Thai banks, corporates will take time to recover in wake of pandemic
Thailand’s recovery after the Covid-19 outbreak is likely to be weighed down by the country’s high reliance on tourism and weak domestic demand, Fitch Ratings analysts said at the agency’s annual conference.
The two-day conference, which started on Wednesday, focused on the credit impact of the pandemic.
Fitch still expects Thailand’s sovereign ratings to be resilient in light of its strong public and external finance buffers. However, the country’s banking and corporate sector face significant financial and operating risks into 2021.
James McCormack, managing director and global head of sovereigns at Fitch Ratings, said there is a sequential economic recovery underway globally, led by China where the virus appears to have been contained and production levels have rebounded.
However, Fitch does not forecast a “V-shaped” recovery for Thailand, as the services sector, including tourism, will be slow to gain traction amid prolonged restrictions on movement and new social distancing norms.
Thailand is among the countries most exposed to tourism, and Fitch forecasts an economic contraction of 7.8 per cent this year, followed by an expansion of 3.9 per cent in 2021, both below the global average. Even so, Thailand's (BBB+/Stable) sovereign rating is still supported by comparatively robust public and external finances.
Both the US and Europe are still tackling Covid-19 infections, though Fitch does not expect a return of economy-wide lockdowns. Fiscal support will continue as long as effects of the pandemic linger, and the surge in global government debt levels is the primary reason for the record number of “negative outlooks”, which currently stand at 40.
The United States’ “AAA” rating has been given negative outlook and near-term uncertainties may rise with the upcoming election. A number of European sovereigns are also on negative outlook, and rating outcomes will be guided in part by medium-term fiscal consolidation strategies. The same is true of Japan (A/Negative), which has the highest government debt burden of any Fitch-rated sovereign.
In his presentation on the banking sector, Parson Singha, senior director of financial institutions at Fitch Ratings Thailand, pointed out that the pandemic has raised the level of credit risk globally, leading to a significant deterioration in the operating environment for banks.
In the longer run, Thai banks may suffer the adverse impact of a period of low interest rates and poor economic growth, which make finding earnings drivers more difficult. Rapid changes in technology and consumer behaviour also pose risks, but could also present opportunities to nimble players.
Obboon Thirachit, director of corporate ratings at Fitch Ratings Thailand, said the agency expects the pandemic to cause aggregate EBITDA (earnings before interest, taxes, depreciation and amortisation) of Thai corporates drop by 24 per cent, with median leverage increasing 4.4 times this year, compared to 2.8 times last year.
Fitch expects a gradual earnings recovery and deleveraging in 2021, subject to the continued containment of the pandemic in Thailand.
Oil, gas and petrochemicals are among the hardest-hit sectors amid the plunge in oil price and weak product margins. International travel restrictions and higher unemployment will remain a constraint to the recovery of hotel, airline, residential property and non-food retail industries. The more resilient sectors are telecoms, utilities and food retail.
With several Thai corporates on negative outlook, further downgrades are possible if the expected economic recovery falters.
Siew Wai Wan, senior director of insurance ratings at Fitch Ratings, said operating challenges from the pandemic have exacerbated the impact from the low interest rate environment and recent catastrophes. Insurance companies are expected to increasingly focus on capital and risk management to withstand the volatile operating landscape as well as stricter regulatory regimes.