Ratings has affirmed Thailand's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BBB+' with a Stable Outlook.

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Fitch Affirms Thailand at 'BBB+'; Outlook Stable

Fitch Ratings - Hong Kong - 29 Oct 2020: Fitch Ratings has affirmed Thailand's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BBB+' with a Stable Outlook.

KEY RATING DRIVERS

Thailand's ratings are supported by strong public and external finances, which have provided buffers to respond to the economic shock and market volatility associated with the coronavirus pandemic. General government debt as a share of GDP will rise sharply from the policy response and decline in nominal GDP, but a record of prudent fiscal management limits public finance risks, in our view. The ratings are primarily constrained by weaker structural features relative to 'BBB' peers, including lower World Bank governance scores and per capita income. Persistent political uncertainty also weighs on the credit profile through its impact on the economic outlook and policymaking effectiveness.

Fitch forecasts Thailand's economy will contract by 7.8% in 2020, more sharply than its rating peers (current BBB median of -6.7%) due to its dependence on external trade and tourism inflows. The latter accounts directly for around 11.4% of GDP. A highly successful containment of the coronavirus locally - fewer than 4,000 cumulative cases have been reported through October - is supporting a recovery in domestic demand following a lockdown in 2Q20, when GDP shrank by 12.2% yoy. However, a near-complete halt in foreign tourism since April and a slump in merchandise exports continue to drag on economic performance.

Thailand's political environment remains fragile, evident from the recent escalation in youth demonstrations. In our view, heightened political disruptions are unlikely to have immediate economic implications, especially as international tourism, which could normally have been deterred, has already diminished due to the pandemic. However, the rise in political uncertainty underscores political risks over the medium term, which could further weigh on potential economic growth by hampering consumer and business sentiment. Policymaking could be hindered by the ongoing political volatility, evident from a cabinet reshuffle this past summer that underscored the fragility of the government coalition.

We expect the economy to rebound by 3.8% in 2021, underpinned by government stimulus measures and improving external demand for merchandise exports, as well as base effects. This recovery will be relatively sluggish in light of the dependence on inbound tourism flows, which will recover slowly. A cautious reopening to international tourists is underway, but we expect a gradual recovery to begin only in 2H21 due to lingering uncertainty over the evolution of the pandemic and the availability of effective vaccines and treatments. A recovery of domestic demand and local tourism will only partly offset losses from fewer inbound tourists, and will be constrained by rising vulnerabilities associated with household debt.

The government has announced a series of fiscal packages since the onset of the pandemic to cushion the economy. The measures include direct cash handouts to targeted individuals, soft loans to vulnerable private businesses, reduction of social security fund contributions and utility charges, an increase in medical and health spending and, more recently, tax breaks and subsidy packages to boost domestic consumption. In addition to budget allocations for COVID-19 relief spending, the cabinet has approved an emergency decree authorising the Ministry of Finance to borrow up to THB1.0 trillion cumulatively in the fiscal year ended September 2020 (FY20) and FY21, equivalent to about 3.2% of GDP annually if equally deployed. The approval of the FY21 budget in late September bodes well for budget execution in a timely fashion compared with FY20. This also reduces potential inefficiency in public spending amid a fragile economic recovery.

We estimate the general government deficit at 4.8% of GDP (Government Finance Statistics basis) in FY20 and project a deficit at 4.6% of GDP in FY21, compared with a surplus of 0.4% in FY19. Higher fiscal deficits and slow economic recovery may raise Thailand's general government debt ratio in the next few years. Fitch forecasts gross general government debt (GGGD) to increase to 45.4% of GDP by end-FY20 and 49.7% of GDP by end-FY21, from 35.9% as of end-FY19, still well below the current 'BBB' median of 54.8% as of end-FY21. We expect Thailand's general government debt ratio to stabilise over the medium term in light of a record of prudent fiscal management, reinforced by the Fiscal Responsibility Act of 2018, though the trajectory remains sensitive to growth assumptions.

The Bank of Thailand (BoT) has introduced various monetary easing measures to mitigate the adverse economic impact of the coronavirus pandemic. The central bank has cut its benchmark policy rate by a cumulative 75bp since February to a historical low of 0.5% and has recently extended its THB500 billion soft loan scheme by six months to April 2021 to financial institutions for on-lending to SMEs. Fitch expects average headline inflation of -0.9% in 2020 largely due to falling oil prices and the pandemic impact, before rebounding to the lower end of the BoT's 1%-3% target band in 2021. We expect the BoT to maintain an accommodative monetary policy stance, and believe it has additional policy tools to support the economy and preserve financial stability should downside risks materialise.

Fitch expects Thailand's external finances to remain a core credit strength and buffer against external volatility. The current account will remain in surplus, at 2.9% of GDP in 2020 under Fitch projections, down from 7.0% in 2019 due to the large decline in tourism receipts. However, the agency forecasts the current account surplus will resume widening in 2021 to 3.1% of GDP, and Thailand's large net external creditor position will remain at around 48.4% of GDP in 2020-2021 (BBB median: 9.8% debtor position). We project official foreign reserves will cover 11.8 months of current external payments in 2020, well in excess of the 'BBB' median of 8.7 months.

Fitch has a negative sector outlook on Thailand's banks amid the weak operating environment. Household debt-to-GDP ratio, which was already high compared with that of rating peers, rose to 83.8% in 2Q20 amid the deep economic contraction. However, Fitch expects Thai banks' capital and loan-loss reserve coverage to remain sound, and to provide adequate buffers against potential shocks. Pressure on banks' balance sheet has risen, and the impact is likely to become more visible once the debt relief measures expire.

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. 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 in 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 positive rating action/upgrade:

- Macroeconomic: A resumption of resilient growth without a significant rise in household debt.

- Structural Features: Lower social and political tensions, for instance, reflected by improved governance and development indicators or a record of political stability.

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 negatively affect Thailand's economic prospects.

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 rated peers, as follows:

- Macroeconomic: We have introduced a new positive notch to offset the deterioration in the SRM output driven by the coronavirus shock, in particular from the growth volatility variable. Fitch expects Thailand to have the sound policymaking framework and capacity to absorb the shock without lasting effects on medium-term macroeconomic stability.

- External Finance: +1 notch, to reflect strengths in Thailand's external finances not captured in the SRM, including its large net creditor position, strong external liquidity, and demonstrated resilience to external shocks.

- Structural Features: -1 notch, to reflect lingering uncertainty in Thailand's political environment.

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 world economy performs broadly in line with Fitch's latest Global Economic Outlook, published in September 2020.

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 highly relevant to the rating and a key rating driver with a high weight. Thailand's rating reflects a higher level of risks in the political environment relative to peers.

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.

Thailand has an ESG Relevance Score of 4 for Human Rights and Political Freedoms as social stability and voice and accountability are reflected in the WBGIs that have the highest weight in the SRM. They are 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.

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(ies), either due to their nature or to the way in which they are being managed by the entity(ies). 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

Fitch (Hong Kong) Limited

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

Jeremy Zook

Director

Secondary Rating Analyst

+852 2263 9944