Fitch Ratings affirmed Thailand’s long-term foreign currency issuer (IDR) default rating at ‘BBB+’ with a stable outlook.
A full list of rating actions can be found at the end of this rating action commentary.
Main rating factors
Strong externals, structural constraints
Thailand’s ratings are underpinned by the country’s sustained external financial strengths and sound macroeconomic policy framework. The ratings also reflect weaker structural characteristics compared to BBB peers, including lower per capita income and World Bank governance scores. Moreover, prospects for growth and fiscal consolidation in the medium term are limited by unfavorable demographic factors and the potential scars of the Covid-19 pandemic.
Recover to strengthen
Fitch expects Thailand’s economy to grow 3.2% in 2022 (BBB median: 3.4%), from 1.5% in 2021, supported by improving domestic consumption, still supportive policies and a modest recovery inbound tourism. Thailand has eased national lockdowns and fully reopened its borders to international travellers.
Fitch forecasts GDP growth to accelerate to 4.5% in 2023 (BBB median: 4.0%), supported by a continued recovery in domestic demand and a faster recovery in inbound tourism. Our baseline scenario projects tourist arrivals to increase to 22 million in 2023, or 55% of its pre-pandemic level, from 6.5 million in 2022. We project that a full recovery of tourist flows to pre-pandemic levels will take a few years, especially the slow recovery of arrivals from China.
Reduction of the budget deficit
Fitch expects the general government deficit to gradually narrow to 5.3% of GDP (Basis for Government Finance Statistics) in the year ending September 2022 (FY22) (BBB median: 3.9%) and 3.7% in FY23 (median BBB: 3.1%) from around 7.0% in FY21. A narrower budget deficit reflects stronger revenue collection and a measured unwinding of pandemic-related economic relief measures. Our forecast for modest fiscal consolidation reflects the still nascent stage of Thailand’s ongoing economic recovery.
Higher but stabilizing debt ratio
Fitch forecasts gross government debt (GGGD) to reach 55.4% of GDP by FY22 (FY21: 53.8%), broadly in line with the “BBB” median (55.9%). We expect the ratio to rise to 56.6% by FY26, about 21 percentage points above its pre-pandemic level. We see risks to the GGGD/GDP tilted to the upside given plans for only gradual consolidation, particularly if the recovery is prolonged, but risks are mitigated by the government’s fiscally prudent track record, financial markets deep national capital and a stock of public debt mainly financed in baht.
Strong external finances
Thailand’s resilient external position is a fundamental asset that we believe provides sufficient protection to manage tighter global financial conditions and increased geopolitical risks. Fitch forecasts that Thailand will maintain its position as a major net external creditor at 41.5% of GDP in 2022, well above the median level projected for the peers “BBB” (-4.4%) and “A” (- 6.2%). We forecast foreign exchange reserves at $232 billion by the end of 2022, sufficient to cover 7.8 months of current external payments in 2022, above the “BBB” median of 5.6 months.
Fitch expects the current account deficit to narrow to 1.8% of GDP in 2022 from around 2.1% in 2021, reflecting modest recovery in tourism receipts offsetting higher energy imports and freight payments . We expect the current account to return to a surplus of 1.0% in 2023 and widen further to 2.8% in 2024 as the tourism recovery gathers pace.
Inflationary pressures are increasing
Fitch expects headline inflation to average around 6.0% in 2022, down from 1.2% in 2021, driven primarily by widening cost push factors. We expect the Bank of Thailand (BoT) to raise the benchmark interest rate by 25 basis points in 2H22 after keeping the policy rate at an all-time low of 0.5% since May 2020. The BoT adopted a more hawkish stance in recent months, but Fitch believes the pace of rate hikes will be gradual so as not to derail the recovery. We expect inflation to return to the BoT’s 1% to 3% target range in 2023 at 2.3%.
High household debt
Thai household debt increased further to 90.1% of GDP at the end of 4Q21, compared to its pre-pandemic level of 79.9% at the end of 4Q19. Low-income households and indebted SMEs are more exposed to the pandemic shock and remain a source of vulnerability for the banking sector, if the recovery proves to be longer than expected. Fitch expects bank loan writedowns to rise as regulatory relief measures expire in 2022, but asset quality pressures are mitigated by loan loss provisions and Tier 1 capital adequate.
Medium-term growth prospects are hampered by an aging population, which could be exacerbated by the potential economic scars of the pandemic. The scar effects could manifest themselves in a prolonged period of subdued investment, slower productivity growth, and deteriorating labor skills and incomes. To counter these potential headwinds, the government is seeking to boost productivity through investments in hard and soft infrastructure and by promoting targeted innovation and technology industries.
Elections bring political uncertainty
The next general elections scheduled by March 2023 could inject further uncertainty around the political outlook. The election campaign also carries risks of increased political tensions, which could manifest in further protests, although we do not expect these risks to disrupt the economic recovery. The outcome of the election remains uncertain, but it could result in another broad-coalition government, which could call into question the effectiveness of policy-making, according to Fitch.
ESG – Governance
Thailand has an ESG Relevance Score (RS) of ‘5’ for Political Stability and Rights, and ‘5[+]’ for the Rule of Law, Institutional and Regulatory Quality and the Fight against Corruption. These scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary sovereign rating model. Thailand has an average WBGI ranking at the 45th percentile, partly reflecting strong institutional capacity and regulatory quality, and established rule of law, offset by persistent political volatility.
Read more: fitchratings.com