James McCormack, Managing Director, Global Head of Sovereigns at Fitch Ratings, said the global economy is facing severe headwinds as the year winds down, and the outlook for 2023 will remain challenging. Fitch forecasts a recession in the eurozone beginning this year, with notable contractions in Germany, Italy and Spain in 2023, driven by the energy crisis. Fitch expects the US economy to experience a mild recession in mid-2023, as the Federal Reserve continues to raise interest rates in response to elevated inflation and a strong labour market. Economic growth in China is weighed down by the ongoing Zero-Covid policy and continued stress in the property market.
One of the biggest risks for emerging market sovereigns is the US dollar, which has been appreciating. Tighter external funding conditions have affected some smaller and frontier markets, but most larger sovereigns have greater funding flexibility. As a net oil importer, Thailand has experienced a terms-of-trade shock that, together with weakness in the tourism sector, has led to the first current account deficit in many years. Even so, Thailand's external finances are a relative rating strength, and it is one of the few economies in which growth is forecast to accelerate next year. The recovery of tourism is gaining momentum, and Fitch forecasts GDP growth of 3.1% in 2022 and 4.2% in 2023.
Tania Gold, Senior Director and Head of South and South-East Asia Banks Ratings at Fitch Ratings, said in her presentation, the recovery across APAC banking sectors is expected to continue, albeit it at a slower pace given slower APAC GDP growth expectations for next year. Most banks' net interest margins will benefit from higher interest rates with upside likely highest in Hong Kong and Singapore. Further asset-quality impact on earnings in APAC banks should generally be moderate as they have built up loan-loss buffers. However, asset-quality risks may linger after the end of a long period of low interest rates and forbearance.
Earnings in the Thai banking sector are poised to continue to improve, driven by the economic recovery and reduced, albeit still-elevated, provisioning. Fitch expects impaired loans to rise as pandemic-relief measures taper off and higher interest rates add to the incremental asset-quality risks. However, asset-quality risks should be contained given the expected moderate pace of monetary tightening in Thailand. In addition, Thai banks have built loan loss reserve and capital buffers, both of which are rating strengths.
Obboon Thirachit, Director of Thailand Corporate Ratings at Fitch Ratings, said the recovery in the Thai economy should support continued earnings growth for domestic Fitch-rated corporates in 2023. Most sectors, including food and retail, telecoms, and cement and building materials, should see earnings improve to above pre-pandemic levels in 2023. However, high oil prices and energy costs hinder earnings improvement for the petrochemical and utilities sectors, where the ability to pass on cost increases is limited.
Rated Thai corporate issuers demonstrated prudent cash flow management during the pandemic, with cautious investment and lower dividend payouts. Nevertheless, investment and acquisitions have increased, particularly for oil and gas and utilities companies, to address the long-term changes driven by the energy transition and the transformation to low-carbon businesses. This will keep financial leverage elevated and constrain rating improvement.
Source: Fitch Ratings