Dagong Upgrades the Sovereign Credit Rating Outlook of the Kingdom of Thailand to Stable
Dagong Global Credit Rating Co., Ltd.
July 21, 2017
Dagong Global Credit Rating Co., Ltd. (hereinafter referred to as “Dagong”) has decided today to upgrade the outlook for the sovereign credit ratings of the Kingdom of Thailand from negative to stable, while maintaining its local and foreign currency sovereign credit ratings at BBB. The political situation of Thailand will tend towards further stabilization in the short term, and its economy will grow slightly. Although fiscal expansion policies will slightly push up the general government’s fiscal deficit, it is the government’s stabilized debt burden, high financing capability, as well as Thailand’s sufficient foreign reserves which could guarantee that government solvency in both local and foreign currency remains stable.
The main reasons for upgrading the sovereign credit rating outlook of Thailand are set out below:
1. The stability of Thailand’s political situation will tend to improve, ensuring the continuity of government policy. The new constitution, signed and promulgated by Thailand’s King in April 2017, expands the number of senate members and grants the senate increasing power over the election of the prime minister, which could further cement the military’s continued influence over the government even following the next election. Thus, the stability of Thailand‘s political situation is expected to improve in the short term, which will help guarantee the continued implementation of national development strategies such as Thailand Industry 4.0 and Thailand's Eastern Economic Corridor projects.
2. The economy will grow mildly in the short term. The slowdown in investment slackened Thailand’s economic recovery, achieving a 3.2% growth in 2016. In the short term, stable domestic consumption demands and positive projections of exports will make consumption and net export the key drivers of economic growth. Meanwhile, the gradual improvement of domestic and external demands will aid investment recovery. Economic growth is expected to grow by 3.2% in 2017 and by 3.3% in 2018. The economic reform policies in Thailand’s 20-year National Development Strategy will show their effects in the long run, and Thailand’s average economic growth is expected to grow 3.1% in 2019-2021.
3. Thailand’s general government fiscal deficit will be controlled at a moderate level, and debt repayment resources will remain stable. To stimulate economic growth, Thailand‘s government will continue to maintain its expansionary fiscal policy in the short term. The government’s preferential tax policies and tax exemption will pose downward pressure upon fiscal revenue, while infrastructure construction programs will increase the government’s capital expenditure. Thus, Thailand general government primary fiscal deficit is projected to rise to 0.8% in Fiscal Year 2016/2017 and to 0.7% in FY2017/2018. Nevertheless, fiscal deficit will be controlled at a moderate level, and the government’s financing needs-to-GDP ratio will stand at 4.0%, a relatively low level. Regarding Thailand’s effective financing channel and low financing cost, debt repayment sources are expected to remain stable.
4. Thailand’s general government solvency in both local and foreign currencies will remain stable. Fiscal deficit has increased the debt burden on the government, and the general government debt-to-GDP ratio will rise to 42.5% in 2017 and further to 43.0% in 2018, respectively. However, long-term debts account for more than 90.0% of the total government debt, and so the government’s debt repayment pressure is not severe in the short term. In 2016, Thailand’s total external debt-to-GDP ratio had declined to 32.3%, while the current account surplus-to-GDP ratio had soared to 11.6%. In the short term, a rise in import demands and costs will narrow down Thailand’s current account surplus, although international reserves taking up as much as 40.0% of GDP will be able to cover Thailand’s total external debt and guarantee that the government’s solvency in foreign currency remains stable.
There are three primary reasons for maintaining Thailand’s sovereign credit ratings: first, household debts make up as high as nearly 80.0% of GDP, which is a potential threat to the stability of Thailand’s credit environment; second, negative factors, including the country‘s heavy economic dependence on foreign trade, the weakening labor force advantage, and vulnerable political stability, will constrain the improvement of the general government’s wealth creation capability over the medium and long terms; third, the Fed entering the rate-hike cycle might increase capital outflow risks to Thailand, undermining the stability of the financial system and incurring external risks. Dagong will continue to monitor changes in Thailand’s rating factors and risks, and thereof make corresponding adjustments if necessary.