Bangkok--May 12--Fitch Ratings
This is a correction for a previous message. It corrects the Short-term foreign currency rating in the first paragraph to 'F2' from 'F3'. The corrected text follows:
Fitch Ratings, the international rating agency, has today upgraded the Kingdom of Thailand's Long-term foreign currency rating to 'BBB+' from 'BBB' and the Long-term local currency rating to 'A' from 'A-' (A minus). At the same time, the agency also upgraded Thailand's Short-term foreign currency rating to 'F2' from 'F3'. The Country Ceiling has been revised to 'A-' (A minus) from 'BBB+'. The Outlook on the ratings is Stable.
Fitch's rating action reflects Thailand's increasingly robust external position, recent impressive fiscal outturns and improving banking sector health against a backdrop of solid economic growth. "It is simply hard to argue with the numbers - most of Thailand's credit indicators now look very good compared to 'BBB' rated peers," said Ai Ling Ngiam, Associate Director, Asian Sovereigns.
Thailand's external finances are among the strongest, if not the strongest, in the 'BBB' category. The country's diversified export sector has proven to be surprisingly resilient amidst rising competition from its low-cost peers, helped by a slew of free trade pacts with major trading partners and progress in establishing itself as a key regional player in strategic manufacturing sectors including automobiles. Current account surpluses averaging 5.7 % of GDP since 2000 have helped Thailand reduce its external debt burden by half since end-1997, and the accumulation of foreign exchange reserves has picked up, with reserves reaching THB49 billion at end-March 2005 from 2001. Thailand's international liquidity ratio has continued to rise, hitting 287% in 2005, which is the strongest in the 'BBB' range. Comparatively, the gross external debt to current external receipts ratio is expected to drop significantly to 32% in 2005, only one-fifth that in 1998, and the lowest in the 'BBB' category. Indeed, the country has been a net external creditor since 2003, with net external assets forecast to reach 14% of GDP by 2005.
Fiscal consolidation has also been noteworthy. The general government recorded its first surplus since FY1996 in FY2004, thanks to the cyclical upturn in the economy and structural improvements in revenue collection. Taxes have increased rapidly thanks to the expiry of crisis-related tax breaks in the corporate sector and higher collections generated from rural areas. General government debt (including FIDF liabilities) has fallen to 34% at end 2004 compared to a 'BBB' median of 37%.
On the political front, the incumbent Thai Rak Thai ("TRT") party now has a strong public mandate and tight hold over the legislature since the recent general elections. This has come partly on the back of impressive economic growth momentum over the last three years - supported by a rebound in consumer confidence and a revival in investment - with GDP growth expected to moderate only slightly to 5.5% in 2005 in the face of a more challenging external environment. The smooth transition of power and the presence of a strong, stable and fully democratic government is certainly impressive in a regional context but the ongoing instability in the south of Thailand, notwithstanding recent conciliation efforts, has marred the improvement in Thailand's political risk profile.
Looking forward, Fitch cautions that the recently unveiled large-scale public investment programme bears material risks for the public finances outlook even though recent outturns have given the government more fiscal headroom.
Fitch's medium-term fiscal scenarios show that it is likely that Thailand's non-financial public sector debt-to-GDP ratio could marginally breach the 50% mark that the government has set as its own target. "If badly managed, these planned investment projects, worth 36% of 2004 GDP spread over 5 years, could see all the improvement in broader public debt to GDP ratio since 2002 unwound," said Ms. Ngiam. State-owned enterprises ("SOEs") in particular could be exposed to financial risks posed by the substantial scale of these infrastructure projects.
The clear increase in state intervention in the economy in recent years has also raised some questions as to the underlying momentum of private sector activity through the recovery phase. In particular, government-directed lending initiatives by state-owned banks - which have accounted for 80% of the increase in bank credit since 2002 - and specialised financial institutions pose risks to the broader public debt outlook. This comes against a backdrop of concerns that linger about the potential for contingent liabilities from a still-incomplete financial sector restructuring process that has seen only limited final resolution of bad debts in the hands of various state-owned asset management companies. However, Fitch notes that the Bank of Thailand's response to concerns about potential asset quality problems at one large state-owned bank last year has helped mitigate the risk of imprudent state-bank lending in the future.
Contact: Ai Ling Ngiam, Hong Kong +852 2263 9913; Brian Coulton, Hong Kong +852 2263 9797.
Media Relations: Ching-Yuen Lock, Singapore, Tel: +65 6238 7301. End.