By THE NATION
The outlook revision on Thailand's IDRs reflects increasing confidence that lingering political risks are unlikely to derail sound macroeconomic management, Fitch said.
This is demonstrated by the sustained strength of external and public finances over the past several years, which has resulted in greater resilience to macroeconomic and financial shocks.
A major political hurdle has been passed with the formation of a new civilian-led government following elections in March. Nevertheless, a degree of political uncertainty remains in the context of the stability of the new coalition government, Fitch added.
“Thailand’s robust external position is a core credit strength, exemplified by the economy’s insulation from recent bouts of global risk aversion toward emerging markets, when the country’s financial markets continued to exhibit safe-haven characteristics,” according to Fitch.
The baht has been one of the strongest performing emerging-market currencies against the US dollar in 2019, appreciating by over 4.5 per cent as equity and debt inflows have increased, particularly in June.
Fitch forecasts external finances to remain robust. It expects the current account surplus to remain high relative to peers at 5.6 per cent of GDP in 2019 and 4.9 per cent in 2020, supported by tourism inflows and a goods surplus, despite slowing exports.
Fitch estimates that the large current account surplus along with portfolio inflows will facilitate an increase in official reserves to about $216 billion (7.9 months external payments coverage) at end-2019, from $205.6 billion at end-2018. Thailand’s net external creditor position of 43 per cent of GDP in 2019, under Fitch’s forecast, would be well above the BBB median net debtor position of 7 per cent of GDP and the A median net creditor position of 9.7 per cent of GDP.
The rating agency forecasts general government debt-to-GDP to rise to 40.7 per cent by the fiscal year ending September 2023, from 36.3 per cent in FY18, as the government uses its fiscal space to boost infrastructure investment, before trending downward thereafter.
Fiscal deficits remain low relative to peers. Fitch forecasts a general government deficit (on a government finance statistics basis) of 0.2 per cent of GDP in fiscal year 2019 from a surplus of 0.1 per cent in the previous fiscal year. Fitch expects continued implementation of the economic plan under the 20-year national strategy and the focus on development of the Eastern Economic Corridor (EEC).
The broad policy contours and sustained infrastructure investment should be supportive of near- and medium-term growth prospects, according to Fitch. However, the stability of the new coalition government under Prime Minister Prayut Chan-o-cha, with its disparate 19 parties led by the Phalang Pracharath Party, is uncertain and its ability to implement its policy agenda could be constrained by its thin majority. Protracted negotiations over the formation of the new government have already led to a three-month delay in the budget process and the approval of new infrastructure projects.
The BBB+ IDR also reflects the following key rating drivers:
Fitch forecasts growth to slow, as with other trade-dependent countries in the region. It expects Thailand’s GDP growth to ease to 3.3 per cent in 2019 from 4.1 per cent in the previous year.
Merchandise export values contracted by 2.7 per cent year on year through May 2019 and Fitch forecasts full-year export growth to remain flat. It expects investment to moderate slightly in 2019 due to approval delays of new infrastructure projects and lower investment by export-oriented firms. Consumption is likely to receive some support from government transfers to low income households, but may be constrained by high household debt levels.
Fitch forecasts growth to rise to 3.5 per cent in 2020 as the drag from declining exports subsides. Investment should accelerate in 2020 as public investment ramps up and helps to crowd in private investment. A further escalation in the US-China trade war is a downside risk for the economic outlook, but could be somewhat offset by gains from trade diversion and investment flows away from China.
It expects the Bank of Thailand (BOT) to keep rates on hold at 1.75 per cent during 2019, taking into account its focus on financial stability, in the context of low inflation and slowing growth.
The divergence of the BOT’s monetary policy stance compared with other global central banks has contributed to a broad appreciation of the baht. The baht’s strength relative to regional peers could weigh on Thailand's export competitiveness, but it is unclear that this has manifested itself yet, with recent export declines broadly in line with peers.
The BOT has voiced concerns about the strength of the currency and in July took steps to reduce short-term flows, such as a lower ceiling on non-resident local currency accounts for securities and greater non-resident reporting requirements on holdings of debt securities.
Medium-term growth prospects are dampened by structural challenges from an ageing population. The government’s economic agenda and the EEC have the potential to boost productivity by improving infrastructure and incentivising foreign investment.
Foreign direct investment has been resilient over the past several years and new FDI applications jumped sharply in the first quarter. However, it remains to be seen whether Thailand can address risks of a middle income trap associated with ageing demographics and human capital constraints.
Fitch believes financial sector risks are well contained, but there are pockets of vulnerability. Household debt as a share of GDP has begun ticking up after a couple years of moderate declines, reaching 78.7 per cent in the first quarter, due to rising mortgage and auto loan credit. Debt ratios as a share of income have risen steadily, posing risks for debt servicing if economic growth slows sharply or interest rates rise rapidly. However, banks are well-capitalised and have sound liquidity, providing a buffer against potential shocks, particularly for low income households. The BOT tightened its loan-to-value ratio measures for mortgages on April 1.
Weak structural factors relative to BBB and A rated peers constrain Thailand’s rating, Fitch said. Thailand’s World Bank Governance score stands at the 44th percentile, compared with the BBB median in the 58th percentile. GDP per capita of $8,059 in 2019 is below the BBB median of $11,595 and A median of $22,914.