The recent military coup in Thailand will likely harm the economy, investor confidence, and the credit profile of banks in the region, suggests Moody’s Investors Service in a new report.

Last week, after first declaring martial law, Thailand’s army suspended the country’s constitution and ousted the government. “The coup d’etat is credit negative,” says Moody’s, noting that it “underscores Thailand’s perilous politics and will not restore investor confidence or ease downward pressure on the economy, as reflected by real GDP trending far below its potential growth rate this year.”

The rating agency observes that this is the second military coup in Thailand in the past eight years. After the previous coup in 2006, the country suffered from policy drift, it says. “Although the country’s economic and financial fundamentals held up relatively well, political turmoil and uncertainty stymied more dynamic development of the Thai economy,” it says. As a result, its sovereign credit quality has remained static, while the credit profiles of other regional sovereigns have improved, and have seen rating upgrades.

Moody’s says that if the current political impasse persists for the rest of the year, it estimates that “the economic cost will be significant, slicing off two to three percentage points from our pre-crisis forecast of 4.5% real GDP growth or even more.” And, even if the political turmoil eases, it says “there is no assurance that the military government can remove uncertainty from the investment environment.”

“Since late last year, government bond yields have been immune to the political events, as has the baht, although Thailand’s high international reserves have declined somewhat in the past year. Nonetheless, we see the coup as further weighing on Thailand’s economic performance, with the risk that political uncertainty will continue to dim the investment climate and dampen growth performance,” it says.

Moreover, the coup is credit negative for Thailand’s banks, Moody’s says, “because they add pressure to already weakened investor and consumer confidence and risk stalling loan growth and undermining asset quality.”

“The more protracted this crisis, the lower our economic growth expectations become, which, in turn, will lower loan demand,” it says, adding that this will also hurt banks’ asset quality, as they become increasingly cautious about lending to the sectors of the economy that are most vulnerable to a slowdown, such as the retail and small and midsize enterprise (SME) segments.

“Although the effect on the banks’ overall asset quality should be moderate because the most vulnerable segments – retail unsecured, auto loans and small SMEs – constitute a small proportion of banks’ overall loan book, the downside risks are increasing as economic conditions deteriorate,” it says.