A full list of rating actions is at the end of this rating action commentary.
KEY RATING DRIVERS
External Strengths, Structural Constraints: Thailand's ratings balance its strong external finances and sound macroeconomic policy framework against weaker structural features, such as lower per capita income and World Bank governance scores, compared with 'BBB' category peers. Lingering political uncertainty weighs on Thailand's credit profile, but this may be partially alleviated in the near term after parliament agrees on a new prime minister. Demographic headwinds could exacerbate the challenges to the medium-term growth outlook and fiscal consolidation plans.
Growth to Strengthen: Fitch forecasts real GDP growth of 3.7% in 2023 and 3.8% in 2024 for Thailand, up from 2.6% in 2022. We expect economic prospects will be bolstered by an increasingly broad-based tourism revival from key source markets, alongside robust private consumption as the labour market recovers steadily amid policy settings that remain supportive. Merchandise exports will continue to face headwinds, given subdued global demand and the lagged effect of monetary tightening in advanced economies.
Strong Tourism Recovery: We expect international tourist arrivals to significantly increase to about 29 million in 2023, from 11.2 million in 2022, reaching nearly three-quarters of its pre-pandemic level. Thailand's tourism recovery outlook has improved in light of China's swift reopening. A stronger-than-expected tourism recovery poses a key upside risk to near-term growth prospects, while a more pronounced global economic slowdown and domestic political uncertainty form the major downside risks to the economy.
Political Uncertainty Could Continue: Thailand's near-term economic and fiscal policy outlook is somewhat clouded by lingering political uncertainty after the 14 May election. A joint session of parliament will be convened on 13 July to choose the next prime minister, but when a new government will take office is far from certain. Effective policymaking may be constrained if the formation of the government drags on for several months. Still, we believe such an outcome is unlikely to lead to major shifts in the government's key economic development strategy.
In Fitch's view, more protracted political strife could add to social stability risks and lead to disruptions to budget disbursements for the fiscal year ending September 2024 (FY24), although this is not our baseline assumption.
Mild Fiscal Consolidation: Fitch projects a general government deficit of 3.4% of GDP (Government Finance Statistics basis) in FY23, down from 4.4% in FY22. The deficit reduction reflects stronger-than-budgeted tax revenues and the phasing out of pandemic-related spending, which offset extended relief measures to mitigate the impact of elevated energy prices. The deficit is forecast to fall to 3.2% in FY24 on solid revenue collection, though sustained social welfare spending with additional relief measures advocated by major parties during the campaign is likely to constrain fiscal consolidation efforts.
Public-Debt Ratio to Stabilise: We forecast gross general government debt (GGGD) will increase to 55.9% of GDP by FYE25, equal to the median for 'BBB' category peers, and that GGGD/GDP will remain about 20pp above the FYE19 level. Thailand's public finance metrics deteriorated significantly during the Covid-19 pandemic, eroding its fiscal strength relative to its peers before the pandemic, and constraining fiscal headroom from a ratings perspective against renewed shocks.
Our baseline case expects GGGD/GDP to stabilise over the medium term with an assumption of continued gradual fiscal consolidation. We believe the government's access to deep domestic capital markets through the cycle and high share of local-currency debt in public debt stock with a relatively long average maturity mitigate the public finance risks.
Robust External Finances: Thailand's resilient external position remains a core strength, providing a buffer against tight global financial conditions and geopolitical risks. Fitch projects the current account will flip back into a surplus of 2.0% of GDP in 2023, and widen further to 3.9% in 2024, reversing average deficits of 2.8% for the past two years. Such a shift reflects our expectation of improving tourism receipts and an easing terms-of-trade shock on falling oil prices.
Ample Foreign Reserves: Fitch forecasts Thailand will maintain its large net external creditor position at 42.6% of GDP in 2023, well above the projected median level for 'BBB' (-2.2%) and 'A' (4.8%) peers. Foreign-currency reserves gradually rebounded since 4Q22 with the steady tourism recovery, despite bouts of market volatility. We expect reserve buffers will remain ample to cover 7.3 months of current external payment in 2023, in excess of the projected median of 4.2 months for 'BBB' and 'A' peers.
Measured Monetary Normalisation: We project Thailand's headline inflation to average 2.0% in 2023, a significant reduction from 6.1% in 2022, and within the Bank of Thailand's (BoT) 1.0%-3.0% target band. This reflects a combination of falling cost-push factors, a mild wage-price spiral and favourable base effects. Headline inflation has quickly decelerated recently, but the BoT is still likely to raise its policy rate by 25bp to 2.25% before an extended pause, given its focus on price pressures that may emanate from the continued tourism and consumption recovery.
Elevated Household Debt: Thailand's household debt-to-GDP ratio fell to 90.6% in 1Q23 from a peak of 95.5% in 1Q21, but the ratio remained above that of most regional peers. Deterioration in the debt serviceability of highly-indebted households and businesses constitutes a source of financial-sector vulnerability, although the banking sector appears resilient to such asset-quality challenges. We expect the banks to continue maintaining solid buffers against downside risks, supporting the neutral outlook for the sector.
ESG - Governance: Thailand has an ESG Relevance Score (RS) of '5' and '5[+]' respectively for both Political Stability and Rights, and for Rule of Law, Institutional and Regulatory Quality and Control of Corruption. These scores reflect the high weight that the World Bank Governance Indicators (WBGIs) have in our proprietary Sovereign Rating Model. Thailand has a medium WBGI ranking at the 44th 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: Inability to stabilise the general government debt ratio; for example, due to prolonged fiscal deterioration or continued spending pressures.
- Structural Features: Heightened political disruption on a scale sufficient to alter Thailand's economic policymaking effectiveness and growth prospects, or affect its tourism recovery.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
- Macroeconomic: An improvement in medium-term growth prospects without a significant rise in non-financial private-sector debt.
- Public Finances: A decline in the general government debt to GDP ratio; for example, due to smaller fiscal deficits 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 IDR scale.
Fitch's sovereign rating committee adjusted the output from the SRM to arrive at the final Long-Term Foreign-Currency IDR by applying its QO, relative to SRM data and output, as follows:
- Macro: +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 Covid-19 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.
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 Long-Term Foreign-Currency 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.
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 WBGIs 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. As Thailand has a percentile rank below 50 for the respective Governance Indicator, this has a negative impact on the credit profile.
Thailand has an ESG Relevance Score of '5[+]' for Rule of Law, Institutional & Regulatory Quality and Control of Corruption as WBGIs 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. As Thailand has a percentile rank above 50 for the respective Governance Indicators, this has a positive impact on the credit profile.
Thailand has an ESG Relevance Score of '4' for Human Rights and Political Freedoms as the Voice and Accountability pillar of the WBGIs is relevant to the rating and a rating driver. As Thailand has a percentile rank below 50 for the respective Governance Indicator, this has a negative impact on the credit profile.
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. As Thailand has track record of 20+ years without a restructuring of public debt and captured in our SRM variable, this has a positive impact on the credit profile.
Except for the matters discussed above, the highest level of ESG credit relevance, if present, 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