Fitch Affirms Thailand at 'BBB+'; Outlook Stable
KEY RATING DRIVERS
The affirmation and Stable Outlook reflect the following key rating drivers:
- Thailand's public and external finances stand out as clear rating strengths, and the economy has shown resilience despite a series of negative shocks. Fitch believes the economy continues to operate below potential. In addition, the ageing population, declining export competitiveness and high private-sector leverage act as structural headwinds. Unresolved political and social cleavages weigh on economic performance and the rating.
- The economic recovery following the military coup in May 2014, after months of political protests had disrupted economic activity, has been lacklustre relative to Fitch's expectations. Fitch expects GDP to grow by 2.7% in 2015, down from 3.5% in our previous review. While tourism has been a notable bright spot, weak global demand, drought and low private-sector confidence have dragged on economic growth. Fitch expects growth to pick up to 3.4% in 2016, assuming the recent surge in public investment is able to support business sentiment and spur private investment growth.
- Thailand's fiscal position remains a credit strength even as the economy underperforms. The general government deficit has been revised down to 0.8% of GDP from 1.8% for 2014, due to lower expenditure. General government debt-to-GDP has also been revised down to 30% for 2014 from 33%. This is due to methodological changes, including a revision of GDP data back to 1993 to include a wider set of economic activities, which raised the level of nominal GDP by 8% in 2014. Fitch expects the general government deficit to widen moderately as the government increases public investment, but projects the government debt ratio to remain on a sustainable path well below the 'BBB' median of 42% of GDP.
- External finances have improved as tourism revenues rebounded, with visitor arrivals from Mainland China almost doubling. Lower oil prices also reduced the value of imports, although the overall impact on net exports was partly offset by a decline in prices for petroleum and agricultural products. Thailand also has substantially higher reserves relative to imports than the medians of the 'BBB' and 'A' peer group, providing protection during bouts of volatile capital flows.
- High private-sector leverage constrains consumption and increases the economy's sensitivity to macroeconomic shocks. Thailand's household debt now exceeds 80% of GDP, having grown rapidly during the government's first-car rebate programme in 2011 and 2012. Credit growth has since slowed, but the household debt-to-GDP ratio has continued to creep up as nominal GDP growth weakened. Persistently low inflation could add to the challenge of deleveraging, and prolong the drag on consumption activity.
- Asset quality has gradually deteriorated, particularly among auto loans extended to low-income households. The default in October 2015 by a subsidiary of Sahaviriya Steel Industries, the largest Thai corporate default since the 1997 financial crisis, will also add to NPLs. Fitch expects the gradual deterioration in asset quality to continue over the next 12 months, with loans to SMEs a particular source of downside risk. However, the banking system remains resilient, as reflected by stable outlooks of banks under Fitch's coverage.
- The political environment remains uncertain. The National Reform Council has rejected a draft constitution prepared by the military that set a timeline for elections to take place by late 2016. Fitch now does not expect elections to be held until at least 2017. Continued uncertainty over the terms and timing of a transition back to civilian rule may weigh on economic activity, as could a flaring of political tensions.
The Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are well balanced.
The main factors that could, individually or collectively, lead to negative rating action are:
- Persistently lower economic growth accompanied by the emergence of macroeconomic imbalances, for example through renewed political instability.
- Evidence that contingent liabilities stemming from broader public-sector debts and a highly leveraged private sector will crystallise on the sovereign balance sheet.
The main factors that could, individually or collectively, lead to positive rating action include:
- Substantial improvements to governance and development indicators, for example through the alleviation of political and social tensions.
- A sustained pick-up in economic growth above Fitch's expectations.
- The global economy performs broadly in line with Fitch's Global Economic Outlook.