Fitch Ratings has affirmed Thailand's long-term foreign-currency issuer default rating (IDR) at BBB+ with a stable outlook.
The country's ratings are supported by robust external and public finances, which continue to provide buffers against downside risks amid a prolonged economic recovery from the coronavirus pandemic, Fitch said in a statement.
"These strengths are balanced against weaker structural features relative to BBB range peers, including lower World Bank governance scores and per capita income, and weaker medium-term growth prospects based in part on population ageing," it added.
The stable outlook reflects an assessment that the rise in government debt associated with the fiscal response to the pandemic can be contained over the medium term, based on the strengths of the fiscal framework and the country's record in managing its public finances.
Fitch forecasts Thailand's tourism-dependent economy will recover only modestly, by 1.8% this year, after a sharp 6.1% contraction in 2020. The weak recovery reflects limited tourism inflows and disruptions from the third Covid-19 wave that emerged in April. The official unemployment rate rose to 2% as of the end of the first quarter, which will constrain the recovery in private consumption.
"Even so, strong merchandise exports along with higher disbursements for public investment projects pose some upside to growth prospects in the second half," Fitch said.
The ratings agency projects real GDP growth will rise to 4.2% in 2022, underpinned by external demand, government stimulus measures and a gradual return of tourism.
A mass vaccination programme is now under way, with a goal to vaccinate 70% of the population by the end of the year or sooner. The "Phuket Sandbox", to be launched in July, will mark the return of quarantine-free inbound travel for vaccinated tourists and could be expanded to other provinces.
"Still, a resumption of tourism inflows to pre-pandemic levels will take a few years," Fitch said.
Fitch forecasts the general government deficit will widen to 5.9% of GDP in the 2021 fiscal year ending Sept 30, from an estimated 4.4% in fiscal 2020. The wider fiscal deficit reflects efforts to step up support for economic activity and protect households and businesses from longer-term scarring.
"Under our baseline case we forecast the general government deficit will narrow to 4% of GDP in fiscal 2022, on improving revenue and declining Covid-related spending associated with the expected upturn," it said.
The cabinet approved a new emergency decree in May authorising the Finance Ministry to borrow up to an additional 500 billion baht (2.9% of projected fiscal 2022 GDP) by September next year. Fitch expects the bulk of these funds to be disbursed in fiscal 2022.
Government debt is projected to increase to 52.7% of GDP by the end of fiscal 2022, from 35.9% at the end of fiscal 2019, still below the current BBB median of 59.4% projected for 2022.
"Mitigating the risks associated with the large increase in public debt is the government's sound debt management strategy, exemplified by a long average maturity on government securities of 9.5 years, and high share of local currency denomination of over 98%," said Fitch, noting that the median for BBB-rated economies is 68.8%.
Robust external finances remain a core credit strength of Thailand, said Fitch. It forecasts a current account surplus of 0.5% of GDP in 2021, well down from the pre-pandemic period, due to the collapse in tourism receipts.
"However, we expect the surplus will gradually widen to 2.3% of GDP in 2022 and 4% in 2023 as tourism recovers."
Fitch projects foreign-currency reserves to remain largely stable at US$258 billion by end-2021, sufficient to cover 10.8 months of current external payments, and in excess of the BBB median of 9.3 months.
"Thailand's political environment remains delicate, although the youth-led demonstrations that began in 2020 have been subdued amid the third wave of the virus," Fitch added. "We believe the economic impact of political tensions has been limited. Still, risks of political tensions heading into the next general elections, due by 2023, could hamper consumer and business sentiment."
Fitch maintains a stable sector outlook on Thailand's banks.
"The operating environment remains challenging amid the sluggish economic recovery," it said, noting the already high household debt-to-GDP ratio rose further to 89.3% as of the end of 2020.
"Higher unemployment associated with the pandemic could hinder some households' ability to service debt. However, we expect the impact of the pandemic on banks' asset quality to be mitigated by sufficient loss buffers."