht. Yes, this is higher than the estimates used by Moody’s in April, but it is only 20 billion baht more than the World Bank forecast used by Moody’s and Moody’s won’t downgrade based on 1% extra government spending.

Fourth, government criticism of Moody’s

There has been some criticism of Moody’s by the government or senior civil servants. For example, Bangkok Post in an editorial on June 6:

The Finance Ministry’s Fiscal Policy Office director, Somchai Sujjapongse, hit the nail on the head when he said yesterday that Moody’s Investors Service should not have used press reports as the basis to assess Thailand’s credit rating.

He said it should have sent a representative to collect information from relevant agencies or approached the agencies directly.

Moody’s failed to act professionally and did not meet its standards as an internationally recognised organisation, he said, insisting the rice-pledging scheme losses would not exceed 100 billion baht.

BP:  This is unfair to Moody’s, and as we know now Somchai was wrong. Losses have exceeded the yearly figure of 100 billion baht. Now, if the government had been providing clear and accurate information – Moody’s note they were unable to confirm the Bangkok Post report and as we have seen since then the government is still unable to get its story straight over the amount of the losses – and given the discrepancy between Finance Ministry estimates versus those of the World Bank, there were no clear government figures to rely on. It is not as though the government was able to put out to promptly put out figures, with evidence to back the figures, of the losses.

In this type of environment, Moody’s cannot simply wait 2-3 years after the scheme had finished to calculate the losses. They have to rely on a wide range of sources. Moody’s stated their source. The problem is not really the Moody’s report, it was really the inaccurate reporting and government misplaced overreaction to the report. The report simply cited the Bangkok Post and then the Bangkok Post cited Moody’s…..

Instead of focusing on the inaccuracy of information provided the Bangkok Post source, the government went after the messenger…

So after taking two weeks, after first reports leaked of the 200 billion baht figure, we were all waiting for what the Commerce Minister had to say on Friday. Will look more closely in that post on the rest of the government’s response from the beginning to the Commerce Minister’s press conference and since then….

*Somewhat disconcertingly, despite dire talk of downgrades and complete pessimism about a downgrade, Thanong’s column in The Nation on Friday was relatively balanced:

Moody’s Investors Service has threatened to issue a negative outlook for Thailand’s credit rating…

Moody’s officials have been visiting Thailand over the past months. They have specifically raised concern over the cost of the rice price-pledging programme and the political stability of the Kingdom.

Like many others, Moody’s is confused and concerned by the potential losses of the Thai government from the damaging rice-price scheme. Fresh estimates have implied losses of Bt200 billion for the 2011-2012 harvest year…. A TISCO report played down the concern of a downgrade. It said: “Thailand’s current rating is Baa1 with stable outlook by Moody’s. We think in the worst-case scenario Moody’s is likely to downgrade the outlook (not the rating) before a rating downgrade, as Moody’s usually does. There are some cases when a rating downgrade came before an outlook downgrade, such as Greece and Egypt, due to their potential defaults. However, this should not be the case for Thailand.”

BP: No doubt this is because Thanong is not a big fan of ratings agencies, but we do have a quote of an external assessment of what the Moody’s report actually meant meaning at least you are not left with the inaccurate impression of an imminent downgrade by Moody’s….

Read Part 2 of this story here