Fitch Revises Outlook on Thailand to Positive; Affirms at 'BBB+'

Stocks News Friday July 19, 2019 11:50 —PRESS RELEASE LOCAL

Bangkok--19 Jul--Fitch Ratings Fitch Ratings-Hong Kong-18 July 2019: Fitch Ratings has revised its Outlook on Thailand's Long-Term Foreign-Currency Issuer Default Rating (IDR) to Positive from Stable and affirmed the rating at 'BBB+'. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS The Outlook revision on Thailand's IDRs reflects increasing confidence that lingering political risks are unlikely to derail sound macroeconomic management. This is demonstrated by the sustained strength of external and public finances over the past several years, which has resulted in greater resilience to macroeconomic and financial shocks. A major political hurdle has been passed with the formation of a new civilian-led government following elections in March. Nevertheless, a degree of political uncertainty remains in the context of the stability of the new coalition government. Thailand's robust external position is a core credit strength, exemplified by the economy's insulation from recent bouts of global risk aversion toward emerging markets, when the country's financial markets continued to exhibit safe-haven characteristics. The Thai baht has been one of the strongest performing emerging-market currencies against the US dollar in 2019, appreciating by over 4.5% as equity and debt inflows have increased, particularly in June. Fitch forecasts external finances to remain robust. We expect the current account surplus to remain high relative to peers at 5.6% of GDP in 2019 and 4.9% in 2020, supported by tourism inflows and a goods surplus, despite slowing exports. Fitch estimates that the large current account surplus along with portfolio inflows will facilitate an increase in official reserves to about USD216 billion (7.9 months external payments coverage) at end-2019, from USD205.6 billion at end-2018. Thailand's net external creditor position of 43% of GDP in 2019, under Fitch's forecast, would be well above the 'BBB' median net debtor position of 7.0% of GDP and the 'A' median net creditor position of 9.7% of GDP. Fiscal management remains sound, supported by a record of prudent policies and the Fiscal Responsibility Act (FRA) enacted in April 2018. We forecast general government debt-to-GDP to rise to 40.7% by the fiscal year ending-September 2023 (FY23), from 36.3% in FY18, as the government uses its fiscal space to boost infrastructure investment, before trending downward thereafter. Much of the infrastructure financing is undertaken through direct government borrowing outside of the budget, but is done transparently and is subject to cabinet approval and limits under the FRA. Fiscal deficits remain low relative to peers. We forecast a general government deficit (on a government finance statistics basis) of 0.2% of GDP in FY19 from a surplus of 0.1% in FY18. Approval of the FY20 budget has been delayed by three months, but we expect the deficit to rise to 0.4% of GDP as the government is likely to step up transfers to low-income households and infrastructure spending rises. Completion of the first general elections held since the 2014 military coup help ease political uncertainty. Moreover, the composition of the new government supports policy continuity. Fitch expects continued implementation of the economic plan under the 20-year national strategy and the focus on development of the Eastern Economic Corridor (EEC). The broad policy contours and sustained infrastructure investment should be supportive of near- and medium-term growth prospects. However, the stability of the new coalition government under Prime Minister Prayuth Chan-o-cha, with its disparate 19 parties led by the Palang Pracharath party, is uncertain and its ability to implement its policy agenda could be constrained by its thin majority. Protracted negotiations over the formation of the new government have already led to a three-month delay in the budget process and the approval of new infrastructure projects. The 'BBB+' IDR also reflects the following key rating drivers: Fitch forecasts growth to slow, as with other trade-dependent countries in the region. We expect GDP growth in Thailand's economy to ease to 3.3% in 2019 from 4.1% the previous year, due to external pressures, despite the relative resilience of domestic demand. Merchandise export values contracted by 2.7% yoy through May 2019 and Fitch forecasts full-year export growth to remain flat. We expect investment to moderate slightly in 2019 due to approval delays of new infrastructure projects and lower investment by export-oriented firms. Consumption is likely to receive some support from government transfers to low income households, but may be constrained by high household debt levels. Fitch forecasts growth to rise to 3.5% in 2020 as the drag from declining exports subsides. Investment should accelerate in 2020 as public investment ramps up and helps to crowd in private investment. A further escalation in the US-China trade war is a downside risk for the economic outlook, but could be somewhat offset by gains from trade diversion and investment flows away from China. We expect the Bank of Thailand (BoT) to keep rates on hold at 1.75% during 2019, taking into account its focus on financial stability, in the context of low inflation and slowing growth. The divergence of the BoT's monetary policy stance compared with other global central banks has contributed to a broad appreciation of the baht. The baht's strength relative to regional peers could weigh on Thailand's export competitiveness, but it is unclear that this has manifested itself yet, with recent export declines broadly in line with peers. The BoT has voiced concerns about the strength of the currency and in July took steps to reduce short-term flows, such as a lower ceiling on non-resident local currency accounts for securities and greater non-resident reporting requirements on holdings of debt securities. Medium-term growth prospects are dampened by structural challenges from an ageing population. The government's economic agenda and the EEC have the potential to boost productivity by improving infrastructure and incentivising foreign investment. Foreign direct investment has been resilient over the past several years and new FDI applications jumped sharply in 1Q19. However, it remains to be seen whether Thailand can address risks of a middle income trap associated with ageing demographics and human capital constraints. Fitch believes financial sector risks are well contained, but there are pockets of vulnerability. Household debt as a share of GDP has begun ticking up after a couple years of moderate declines, reaching 78.7% in 1Q19, due to rising mortgage and auto loan credit. Debt ratios as a share of income have risen steadily, posing risks for debt servicing if economic growth slows sharply or interest rates rise rapidly. However, banks are well-capitalised and have sound liquidity, providing a buffer against potential shocks, particularly for low income households. The BoT tightened its loan-to-value ratio measures for mortgages on 1 April 2019. Weak structural factors relative to 'BBB' and 'A' rated peers constrain Thailand's rating. Thailand's World Bank Governance score stands at the 44th percentile, compared with the 'BBB' median in the 58th percentile. GDP per capita of USD8,059 in 2019 is below the 'BBB' median of USD11,595 and 'A' median of USD22,914. SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO) Fitch's proprietary SRM assigns Thailand a score equivalent to a rating of 'BBB+' on the Long-Term Foreign-Currency IDR scale. Fitch's sovereign rating committee adjusted the output from the SRM to arrive at the final Long-Term Foreign-Currency IDR by applying its QO, relative to rated peers, as follows: - External Finances: +1 notch, to reflect strengths in Thailand's external finances not captured in the SRM, including its large net creditor position and strong external liquidity. - Structural Features: -1 notch, to reflect residual, albeit declining, uncertainty in Thailand's political environment even after the completion of recent elections. Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a Long-Term Foreign-Currency IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable or not fully reflected in the SRM. RATING SENSITIVITIES The main factors that could, individually or collectively, lead to an upgrade are: - The avoidance of disruptions to the macroeconomic policy framework through the maintenance of political stability. - A continuation of resilient growth performance without the emergence of imbalances. The main factors that could, individually or collectively, lead to a negative rating action: - Renewed political disruption on a scale sufficient to have a negative effect on Thailand's economy. - A significant and sustained rise in Thailand's government debt ratios; for example, due to fiscal deterioration or a materialisation of contingent liabilities on the sovereign balance sheet. KEY ASSUMPTIONS The global economy performs in line with Fitch's Global Economic Outlook. The full list of rating actions is as follows: Long-Term Foreign-Currency IDR affirmed at 'BBB+'; Outlook Revised to Positive from Stable Long-Term Local-Currency IDR affirmed at 'BBB+'; Outlook Revised to Positive from Stable Short-Term Foreign-Currency IDR affirmed at 'F1' Short-Term Local-Currency IDR affirmed at 'F1' Country Ceiling affirmed at 'A-' Issue ratings on long-term senior unsecured local-currency bonds affirmed at 'BBB+' Issue ratings on short-term senior unsecured foreign-currency bonds affirmed at 'F1'

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