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Rating Action:

Moody's affirms Thailand's Baa1 rating, maintains stable outlook

18 Jul 2017

Singapore, July 18, 2017 -- Moody's Investors Service ("Moody's") has today affirmed the Government of Thailand's long-term foreign currency and local currency issuer ratings at Baa1 and maintained the stable outlook.

The key drivers of the rating affirmation and stable outlook are:

1. Relative to peers, Thailand will sustain its substantial fiscal strength and low external vulnerability;

2. Near-term political uncertainties have eased, but have not dissipated; and

3. At the same time, Thailand's long-term growth outlook faces challenges from diminished competitiveness, which is evident in weakening foreign direct investment (FDI) inflows, as well as an aging population.

Moody's has also affirmed the government's local currency senior unsecured ratings at Baa1, the government's foreign currency commercial paper rating at P-2, and the senior unsecured ratings for the liabilities of the country's central bank, the Bank of Thailand, at Baa1.

Thailand's country ceilings remain unchanged. The long-term foreign currency bond ceiling remains at A2, and the short-term foreign currency bond ceiling at P-1. The long-term foreign currency deposit ceiling remains at Baa1, and the short-term foreign currency deposit ceiling at P-2. Furthermore, the long-term local currency bond and deposit ceilings remain unchanged at A1.

RATINGS RATIONALE

STABLE AND RELATIVELY STRONG FISCAL AND EXTERNAL POSITIONS

Thailand's relative fiscal strength and external balance have proven resilient to a slowdown in growth. Due to a combination of external and domestic factors, Thailand's real GDP growth since 2013 has remained below the long-run, post-Asian financial crisis average of 4.1% between 2000 and 2015. However, lackluster growth has not led to a significant deterioration in Thailand's fiscal and external metrics and we expect Thailand to retain its relative credit strengths in these areas.

The Thai government's debt burden has risen to 31.5% of GDP in FY2016 (fiscal year ending September 2016) from 29.3% in FY2013. By comparison, the corresponding ratios for similarly rated peers have risen more rapidly over the same period and remain higher than that for Thailand. The median government debt for Baa-rated countries has risen by six percentage points to 44.2% of GDP in 2016 from 38.2% in 2013.

We expect the combination of near-term fiscal stimulus and infrastructure development to lead to a further widening of the fiscal deficit and a consequent rise in the stock of direct government debt to just over 35% of GDP by the end of the next fiscal year. Nevertheless, the resulting fiscal metrics would still compare favorably against most Baa-rated peers.

Debt affordability will also remain relatively strong on account of the low interest payments associated with the government's low stock of debt, as well as stable revenue performance.

As regards external vulnerability, a deterioration of terms of trade has coincided with a worsening in external balances in a number of Thailand's rating peers since 2013. By contrast, Thailand's current account surpluses and reserve buffers have increased significantly over the same period.

Import compression from lackluster domestic demand and lower prices for the country's imported energy inputs have offset the sluggishness of goods exports, notwithstanding the recent pickup in external demand. At the same time, the health of services exports, particularly in tourism, contributed to the widening current account surplus that has acted as a more formidable buffer against capital flow volatility and the net outflow of FDI.

As a result, Thailand's official reserve assets climbed to $185.6 billion in June 2017 from a recent low of $155.5 billion in September 2015. We expect our measure of reserve adequacy--the External Vulnerability Indicator which is the ratio of short-term and long-term maturing debt to foreign exchange reserves--to fall below 40 in 2018 from nearly 50 in 2015.

NEAR-TERM POLITICAL UNCERTAINTIES HAVE EASED, BUT HAVE NOT DISSIPATED

The royal approval and entry into force of a new constitution in April 2017 removes some uncertainty on the near-term political outlook as it binds the current military-led government to yield to democratically-elected rule. Over the next year, the government will implement the necessary legal framework in preparation for elections that we expect to be held by the end of 2018, albeit well after the initially proposed target of 2015.

The government has also overseen an orderly process of monarchical transition, which has had only a minor impact on the economy as positive real GDP growth has been maintained.

Nevertheless, Thailand continues to face elevated political risks relative to peers. Underlying political polarization that has contributed to political turmoil since 2006 has not been fully addressed. There have been occasional terrorist bombings, and low-level separatist violence in southern Thailand also persists. Although these events have not significantly affected tourism inflows or the macro-economic policy framework, uncertainty around the timing of the transition to electoral democracy has affected domestic and foreign investment decisions, as further elaborated below.

ERODING COMPETITIVENESS

Thailand's competitiveness has eroded in recent years, as reflected in weakening inflows of FDI. In 2016, gross FDI inflows reached their lowest level since at least 2005 in both US dollar terms ($1.7 billion) and as a share of GDP (0.4% of GDP). In part, this situation reflects the emergence of other countries in the region as more attractive places for investment for certain types of production, despite Thailand's absolute advantage in terms of infrastructure.

In addition, Thailand faces formidable structural challenges related to its aging society, the relatively weak quality of the country's education system, and a mismatch between the availability of and the demand for skills in the labor force, evidenced by high employment shares in the comparatively lower productivity agricultural sector. The labor force peaked in 2013 and will continue to decline in the near- and longer-term, acting as a constraint to improving potential growth.

Political risk will continue to weigh on competitiveness through its impact on private investment decisions. Government instability is cited as a top concern in cross-country surveys such as the World Economic Forum's Global Competitiveness Report. The impact of political risk on the economy is reflected by the sluggishness of private sector gross fixed capital formation since 2013, which has contracted by 1.0% year-on-year over the past four years, as compared to double-digit increases in the period following the global financial crisis.

We expect that these challenges to Thailand's competitiveness will remain, the government has responded by introducing a host of policies to improve long-term growth prospects, underpinned by an intent to reduce the country's dependence on low-cost manufacturing towards higher value-added activities. These include a 20-year national strategy that was recently passed into law, as well as a corresponding action plan, the 12th National Economic and Social Development Plan for 2017-2021. The success of these initiatives in improving economic outcomes and competitiveness is subject to considerable implementation risks.

WHAT COULD MOVE THE RATING UP/DOWN

Against the backdrop of further improvement in the political climate represented by a successful transition to a stable civilian government, upward pressure on the rating could come from tangible progress on competitiveness that helps restore private domestic and foreign investment and economic growth towards pre-political crisis trends. A strengthening of public sector finances, which would include a reduction in budget deficits that contributes to debt consolidation, would also be credit positive.

Any combination of the following factors could potentially trigger a negative rating action: a renewed escalation of the political conflict, resulting in significant and potentially long-lasting effects on tourism, investment, or manufacturing; a significant rise in government funding costs related to domestic political uncertainty or a lapse in fiscal discipline; and/or a sharp deterioration of the balance of payments and significant loss of official international reserves.

GDP per capita (PPP basis, US$): 16,888 (2016 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 3.2% (2016 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 1.1% (2016 Actual)

Gen. Gov. Financial Balance/GDP: -0.8% (2016 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: 11.7% (2016 Actual) (also known as External Balance)

External debt/GDP: 32.3% (2016 Actual)

Level of economic development: High level of economic resilience

Default history: No default events (on bonds or loans) have been recorded since 1983.

On 13 July 2017, a rating committee was called to discuss the rating of the Thailand, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has not materially changed. The issuer has become less susceptible to event risks.

The principal methodology used in these ratings was Sovereign Bond Ratings published in December 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Christian de Guzman
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Atsi Sheth
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
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