By The Nation
In its statement released on Thursday, it said the decision to change the outlook to positive reflects Moody’s view that investment in physical and human capital, in the context of a lengthening track-record of a predictable and stable macroeconomic environment, might over time boost Thailand’s competitiveness. Such developments could partially offset the drag on the country’s growth potential from gaps in human capital development and an ageing population.
The affirmation of Thailand’s Baa1 ratings reflects the country’s very strong public and external finances that provide Thailand significant room to counter shocks. Thailand’s large and diverse economy also supports shock absorption capacity and the rating. By contrast, the Baa1 rating also takes into account credit constraints from lingering, albeit easing, political risk and, longer-term structural challenges related to an ageing society and labour skills shortages that weigh on growth potential.
In addition, Moody’s has also affirmed Thailand’s local currency senior unsecured ratings at Baa1 and the foreign currency commercial paper rating at P-2. Concurrently, Moody’s has affirmed the local currency senior unsecured rating for the country’s central bank, the Bank of Thailand, at Baa1.
Thailand’s country ceilings remain unchanged. The long-term foreign currency bond ceiling remains at A2, and the short-term foreign currency bond ceiling at P-1. The long-term foreign currency deposit ceiling remains at Baa1, and the short-term foreign currency deposit ceiling at P-2. Furthermore, the long-term local currency bond and deposit ceilings remain unchanged at A1.
Thailand is building a lengthening track record of transparent and predictable fiscal and monetary policies that maintain a broadly stable and low government debt burden, low and stable inflation and financial stability. Long-standing macroeconomic stability through economic and political cycles supports competitiveness.
The government’s investment plans on physical capital may partly address Thailand’s competitiveness challenges. In particular, under its 20-year national strategy, the government’s economic plan to raise infrastructure investment in the $50 billion Eastern Economic Corridor (EEC, about 10 per cent of GDP) could support Thailand’s competitiveness through attracting new businesses and technologies. At present, development in the EEC is contributing to a pick-up in private domestic investment and foreign direct investment. Total net investment applications through the Board of Investment in the government’s 10 targeted industries reached Bt700-Bt800 billion in 2017-18 (4.6 per cent-5.2 per cent of GDP), double the levels of 2016. Beyond the EEC, the government’s plan includes investing Bt2.76 trillion (about $89 billion or 18 per cent of GDP) in infrastructure through the Transport Action Plan 2016-18.
Increased competitiveness would be reflected in sustained higher private investment and higher productivity. In the context of potential shifts in production location across Asia, related in part to the US-China trade dispute, a boost to the economy’s attractiveness as a place to locate production from high-quality infrastructure would benefit Thailand’s growth in the medium term.
But the effectiveness of investment in physical capital in attracting private investment and shifting the country’s production to higher value-added industries also hinges on addressing the country’s labour skills shortages. In particular, Thailand faces a shortage of highly skilled labour in areas such as next generation automobiles, software engineering and artificial intelligence, which poses risks to the government’s ability to develop manufacturing capabilities in higher value-added production. The government, in conjunction with the United Nations, is working to promote education that focuses on science, technology, engineering and mathematics, while it is also establishing vocational training institutes to enhance the development of teachers and link educational institutions to enterprises to foster human capital development. These initiatives may, over time, help boost labour skills and productivity.
Overall, Moody’s projects real GDP growth of between 3.0 per cent and 3.5 per cent in 2019-20. At these rates, Thailand’s growth will remain in line with the median for A- and Baa-rated sovereigns in the next couple of years. More effective investment in physical and human capital would boost potential growth. Longer term, effective investment in physical and human capital also offers the prospects to partially offset significant downward pressure on the economy’s growth potential from a rapidly ageing population.
The affirmation of Thailand’s Baa1 ratings reflects the country’s very strong public and external finances, the result of effective macroeconomic policy, that provide Thailand significant room to counter shocks.
Despite continued fiscal accommodation to support infrastructure investment in the next few years, Moody’s projects general government debt to remain around 35 per cent-40 per cent of GDP in 2019-20, staying around the median of 37 per cent for A-rated sovereigns and well below the 52 per cent median for Baa-rated sovereigns. Thailand’s low government debt burden provides it very high fiscal flexibility such that it can fund additional spending on addressing economic and social development needs and counter potential future shocks without weighing on its very high fiscal strength.
Proactive debt management and the very low share of foreign currency denominated debt will continue to insulate Thailand from future potential shifts in international investor sentiment, as most recently evidenced during the period of emerging market volatility in the second half of 2018. Only 1.5 per cent of outstanding government debt is in foreign currency as of April 2019 and only 17.8 per cent of outstanding local government bonds are held by non-residents as of July 2019, in both cases lower than for other similarly-rated sovereigns.