Prime Minister Srettha Thavisin has announced several populist policies in a bid to increase real GDP growth and unveiled an expansionary budget of 3.48 trillion baht for 2024.
While full details of the budget have not yet been revealed, we have revised our budget deficit forecast to 3.6% of GDP in fiscal 2024, which ends on Sept 30 next year.
Over the medium term, we think expansionary populist policies will remain forthcoming, causing the country's fiscal position to deteriorate. As such, we now expect wider budget shortfalls in the next four years (2024-27).
We are not expecting any immediate impact on the country's current fiscal position. Our projection for a budget deficit of 2.9% of GDP in fiscal 2023 still stands. Any new policies implemented by the new government will be reflected in fiscal 2024. The upcoming budget is not expected to be ready until the second quarter of 2024.
In fiscal 2023, Thailand remained on track to meet its expenditure target. The latest data as of Aug 31 showed government spending coming in at about 94% of the total budget, largely similar to prior years. Historically, government spending has mostly been kept within budget appropriations and we believe this trend will largely continue.
Meanwhile, a weaker economy will weigh on public coffers. We previously thought the country's economic rebound would help bolster revenue collection, but it has been lacklustre thus far. Second-quarter real GDP data showed growth slowing to 1.8% year-on-year, defying most analysts' expectations for an acceleration.
REVENUE GROWTH SLIPS
With the economy still facing several headwinds stemming from high interest rates and weak external demand, we are less optimistic about the growth outlook and lowered our projection from 3.0% to 2.8% for 2023. Similarly, we now expect revenue growth to come in at just 2.4% year-on-year, revised downward from 4% previously.
We are forecasting the budget shortfall to widen substantially to 3.6% of GDP in fiscal 2024 before remaining stable over the subsequent four years. At 3.6% of GDP, the five-year average will be wider than pre-pandemic levels (2015-19) of 2.7%. This will be driven by the range of populist policies we think the Pheu Thai-led government will carry out in line with a stated growth target of 5.0%.
Policymakers have already announced several measures that will be detrimental to the country's fiscal position. The most prominent example is the introduction of the 10,000-baht digital wallet handout. It was originally planned to include all Thai citizens over the age of 16, which would cost about 560 billion baht (2.8% of GDP). Changes have since been made following numerous criticisms, leading to the expected exclusion of "rich people" from the scheme.
While it is not yet clear what the definition of "rich people" is, we believe the programme will still cost the government a substantial amount if it includes everyone from the lower-middle income bracket.
THAKSIN PLAYBOOK
Mr Srettha's emphasis on populist policies to address the country's poor economic performance is reminiscent of those carried out by Thaksin Shinawatra during his tenure as prime minister from 2001-06.
The new prime minister has made promises to bolster the economy by stimulating domestic consumption, boosting small and medium-sized enterprises, and addressing income inequality. While this will help support growth in the medium term, the bigger concern is fiscal sustainability.
As a result of the pandemic, the country's fiscal deficit has widened to record levels and debt levels have ballooned.
Implementing expansive populist measures without concrete plans to expand the tax base will exacerbate these challenges over the longer term, which will lead to a larger deficit over the next four years.
As a consequence, we expect debt levels to stay elevated. Government debt as a share of GDP surged to 61% in fiscal 2022, from 41.2% before the pandemic.
Similar to most countries, Thailand ran huge budget deficits as the government increased expenditure levels considerably to mitigate the economic fallout caused by the pandemic.
A delay in the fiscal consolidation process as the new government expands fiscal spending to fund new initiatives could result in government debt remaining at elevated levels of around 60% in the medium term.
BMI Country Risk & Industry Research is part of Fitch Solutions Group (FSG), an affiliate of Fitch Ratings Inc. FSG is solely responsible for the content, without any input from Fitch Ratings.