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FITCH12 40Fitch Affirms Thailand at 'BBB+'; Outlook Stable

       Fitch Ratings - Hong Kong - 21 Jun 2022: Fitch Ratings has affirmed Thailand's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BBB+' with a Stable Outlook.

A full list of rating actions is at the end of this rating action commentary.

KEY RATING DRIVERS

         Strong Externals, Structural Constraints: Thailand's ratings are underpinned by the country's sustained external finance strengths and strong macroeconomic policy framework. The ratings also reflect weaker structural features relative to 'BBB' peers, including lower per capita income and World Bank governance scores. Moreover, medium-term prospects for growth and fiscal consolidation are constrained by adverse demographic factors and potential scarring from the Covid-19 pandemic.

        Recovery to Strengthen: Fitch forecasts Thailand's economy will expand by 3.2% in 2022 (BBB median: 3.4%), up from 1.5% in 2021, bolstered by improved domestic consumption, still-supportive policy settings, and a mild recovery in inbound tourism. Thailand has relaxed domestic containment measures and fully reopened its borders to international travellers.

        Fitch projects GDP growth will accelerate to 4.5% in 2023 (BBB median: 4.0%), underpinned by a continued recovery in domestic demand and a faster resumption of inbound tourism. Our baseline expects tourist arrivals will increase to 22 million in 2023, or 55% of its pre-pandemic level, from 6.5 million in 2022. We envisage a full resumption of tourism inflows to pre-pandemic levels will take a few years, particularly given the slow revival of arrivals from China.

        Narrower Fiscal Deficit: Fitch forecasts the general government deficit will gradually narrow to 5.3% of GDP (Government Finance Statistics basis) in the fiscal year ending-September 2022 (FY22) (BBB median: 3.9%), and 3.7% in FY23 (BBB median: 3.1%), from an estimated 7.0% in FY21. A narrower fiscal deficit reflects stronger revenue collection and a measured unwinding of pandemic-related economic relief measures. Our expectation for only a modest fiscal consolidation reflects the still nascent stage of Thailand's ongoing economic recovery.

         Higher, but Stabilising Debt Ratio: Fitch forecasts gross general government debt (GGGD) to rise to 55.4% of GDP by FYE22 (FYE21: 53.8%), broadly in line with the 'BBB' median (55.9%). We expect the ratio to rise to 56.6% by FYE26, about 21pp above its pre-pandemic level. We view risks to GGGD/GDP as tilted to the upside given plans for only gradual consolidation, particularly if the recovery is more prolonged, but the risks are mitigated by the government's record of fiscal prudence, deep domestic capital markets, and a public debt stock mainly funded in baht.

        Robust External Finances: Thailand's resilient external position is a core strength, which, in our view, provides a sufficient buffer to manage tightening global financial conditions and greater geopolitical risks. Fitch forecasts Thailand to maintain its large net external creditor position at 41.5% of GDP in 2022, well above the projected median level for 'BBB' (-4.4%) and 'A' (-6.2%) peers. We expect foreign-currency reserves at USD232 billion by end-2022, sufficient to cover 7.8 months of current external payment in 2022, in excess of the 'BBB' median of 5.6 months.

       Fitch forecasts the current account deficit will narrow to 1.8% of GDP in 2022 from an estimated 2.1% in 2021, which reflects the modest recovery in tourism receipts offsetting higher energy import and freight payments. We expect current account will return to a surplus of 1.0% in 2023 and widen further to 2.8% in 2024, as the tourism recovery gains momentum.

        Inflationary Pressures Rise: Fitch projects headline inflation will average about 6.0% in 2022, up from 1.2% in 2021, primarily fuelled by broadening cost-push factors. We expect the Bank of Thailand (BoT) to raise the benchmark interest rate by 25bp in 2H22 after keeping the policy rate at a historical low of 0.5% since May 2020. The BoT has adopted a more hawkish stance in recent months, but Fitch believes the pace of rate hikes will be gradual to avoid derailing the recovery. We forecast inflation will fall back to the BoT's 1%-3% target band in 2023 at 2.3%.

          Elevated Household Debt: Thailand's household debt further increased to 90.1% of GDP by end-4Q21 from its pre-pandemic level of 79.9% at end-4Q19. Indebted low-income households and SMEs are more exposed to the pandemic shock, and remain a source of vulnerability for the banking sector, if the recovery proves more protracted than we forecast. Fitch expects banks' loan impairments to increase as regulatory relief measures expire in 2022, but asset quality pressures are mitigated by adequate loan-loss allowances and core capital.

         Structural Headwinds: Medium-term growth prospects are dampened by an ageing population, which could be exacerbated by potential economic scarring from the pandemic. The scarring effects could be manifested through an extended period of subdued investment, slowing productivity growth, and a deterioration in labour skills and earnings. To counter these potential headwinds, the government is seeking to boost productivity through hard and soft infrastructure investment, and by promoting targeted innovation and technology industries.

        Elections Bring Political Uncertainty: Upcoming general elections due by March 2023 could inject additional uncertainty around the policy outlook. The run-up to the election also brings risks of an increase in political tensions, potentially manifested in renewed protests, though we do not expect these risks to disrupt the economic recovery. The election outcome remains uncertain, but it may result in another broad coalition government, which could challenge policymaking effectiveness, in Fitch's view.

       ESG - Governance: Thailand has an ESG Relevance Score (RS) of '5' for Political Stability and Rights, and '5[+]' for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption. Theses scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model. Thailand has a medium WBGI ranking at the 45th percentile, in part reflecting sound institutional capacity and regulatory quality, and established rule of law, offset by persistent political volatility.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to negative rating action/downgrade:

- Public Finances: A sustained rise in the general government debt ratio, for example, due to a prolonged fiscal deterioration, or continued spending pressures.

- Structural Features: Heightened political disruption on a scale sufficient to impact Thailand's economic prospects.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

- Macroeconomic: An improvement in medium-term growth prospects without a significant rise in household debt.

- Public Finances: A decline in the general government debt to GDP ratio, for example due to smaller fiscal deficits and/or improving medium-term growth potential.

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 (LT FC) IDR scale.

Fitch's sovereign rating committee adjusted the output from the SRM to arrive at the final LT FC IDR by applying its QO, relative to SRM data and output, as follows:

- Macro: +1 notch, to offset the deterioration of the GDP volatility variable in the SRM, which we believe will be temporary, driven by the impact of the coronavirus shock, and would otherwise add excess volatility to the rating. Fitch expects Thailand to have the sound policymaking framework and capacity to absorb the shock without lasting effects on medium-term macroeconomic stability.

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 LT FC 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 and/or not fully reflected in the SRM.

BEST/WORST CASE RATING SCENARIO

                 International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years.

                 The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG CONSIDERATIONS

                 Thailand has an ESG Relevance Score of '5' for Political Stability and Rights as World Bank Governance Indicators have the highest weight in Fitch's SRM and are therefore highly relevant to the rating and a key rating driver with a high weight. As Thailand has a percentile rank below 50 for the respective Governance Indicator, this has a negative impact on the credit profile.

                 Thailand has an ESG Relevance Score of '5[+]' for Rule of Law, Institutional & Regulatory Quality and Control of Corruption as World Bank Governance Indicators have the highest weight in Fitch's SRM and are therefore highly relevant to the rating and are a key rating driver with a high weight. As Thailand has a percentile rank above 50 for the respective Governance Indicator, this has a positive impact on the credit profile.

                 Thailand has an ESG Relevance Score of '4' for Human Rights and Political Freedoms as the Voice and Accountability pillar of the World Bank Governance Indicators is relevant to the rating and a rating driver. As Thailand has a percentile rank below 50 for the respective Governance Indicator, this has a negative impact on the credit profile.

                 Thailand has an ESG Relevance Score of '4[+]' for Creditor Rights as willingness to service and repay debt is relevant to the rating and is a rating driver for Thailand, as for all sovereigns. As Thailand has track record of 20+ years without a restructuring of public debt and this is captured in our SRM variable, this has a positive impact on the credit profile.

                 Except for the matters discussed above, the highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or to the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

Additional information is available on www.fitchratings.com

FITCH RATINGS ANALYSTS

George Xu

Associate Director

Primary Rating Analyst

+852 2263 9629

george.xu@fitchratings.com

Fitch (Hong Kong) Limited

19/F Man Yee Building 60-68 Des Voeux Road Central Hong Kong

Jeremy Zook

Director

Secondary Rating Analyst

+852 2263 9944

jeremy.zook@fitchratings.com

Andrew Fennell

Senior Director

Committee Chairperson

+852 2263 9925

andrew.fennell@fitchratings.com

APPLICABLE CRITERIA

Country Ceilings Criteria (pub. 01 Jul 2020)

Sovereign Rating Criteria (pub. 11 Apr 2022) (including rating assumption sensitivity)

 

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