Thailand's economic recovery could be constrained by a global slowdown, while the new coalition government's economic stimulus policies could lead to higher government debt, according to Fitch Ratings analysts.
Thai banks are expected to have some ratings headroom because of their improving financial performance, as well as, in some cases, expectations of government or shareholder support, Fitch analysts said at the company's recent annual conference on Thailand.
The agency forecasts a mild recession in the US later this year and below-trend growth in Europe, as developed economies continue to struggle with persistent inflation that will remain above most countries' targets into 2024, said James McCormack, managing director and global head of sovereigns at Fitch.
The US economy is proving resilient to higher interest rates, but job growth is starting to slow, consistent with an overall easing of growth momentum.
Growth is slowing in China, but for different reasons. A severe downturn in the property sector is affecting confidence elsewhere, prompting policymakers to roll out modest stimulus measures. It is unclear whether sufficient stimulus will be forthcoming to ensure growth reaches the government's "around 5%" target for 2023.
Thailand is not immune to the weaker global backdrop, with merchandise exports contracting year-on-year since October 2022 and tourist arrivals, while rising, remaining well below pre-pandemic levels.
Fitch believes the recent formation of the multi-party coalition government could encourage consensus-led policymaking, but wide-ranging views within the coalition will complicate the process and may delay the budget for fiscal 2024, which begins on Oct 1 this year.
Fiscal consolidation is likely to be constrained by parties' campaign pledges to raise social spending. This would support growth in the short term, though it could put upward pressure on government debt relative to GDP unless the pick-up in growth is sustained.
Jonathan Cornish, managing director and head of Asia-Pacific banks at Fitch, said the mid-year sector outlook for banking systems in developed economies was biased towards the downside.
Fitch sees business generation prospects deteriorating relative to 2022 and certain core financial metrics weakening over the course of 2023 and into 2024 in markets such as North America, the UK, Germany and Australia.
By comparison, the sector outlook for emerging market banking systems looks more benign despite still challenging conditions in some major markets. In the largest of them, China, the Fitch-rated banks appear most resilient, but strengthening headwinds means an increasing number of smaller unrated banks will likely face difficulty sustaining growth in business volumes, margins and profitability, while asset quality and balance sheets come under further pressure.
In Thailand, the ratings outlook for all banks is stable, albeit for varying reasons. The issuer default ratings of the largest private commercial banks are all at BBB with stable outlooks, and are driven by their viability ratings (the same level as their government support ratings).
Fitch expects the environment in Thailand over the next two years to become more conducive for banks to grow profitably and generate capital despite the risk of further impairments on restructured loans. That said, major banks have an appetite to seek opportunities for growth domestically in non-bank segments, as well as abroad.