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

A full list of rating actions is at the end of this rating action commentary.

Key rating drivers

Strong Externals, Structural Constraints

Thailand’s ratings are underpinned by the country’s sustained external finance strengths and strong macroeconomic policy framework. The ratings also reflect weaker structural features relative to ‘BBB’ peers, including lower per capita income and World Bank governance scores. Moreover, medium-term prospects for growth and fiscal consolidation are constrained by adverse demographic factors and potential scarring from the Covid-19 pandemic.

Recovery to Strengthen

Fitch forecasts Thailand’s economy will expand by 3.2% in 2022 (BBB median: 3.4%), up from 1.5% in 2021, bolstered by improved domestic consumption, still-supportive policy settings, and a mild recovery in inbound tourism. Thailand has relaxed domestic containment measures and fully reopened its borders to international travellers.

Fitch projects GDP growth will accelerate to 4.5% in 2023 (BBB median: 4.0%), underpinned by a continued recovery in domestic demand and a faster resumption of inbound tourism. Our baseline expects tourist arrivals will increase to 22 million in 2023, or 55% of its pre-pandemic level, from 6.5 million in 2022. We envisage a full resumption of tourism inflows to pre-pandemic levels will take a few years, particularly given the slow revival of arrivals from China.

Narrower Fiscal Deficit

Fitch forecasts the general government deficit will gradually narrow to 5.3% of GDP (Government Finance Statistics basis) in the fiscal year ending-September 2022 (FY22) (BBB median: 3.9%), and 3.7% in FY23 (BBB median: 3.1%), from an estimated 7.0% in FY21. A narrower fiscal deficit reflects stronger revenue collection and a measured unwinding of pandemic-related economic relief measures. Our expectation for only a modest fiscal consolidation reflects the still nascent stage of Thailand’s ongoing economic recovery.

Higher, but Stabilising Debt Ratio

Fitch forecasts gross general government debt (GGGD) to rise to 55.4% of GDP by FYE22 (FYE21: 53.8%), broadly in line with the ‘BBB’ median (55.9%). We expect the ratio to rise to 56.6% by FYE26, about 21pp above its pre-pandemic level. We view risks to GGGD/GDP as tilted to the upside given plans for only gradual consolidation, particularly if the recovery is more prolonged, but the risks are mitigated by the government’s record of fiscal prudence, deep domestic capital markets, and a public debt stock mainly funded in baht.

Robust External Finances

Thailand’s resilient external position is a core strength, which, in our view, provides a sufficient buffer to manage tightening global financial conditions and greater geopolitical risks. Fitch forecasts Thailand to maintain its large net external creditor position at 41.5% of GDP in 2022, well above the projected median level for ‘BBB’ (-4.4%) and ‘A’ (-6.2%) peers. We expect foreign-currency reserves at USD232 billion by end-2022, sufficient to cover 7.8 months of current external payment in 2022, in excess of the ‘BBB’ median of 5.6 months.

Fitch forecasts the current account deficit will narrow to 1.8% of GDP in 2022 from an estimated 2.1% in 2021, which reflects the modest recovery in tourism receipts offsetting higher energy import and freight payments. We expect current account will return to a surplus of 1.0% in 2023 and widen further to 2.8% in 2024, as the tourism recovery gains momentum.

Inflationary Pressures Rise

Fitch projects headline inflation will average about 6.0% in 2022, up from 1.2% in 2021, primarily fuelled by broadening cost-push factors. We expect the Bank of Thailand (BoT) to raise the benchmark interest rate by 25bp in 2H22 after keeping the policy rate at a historical low of 0.5% since May 2020. The BoT has adopted a more hawkish stance in recent months, but Fitch believes the pace of rate hikes will be gradual to avoid derailing the recovery. We forecast inflation will fall back to the BoT’s 1%-3% target band in 2023 at 2.3%.

Elevated Household Debt

Thailand’s household debt further increased to 90.1% of GDP by end-4Q21 from its pre-pandemic level of 79.9% at end-4Q19. Indebted low-income households and SMEs are more exposed to the pandemic shock, and remain a source of vulnerability for the banking sector, if the recovery proves more protracted than we forecast. Fitch expects banks’ loan impairments to increase as regulatory relief measures expire in 2022, but asset quality pressures are mitigated by adequate loan-loss allowances and core capital.

Structural Headwinds

Medium-term growth prospects are dampened by an ageing population, which could be exacerbated by potential economic scarring from the pandemic. The scarring effects could be manifested through an extended period of subdued investment, slowing productivity growth, and a deterioration in labour skills and earnings. To counter these potential headwinds, the government is seeking to boost productivity through hard and soft infrastructure investment, and by promoting targeted innovation and technology industries.

Elections Bring Political Uncertainty

Upcoming general elections due by March 2023 could inject additional uncertainty around the policy outlook. The run-up to the election also brings risks of an increase in political tensions, potentially manifested in renewed protests, though we do not expect these risks to disrupt the economic recovery. The election outcome remains uncertain, but it may result in another broad coalition government, which could challenge policymaking effectiveness, in Fitch’s view.

ESG – Governance

Thailand has an ESG Relevance Score (RS) of ‘5’ for Political Stability and Rights, and ‘5[+]’ for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption. Theses 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 45th percentile, in part reflecting sound institutional capacity and regulatory quality, and established rule of law, offset by persistent political volatility.

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