At the same time, the agency has affirmed the country's Long-Term Foreign Currency IDR at 'BBB' with Stable Outlook, its Short-Term Foreign Currency IDR at 'F3' and the Country Ceiling at 'BBB+'.
"The Outlook change reflects an earlier stabilisation in Thailand's public finances than Fitch previously expected, driven by a sustainable economic recovery and implementation of the government's fiscal stabilisation plan," says Vincent Ho, Associate Director in Fitch's Asia Pacific Sovereign Ratings team. "Nevertheless, political instability continues to weigh on Thailand's sovereign ratings, and the elections scheduled for July 2011 will be a key test."
The general government fiscal deficit for the fiscal year ended September 2010 narrowed to 0.8% of GDP from 3.5% in FY09 (on Fitch's definition including financial restructuring costs and off-budget stimulus packages). Moreover, the government has shifted gear towards fiscal stabilisation over FY12-FY16, from fiscal stimulus over FY09-FY12, by constraining central government expenditure growth and targeting a balanced primary budget (government's definition including debt principal repayment and net treasury reserve transfer) by FY16. These are in line with the fiscal sustainability framework that includes a ceiling on public debt of 60% of GDP. While this was revised up from 50% in 2009, arguably undermining the credibility of the framework, Fitch notes that public finances deteriorated in many countries over 2008-2010 and the rise in Thailand's general government debt of 5pp of GDP was less than the rise in the 'BBB' median of 10pp. Furthermore, successive governments have delivered a sustained reduction in Thailand's public indebtedness since 2001, despite political uncertainty. Fitch, in its baseline scenario, expects the general government debt/GDP ratio to decline gradually to 27% by FY15, from 30% in FY10. The calculation incorporates an estimated trend growth rate of 4.5% per annum.
The economy has weathered ongoing political uncertainty since a coup ousted the "red shirt" government of Thaksin Shinawatra in 2006, and has been recovering since the recession in 2008-2009. Expected further tightening of monetary policy to contain still-rising inflation, and the impact of supply-chain disruption on Japanese-owned corporates, have led Fitch to revise down its 2011 growth forecast to 4% from 4.5%, with the economy expected to return to 4.5% growth in 2012. Private-sector credit fell to 79% of GDP in 2010, from 182% in 1997; declining leverage helped to buffer the economy from the turbulence of the global financial crisis. Thailand's annual average GDP growth of 3.6% over 2006-2010 is in line with the 'BBB' median, although Thailand's growth has been less volatile.
Thailand's net external financial position is exceptionally strong compared with the 'BBB' median, with one of the strongest net external creditor positions (43% of GDP end-2010) among the 'BBB' group (median of net external debt: 8%). This is underpinned by five years of current account surplus, running at 4.6% of GDP in 2010. Sovereign net foreign assets rose to 52% of GDP in 2010 from 30% in 2006, while the 'BBB' median fell to 6% from 7%. In addition, Thailand's external debt-servicing ability fares better than the 'BBB' median, as evident from the country's lower ratios of external debt service (2.6%) and external interest service (0.5%) over current external receipts than the 'BBB medians of 14.3% and 4% respectively.
Persistent political instability weighs on Thailand's sovereign creditworthiness, reflected in the downgrade of the ratings to their current levels in April 2009. According to the World Bank's governance indicators, Thailand's political stability is much weaker than the 'BBB' median, although other indicators are more in line with 'BBB' norms. Elections scheduled for July 2011 will be a further test of Thailand's political institutions. If intensified instability led to a more substantial impact on the economy and public finances, then negative pressure on the ratings could resume. However, if evidence begins to build that tensions have eased materially -- for example, if election results producing a clear winner are undisputed -- then Thailand's relative economic robustness, fiscal stabilisation and strong external finances could exert upwards pressure on the ratings.