Fitch Ratings has affirmed Thailand’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘BBB+’ with a Stable Outlook.

Key rating drivers

Thailand’s ratings are supported by robust external and public finances, which continue to provide buffers against downside risks amid a prolonged economic recovery from the coronavirus pandemic.

These strengths are balanced against weaker structural features relative to ‘BBB’ range peers, including lower World Bank governance scores and per capita income, and weaker medium-term growth prospects based in part on population ageing.

The affirmation with a Stable Outlook reflects Fitch’s assessment that the rise in government debt associated with the fiscal response to the pandemic can be contained over the medium term, based on the strengths of the fiscal framework and Thailand’s record in managing its public finances.

Thailand’s tourism-dependent economy will recover only by 1.8% in 2021

Fitch forecasts Thailand’s tourism-dependent economy will recover only modestly, by 1.8% in 2021 after a sharp 6.1% contraction in 2020.

The weak recovery is due to limited tourism inflows and disruptions from a third Covid-19 wave that emerged in April. The unemployment rate rose to 2% by end-1Q21, which will constrain recovery in private consumption. Even so, strong merchandise exports along with higher disbursements for public investment projects pose some upside risk to growth prospects in 2H21.

Real GDP growth will rise to 4.2% in 2022

We project real GDP growth will rise to 4.2% in 2022, underpinned by external demand, government stimulus measures and a gradual return of tourism inflows. The government kickstarted its Covid-19 mass vaccination programme in early June, intending to vaccinate 70% of its population, and recently announced that it will slowly reopen its borders fully to tourists.

In addition, the “Phuket Sandbox” scheme to be launched in July will, if implemented as scheduled, allow quarantine-free inbound travel for vaccinated tourists. Still, a resumption of tourism inflows to pre-pandemic levels will take a few years, in Fitch’s view.

Government deficit will widen to 5.9% of GDP

Fitch forecasts the general government deficit will widen to 5.9% of GDP (on a government finance statistics basis) in the fiscal year ending-September 2021 (FY21), from an estimated 4.4% in FY20. The wider fiscal deficit reflects the government’s efforts to step up its support of economic activity and protect households and businesses from longer-term scarring. An emergency decree approved in April 2020 to allow additional spending of THB1.0 trillion (an average of 3.1% of GDP) in FY20 and FY21, has been a key component of this effort.

Under our baseline case we forecast the general government deficit will narrow to 4.0% of GDP in FY22, on improving revenue and declining Covid-19 related spending associated with the expected upturn. The Cabinet approved a new emergency decree in May authorising the Ministry of Finance to borrow up to an additional THB500 billion (2.9% of projected FY22 GDP) by September 2022. We expect the bulk of these funds to be disbursed in FY22.

Government debt to increase to 52.7% of GDP

Fitch projects gross general government debt (GGGD) to increase to 52.7% of GDP by FYE22 from 35.9% at FYE19, still below the current ‘BBB’ median of 59.4% projected in 2022. Mitigating the risks associated with the large increase in public debt is the government’s sound debt management strategy, exemplified by a long average maturity on government securities of 9.5 years, and high share of local currency denomination of over 98% (‘BBB’ current median: 68.8%).

Our baseline forecasts GGGD/GDP to peak at 53.7% in FY23 and then decline modestly due to the recovery in growth and narrowing of fiscal deficits. We believe that, in addition to a strong record of public finance management, the debt trajectory will remain anchored by the Fiscal Responsibility Act. This requires periodic committee approval of increases in the public debt-to-GDP ceiling, which we expect may occur in FY22 to make room for the additional spending.

Bank of Thailand (BoT) benchmark policy rate at a historical low of 0.5%

The Bank of Thailand (BoT) has kept its benchmark policy rate at a historical low of 0.5% since its last rate cut in May 2020. We expect the central bank will leave rates unchanged through end-2022 and rely more on targeted measures to support the recovery.

The BoT launched a new THB250 billion soft loan scheme in March 2021 to financial institutions for on-lending to viable SMEs. The BoT will also provide low-cost funding to support a debt restructuring programme up to THB100 billion for eligible private borrowers through asset warehousing with buy-back options. Fitch expects muted inflationary pressure in 2021, with headline CPI expected to remain at the lower end of the BoT’s 1%-3% target band.

Robust external finances remain a core credit strength

Fitch forecasts a current account surplus of 0.5% of GDP in 2021, well down from the pre-pandemic period, due to the collapse in tourism receipts. However, we expect the surplus will gradually widen to 2.3% of GDP in 2022 and 4.0% in 2023 as tourism recovers. Under our forecasts, Thailand’s large net external creditor position will remain at 45.5% of GDP in 2021 (BBB current median: -5.8%).

We project foreign-currency reserves to remain largely stable at USD258 billion by end-2021, sufficient to cover 10.8 months of current external payments in 2021, still in excess of the ‘BBB’ median of 9.3 months.

Thailand’s political environment remains delicate, although the youth-led demonstrations that began in 2020 have been subdued amid the third wave of the virus. We believe the economic impact of political tensions have been limited. Still, risks of political tensions heading into the next general elections, due by 2023, could hamper consumer and business sentiment.

Fitch maintains a stable sector outlook on Thailand’s banks

The operating environment remains challenging amid the sluggish economic recovery. The already high household debt-to-GDP ratio increased further to 89.3% by end-2020. Higher unemployment associated with the pandemic could hinder some households’ ability to service debt. However, we expect the impact of the pandemic on banks’ asset quality to be mitigated by sufficient loss buffers. In this regard, we consider the loan loss reserve of 144.2% and CET1 ratio of 16.2% (end-1Q21) as important cushions to absorb unexpected losses.

ESG – Governance: Thailand has an ESG Relevance Score (RS) of ‘5’ for both Political Stability and Rights and for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption, as is the case for all sovereigns.

These scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model. Thailand has a medium WBGI ranking at the 46th percentile, in part reflecting sound institutional capacity and regulatory quality, and established rule of law, offset by persistent political volatility.

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