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.
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.
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.
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.
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.
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. 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 46th percentile, in part reflecting sound institutional capacity and regulatory quality, and established rule of law, offset by persistent political volatility.
RATING SENSITIVITIES
FACTORS THAT COULD, INDIVIDUALLY OR COLLECTIVELY, LEAD TO NEGATIVE RATING ACTION/DOWNGRADE:
- Public Finances: A sustained increase in Thailand's general government debt ratios compared with peers, for example, due to a prolonged fiscal deterioration, or the appearance of contingent liabilities on the sovereign balance sheet.
- Structural Features: An escalation in political disruption on a scale sufficient to affect Thailand's economic prospects negatively.
FACTORS THAT COULD, INDIVIDUALLY OR COLLECTIVELY, LEAD TO POSITIVE RATING ACTION/UPGRADE:
- Macroeconomic: A resumption of resilient medium-term growth prospects without a significant rise in household debt.
- Public Finances: Improved prospects for a decline in the general government debt to GDP ratio from post-pandemic fiscal consolidation and/or improving medium-term growth potential.
SOVEREIGN RATING MODEL (SRM) AND QUALITATIVE OVERLAY (QO)
Fitch's proprietary SRM assigns Thailand a score equivalent to a rating of 'BBB' on the Long-Term Foreign-Currency (LT FC) IDR scale.
Fitch's sovereign rating committee adjusted the output from the SRM to arrive at the final LT FC IDR by applying its QO, relative to SRM data and output, as follows:
- Macroeconomic: +1 notch, to offset the deterioration of the GDP volatility variable in the SRM which we believe will be temporary, driven by the impact of the coronavirus shock, and would otherwise add excess volatility to the rating. Fitch expects Thailand to have the sound policymaking framework and capacity to absorb the shock without lasting effects on medium-term macroeconomic stability.
We have removed the +1 notch on External Finances, as we believe that Thailand's external strengths are adequately reflected in the SRM.
We have removed the -1 notch on Structural Features that reflected uncertainty in Thailand's political environment, as we believe these are now adequately captured in the SRM through the governance scores.
Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
KEY ASSUMPTIONS
The global economy performs in line with Fitch's Global Economic Outlook - June 2021, published on 15 June 2021 at www.fitchratings.com/site/re/10166250.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG CONSIDERATIONS
Thailand has an ESG Relevance Score of '5' for Political Stability and Rights as WBGI have the highest weight in Fitch's SRM and are therefore highly relevant to the rating and a key rating driver with a high weight.
Thailand has an ESG Relevance Score of '5' for Rule of Law, Institutional & Regulatory Quality and Control of Corruption as WBGI have the highest weight in Fitch's SRM and are therefore highly relevant to the rating and are a key rating driver with a high weight.
Thailand has an ESG Relevance Score of '4' for Human Rights and Political Freedoms as the Voice and Accountability pillar of the WBGI is relevant to the rating and a rating driver.
Thailand has an ESG Relevance Score of '4' for Creditor Rights as willingness to service and repay debt is relevant to the rating and is a rating driver for Thailand, as for all sovereigns.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or to the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
Additional information is available on www.fitchratings.com
Source: Fitch Ratings