Fitch Affirms Thailand at 'BBB+'; Outlook Stable

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Fitch Affirms Thailand at 'BBB+'; Outlook Stable

Fitch Ratings - Hong Kong - 30 Nov 2022: Fitch Ratings has affirmed Thailand's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BBB+' with a Stable Outlook.

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 are underpinned by its robust external finances and strong macroeconomic policy framework, which should bolster the economic recovery from the Covid-19 pandemic.

These strengths are balanced by weaker structural features compared with its peer group, including lower per capita income and World Bank governance scores. Public finance metrics deteriorated in the past couple of years, and while they are in line with peers, future consolidation could be challenged by adverse demographic factors and scarring from the pandemic.

Growth to Gain Traction: Fitch forecasts Thailand's GDP growth to accelerate to 3.8% in 2023 (BBB median: 2.0%) from 3.3% in 2022. Growth momentum will be underpinned by a robust recovery of inbound tourism due in part to pent-up demand, and continued improvement in domestic demand based on sustained public spending and easing inflation.

These positive trends should offset external headwinds from global monetary tightening and weaker external demand due to lacklustre global growth prospects.

Our baseline expects tourist arrivals to rise to about 24 million in 2023, or 60% of its pre-pandemic level, from 10.3 million in 2022. The nascent tourism recovery has gained momentum in 2H22 after the government fully reopened borders and officially transitioned towards treating Covid-19 as being endemic. A sharper global economic downturn, however, could weigh on growth, while the potential for a faster-than-expected revival of Chinese tourist arrivals in 2H23 forms an upside risk.

Mild Fiscal Consolidation: Fitch estimates a general government deficit of 4.9% of GDP (Government Finance Statistics basis) in the fiscal year ended September 2022 (FY22) (BBB median: 4.1%), down from 6.8% in FY21, largely reflecting stronger-than-budgeted revenue and reductions in pandemic-related spending. We forecast a narrower deficit of 3.8% in FY23 (BBB median: 3.6%) as modest fiscal consolidation continues. We expect buoyant revenue collection as growth strengthens, though sustained public investment and targeted energy subsidies and transfers will keep the deficit sizeable.

Elevated Public-Debt Ratio: Fitch forecasts gross general government debt to rise to 56.2% of GDP by FYE24 (BBB median: 55.8%) from 54.9% at FYE22, which is 20pp above pre-pandemic levels. Under the government's current Medium-Term Fiscal Framework (MTFF), deficits are forecast to remain steady and above pre-pandemic levels. This would lead to the debt ratio stabilising at around current levels, and could constrain fiscal headroom from a ratings perspective in the event of another shock.

Public-Debt Risks Mitigated: Fitch believes the government's solid access to its deep domestic capital markets through the cycle and a public debt stock mainly funded in baht mitigate the risks. The government is set to recalibrate its MTFF in early-2023, which could facilitate faster consolidation.

Robust External Position: Thailand's external finances have remained resilient during the pandemic, providing buffer against tighter external funding conditions. We forecast the current account to flip back into a surplus of 1.9% of GDP in 2023, from a deficit of 3.2% in 2022, largely due to stronger tourism receipts offsetting weaker merchandise exports, and as headwinds from high energy import and freight payments gradually wane. We expect the current account surplus to further widen to 3.7% in 2024, as the tourism recovery gains further traction.

Fitch projects Thailand will maintain its large net external creditor position at 42.1% of GDP in 2023, which is well above the projected median level for 'BBB' (-1.5%) and 'A' (-2.3%) peers. Thailand's foreign-currency reserves fell in 2022 amid a terms-of-trade shock as a large net oil importer. We expect reserves to gradually rebound and remain sufficient to cover 6.9 months of current external payment in 2023, in excess of the projected 'BBB' median of 5.6 months.

Moderate Inflationary Pressures: Fitch forecasts headline inflation to average 6.2% in 2022, mainly fueled by broadening cost-push factors and baht weakness. We project inflation will moderate to 2.8% in 2023 on easing commodity prices and currency pressures, and a mild wage-price spiral. We expect the Bank of Thailand to stick to a measured tightening path by raising the benchmark interest rate to 1.25% by end-4Q22 and 2.00% by end-4Q23.

High Household Debt: Fitch has a neutral sector outlook on Thailand's banks. We believe financial-sector risks are well contained, despite pockets of vulnerability. Thailand's household debt fell to 88.2% of GDP by end-2Q22 from 90.1% six months ago but remained above that of most regional peers. Deterioration of indebted low-income households' and SMEs' ability to service debt amid monetary policy normalisation poses asset-quality challenges to banks. However, banks are well-capitalised with high loan-loss allowance coverage and stable liquidity, providing buffer against unexpected shocks.

Political Uncertainty Amid Upcoming Elections: Political tensions could rise in the run-up to the elections, but are unlikely to disrupt growth momentum, despite possible sporadic protests. The Election Commission has tentatively set the next general elections on 7 May 2023. The election outcome remains highly uncertain, and there remains the potential that a broad and fragmented coalition government could emerge. This could complicate effective policymaking, in our view, but is unlikely to lead to a major shift in the key economic development strategy by the next government.

ESG - Governance: Thailand has an ESG Relevance Score (RS) of '5' for both Political Stability and Rights, and '5[+]' for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption. These 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 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 a 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.

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 (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:

- 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 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.

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.

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 World Bank Governance Indicators 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 World Bank Governance Indicators 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 World Bank Governance Indicators 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

FITCH RATINGS ANALYSTS

George Xu

Associate Director

Primary Rating Analyst

+852 2263 9629

[email protected]

Fitch (Hong Kong) Limited

19/F Man Yee Building 60-68 Des Voeux Road Central Hong Kong

Jeremy Zook

Director

Secondary Rating Analyst