Despite a strong fiscal position and low external vulnerability constituting credit strengths amid recurring political uncertainty, Thailand's ageing society, moderate competitiveness and labour shortages will weigh on economic growth and public finances over time, says Moody's Investors Service.
"Absent materially higher migration, population ageing will weigh significantly on growth potential," Moody's said in a report. "Moreover, while data indicate that Thailand's education standards are higher than the average for countries with similar incomes, they remain lower than some rating peers and Asian neighbours.
"In the absence of ongoing policy reform, this will exacerbate demographic and skills constraints, and weigh on economic competitiveness."
Similar to some neighbouring Asean countries, Thailand's economy faces major structural challenges such as moderate competitiveness, gaps in human capital development and a rapidly ageing population.
Thailand's per capita income is lower than Malaysia's, partly because of Thailand's high dependence on agricultural employment, which makes up nearly one-third of overall employment, and is less productive than other industries, according to the report.
The World Bank Human Capital Index 2018 indicated Thailand's human capital score is higher than the average of countries in the same income group. But while primary school education attainment is higher than in some similarly rated peers in Southeast Asia and Latin America, many of which have similarly large manufacturing sectors, the distribution ratio of lower secondary, upper secondary and post secondary education attainment is lower.
"This contributes to skill shortages in Thailand's labour market that will challenge the country's ability to expand production in higher-value-added industries that rely on skilled labour," Moody's said.
Thailand's economic growth and competitiveness challenges will be exacerbated by an ageing population. The working-age population will fall more sharply over the next two decades compared with many similarly rated sovereigns, according to Moody's.
The working age population peaked at 71.9% of total population in 2010, and the UN forecasts the decline to continue over the coming decades.
To counter this problem, the government has relaxed visa measures to attract foreign professionals in the Eastern Economic Corridor (EEC) in areas such as software engineering. The government is also collaborating with international academic institutions, domestic universities and vocational education institutions to foster human capital development.
"Unless Thailand can effectively address labour skills constraints, the rise of manufacturing production in other Southeast Asian countries will continue to attract a growing share of foreign investment, likely at the expense of Thailand and the EEC," the report said.
Thailand's sovereign credit is rated Baa1 with a stable outlook by Moody's.
STRONG FISCAL POSITION
While policy continuity of the country's 20-year national strategy from the new government, including investment in the flagship EEC, is projected to remain on track, opposition to the ruling coalition's slim majority in the lower house of parliament could delay implementation of certain policies, Moody's said.
"We expect Thailand to sustain its relative fiscal strength because of a track record of adhering to fiscal rules, which supports our very high policy effectiveness assessment," the report said.