Fitch Ratings has affirmed Thailand's long-term foreign-currency issuer default rating (IDR) at 'BBB+' with a stable outlook. Among the key factors influencing ratings:
External strengths, structural constraints: Thailand's ratings reflect its robust external finances and sound macroeconomic policy framework, balanced against some weaker structural features compared with 'BBB' category peers, including lower per capita income and World Bank governance scores.
Public finance metrics have deteriorated in the past few years, and are currently aligned with those of peers. Uncertainty surrounding the financing of the new government's spending pledges implies a fiscal risk in the near term, while unfavourable demographics form a medium-term risk.
Growth to gain more traction: Fitch forecasts Thailand's GDP growth will accelerate to 3.8% in 2024 after a weaker expansion than expected of 2.8% in 2023. We expect stronger growth will be bolstered by a steady tourism recovery, a gradual strengthening of merchandise export momentum, and higher domestic demand from stepped-up public spending and other supportive policy settings.
The new government has launched temporary visa exemptions for tourists from targeted source markets, such as China and India. A faster tourism recovery and higher fiscal spending than we currently anticipate could boost near-term growth further, while downside risks may come from a more pronounced global economic slowdown, severe drought due to El Nino and significant budget delays.
New coalition: We believe the formation of the coalition government led by the Pheu Thai Party (PTP) after a four-month impasse reduces near-term political uncertainty. Bringing the various factions together could encourage consensus-led policymaking, although balancing diverse forces could affect policymaking effectiveness and fiscal prudence. Some political uncertainty remains, as the senate will no longer be able to join the lower house to select the premier from May 2024.
Key policy priorities: Economic headwinds are an imminent challenge for the new government, whose expansionary budget proposal for the fiscal year ending in September 2024 focuses on stimulating domestic demand.
We expect budget enactment to be delayed by seven months to late April 2024, which will weigh on disbursement of capital spending for new investment projects. However, we believe the government will ramp up efforts to support the economy in the budget, without shifting significantly the country's key medium-term strategy of fostering investment and productivity growth.
Wider deficits, slower consolidation: Fitch projects the general government deficit will increase to 3.7% of GDP in fiscal 2024, against a median for BBB-rated economies of 2.9%, from an estimated 3.0% in fiscal 2023. We assume stepped-up expenditure to accommodate the digital cash handout scheme and other measures advocated by the coalition parties during the election campaign, more than offsetting steady revenue collection as growth strengthens.
We forecast the fiscal deficit to decline only modestly to 3.5% in fiscal 2025 (BBB median: 2.6%), due largely to sustained social and capital spending.
Pro-growth spending pledges: Pheu Thai has promised wide-ranging digital cash handouts to targeted citizens of 16 years and older at a one-off cost of roughly 500 billion baht (2.6% of GDP). The plan is to propose a special loan decree to fund the handouts, which will be postponed by three months to May 2024.
However, we see some near-term uncertainty in terms of parliamentary approval for the government to fully fund the scheme with new debt. This could imply slippage in near-term consolidation targets and further constrain fiscal headroom.
Public debt ratio to stabilise: Fitch forecasts that gross general government debt (GGGD) will rise to 56.8% of GDP by fiscal 2025, as much as 21 percentage points above pre-pandemic levels and broadly aligned with the BBB peer median of 56.3%.
The slightly wider fiscal-deficit targets over the next few years -- of around 3.4% of GDP, as published recently by the new government in its medium-term fiscal framework -- will weaken the government debt trajectory, particularly if the rising spending fails to sustain growth in a more durable way.
Our baseline case projects the GGGD/GDP ratio will stabilise at around 57.5% by fiscal 2027. We believe the government's access to deep domestic capital markets through the cycle and a favourable debt structure with long average maturity and mostly in local currency mitigate the public finance risks associated with the large increase in the ratio.
Robust external finances: Thailand's resilient external position remains a core strength, and should provide a sufficient buffer to tightened global financial conditions and geopolitical risks. Fitch forecasts Thailand to maintain its large net external creditor position at 40.1% of GDP in 2024, well above the projected median for BBB (-0.9%) and A-rated (5.9%) category peers.
We forecast the current account will flip back into a surplus of 1.0% of GDP in 2023, from a 3.2% deficit in 2022, with foreign reserves covering 7.1 months of current external payments, above the projected BBB median of 5.0 months.
Moderate inflationary pressures: We forecast headline inflation to average 1.4% in 2023 on extended energy price subsidies and high base effects. We project inflation to remain within the Bank of Thailand's 1-3% target band at 1.8% in 2024, reflecting the impact of a continued tourism recovery, government stimulus measures and mild pass-through from the minimum wage hike from late 2024.
Our baseline expects the central bank to keep its policy rate unchanged at 2.5% through end-2024, although risk from El Nino to agricultural output and rising oil prices could lead to more price pressures.
Household debt remains high: Thailand's household debt remained elevated at 90.7% of GDP as of June 30, 2023, above that of most regional peers. Deterioration of indebted low-income households' and SMEs' ability to service debt amid growth headwinds and monetary policy normalisation could pose asset-quality challenges to banks.
However, we expect banks' earnings to further recover in 2024, while they maintain solid capital and loan-loss allowance coverage with stable liquidity, which provide sound buffers against the risk of further impairments on restructured loans.