Fitch maintains Thailand’s credit rating on BBB + with a stable outlook

Fitch ratings confirm Thailand’s long-term foreign exchange issuer default rating (IDR) on ‘BBB +’ with a stable outlook.

A complete list of rating actions is at the end of this rating action comment.

The original rating driver

Strong external, structural limitations

Thailand’s ratings are based on the country’s sustainable external financial strength and strong macroeconomic policy framework. The ratings also reflect weaker structural features than ‘BBB’ peers, including lower per capita incomes and World Bank governance scores. Furthermore, the medium-term prospects for growth and fiscal consolidation are limited by adverse demographic factors and potential stains from the Covid-19 epidemic.

Recovery to strengthen

Fitch predicts the Thai economy will expand by 3.2% in 2022 (BBB Medium: 3.4%), up from 1.5% in 2021, strengthened by improved domestic use, stable-friendly policy settings and a light recovery in inbound tourism. Thailand has relaxed its internal controls and opened its borders to international travelers.

Fitch projects will accelerate GDP growth to 4.5% in 2023 (BBB average: 4.0%), based on the continued recovery of domestic demand and the rapid recovery of domestic tourism. Our baseline expects tourist arrivals to increase to 22 million in 2023, or 55% of its pre-epidemic level, from 6.5 million in 2022. We anticipate that it will take several years for tourism flows to fully recover to pre-epidemic levels, especially given the slow revival of arrivals from China.

Narrow revenue deficit

Fitch predicts that the general government deficit will gradually shrink to 5.3% of GDP (based on official financial statistics) – 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 narrow revenue deficit reflects a measured irregularity of strong revenue collection and epidemic-related economic relief measures. Our expectation for only a moderate fiscal consolidation reflects Thailand’s ongoing economic recovery still at an early stage.

Higher, but stable debt ratio

FYE22 (FYE21: 53.8%) predicts that gross public debt (GGGD) will rise to 55.4% of GDP, largely consistent with the ‘BBB’ median (55.9%). We expect the ratio to rise to 56.6% by FYE26, which is about 21pp higher than its pre-epidemic level. We see the risks of GGGD / GDP only leaning towards a reversed plan for gradual consolidation, especially if the recovery is further prolonged, but the risks are mitigated by the government’s record of financial prudence, deep internal capital markets and a public debt stock. It is mainly financed.

Strong external financial

Thailand’s resilient external position is a key strength, which, in our view, provides a sufficient buffer to handle the harshness of the global financial situation and the larger geopolitical risks. Fitch predicts that Thailand will maintain its large net external creditors position at 41.5% of GDP in 2022, above the projected median level for peers ‘BBB’ (-4.4%) and ‘A’ (-6.2%). We expect USD232 billion foreign exchange reserves by the end of 2022, which is enough for the current 7.8 months of current external payments in 2022, more than the 5.6-month ‘BBB’ average.

Fitch predicts that the current account deficit will shrink from an estimated 2.1% in 2021 to 1.8% of GDP in 2022, reflecting a slight recovery in tourism receipts offset by high energy imports and freight payments. We expect the current account to return to a surplus of 1.0% in 2023 and expand further to 2.8% in 2024, as tourism picks up speed.

Inflationary pressures increase

Fitch project headline inflation will average about 6.0% in 2022, rising to 1.2% in 2021, initially extending to cost-push factors. We expect the Bank of Thailand (BoT) to raise the benchmark interest rate to 25bp on 2H22 after keeping the policy rate at a historic low of 0.5% from May 2020. The BoT has taken a more aggressive stance in recent months, but Fitch believes the rate hike will be slow to avoid a recovery line. We predict that inflation will return to 2.3% in the BoT 1% -3% target band in 2023.

High family debt

Thailand’s household debt rose to 90.1% of GDP at the end of 4Q21. Debt-ridden low-income households and SMEs are hit by the epidemic and remain a source of weakness for the banking sector, if the recovery is prolonged beyond our forecast. Fitch hopes that with the expiration of the regulatory relief system in 2022, the credit crunch of banks will increase, but the pressure on asset quality will be alleviated by adequate debt-loss allowances and capital.

Structural headwinds

The prospect of medium-term growth is dampened by an aging population, which could be further exacerbated by potential economic wounds from the epidemic. The traumatic effects may be manifested through extended periods of increased investment, a slowdown in productivity growth, and a decline in labor efficiency and earnings. To address these potential headwinds, the government seeks to increase productivity by investing in rigid and soft infrastructure and promoting targeted innovation and technology industries.

Elections bring political uncertainty

The forthcoming general election by March 2023 could enter into additional uncertainty around the policy outlook. The election race also carries the risk of escalating political tensions, which could potentially re-emerge in the protests, although we do not expect these risks to impede economic recovery. The outcome of the election remains uncertain, but it could lead to another broad coalition government, which in Fitch’s view could challenge the effectiveness of policy-making.

ESG – Governance

Thailand has an ESG Relevance Score (RS) of ‘5’ and ‘5’ for political stability and rights[+]For rule of law, institutional and regulatory quality and control of corruption. Thesis scores reflect the high weight of the World Bank Governance Indicator (WBGI) in our proprietary sovereign rating model. Thailand has a moderate WBGI ranking in the 45th percentile, which partly reflects good institutional capacity and regulatory quality, and offset rule of law is established by permanent political instability.

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