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Rating Action:

Moody's changes Thailand's rating outlook to positive from stable; affirms Baa1 ratings

25 Jul 2019

Singapore, July 25, 2019 -- Moody's Investors Service ("Moody's") has today changed the outlook on the Government of Thailand's issuer ratings to positive from stable and affirmed the Baa1 issuer and senior unsecured ratings.

The decision to change the outlook to positive reflects Moody's view that investment in physical and human capital, in the context of a lengthening track-record of a predictable and stable macroeconomic environment, may over time boost Thailand's competitiveness. Such developments could partially offset the drag on the country's growth potential from gaps in human capital development and an ageing population.

The affirmation of Thailand's Baa1 ratings reflects the country's very strong public and external finances that provide Thailand significant room to counter shocks. Thailand's large and diverse economy also supports shock absorption capacity and the rating. By contrast, the Baa1 rating also takes into account credit constraints from lingering, albeit easing, political risk and, longer-term structural challenges related to an ageing society and labour skills shortages that weigh on growth potential.

In addition, Moody's has also affirmed Thailand's local currency senior unsecured ratings at Baa1 and the foreign currency commercial paper rating at P-2. Concurrently, Moody's has affirmed the local currency senior unsecured rating for 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

RATIONALE FOR THE POSITIVE OUTLOOK

INVESTMENT IN PHYSICAL AND HUMAN CAPITAL, COMBINED WITH ONGOING MACRO STABILITY, MAY BOOST THAILAND'S COMPETITIVENESS

The positive outlook is supported by Moody's view that, as Thailand's track record of macroeconomic stability lengthens, the government's investment in physical and human capital may raise the economy's competitiveness. This would help offset the drag on Thailand's growth potential from skills gaps and an ageing population.

Thailand is building a lengthening track record of transparent and predictable fiscal and monetary policies that maintain a broadly stable and low government debt burden, low and stable inflation and financial stability. Long-standing macroeconomic stability through economic and political cycles supports competitiveness.

In recent years, competitiveness has been hampered by delays in infrastructure investment and a lack of skills to allow Thailand's economy to move to higher value-added sectors.

The government's investment plans on physical capital may partly address Thailand's competitiveness challenges. In particular, under its 20-year national strategy, the government's economic plan to raise infrastructure investment in the $50 billion Eastern Economic Corridor (EEC, about 10% of GDP) could support Thailand's competitiveness through attracting new businesses and technologies. At present, development in the EEC is contributing to a pick-up in private domestic investment and foreign direct investment. Total net investment applications through the Board of Investment in the government's 10 targeted industries reached THB700-800 billion in 2017-18 (about $23-$26 billion, or 4.6%-5.2% of GDP), double the levels of 2016. Beyond the EEC, the government's plan includes investing THB2.76 trillion (about $89 billion or 18% of GDP) in infrastructure through the Transport Action Plan 2016-18.

Increased competitiveness would be reflected in sustained higher private investment and higher productivity. In the context of potential shifts in production location across Asia, related in part to the US-China trade dispute, a boost to the economy's attractiveness as a place to locate production from high-quality infrastructure would benefit Thailand's growth in the medium term.

But the effectiveness of investment in physical capital in attracting private investment and shifting the country's production to higher value-added industries also hinges on addressing the country's labour skills shortages. In particular, Thailand faces a shortage of highly skilled labour in areas such as next generation automobiles, software engineering and artificial intelligence, which poses risks to the government's ability to develop manufacturing capabilities in higher value-added production. The government, in conjunction with the United Nations, is working to promote education that focuses on science, technology, engineering and mathematics, while it is also establishing vocational training institutes to enhance the development of teachers and link educational institutions to enterprises to foster human capital development. These initiatives may, over time, help boost labour skills and productivity.

Overall, Moody's projects real GDP growth of between 3.0%-3.5% in 2019-20. At these rates, Thailand's growth will remain in line with the median for A- and Baa-rated sovereigns in the next couple of years. More effective investment in physical and human capital would boost potential growth. Longer term, effective investment in physical and human capital also offers the prospects to partially offset significant downward pressure on the economy's growth potential from a rapidly ageing population.

RATIONALE FOR THE RATING AFFIRMATION AT Baa1

MACRO POLICY TO CONTINUE TO DELIVER STRONG PUBLIC AND EXTERNAL FINANCES

The affirmation of Thailand's Baa1 ratings reflects the country's very strong public and external finances, the result of effective macroeconomic policy, that provide Thailand significant room to counter shocks.

Despite continued fiscal accommodation to support infrastructure investment in the next few years, Moody's projects general government debt to remain around 35%-40% of GDP in 2019-20, staying around the median of 37% for A-rated sovereigns and well below the 52% median for Baa-rated sovereigns. Thailand's low government debt burden provides it very high fiscal flexibility such that it can fund additional spending on addressing economic and social development needs and counter potential future shocks without weighing on its very high fiscal strength.

Proactive debt management and the very low share of foreign currency denominated debt will continue to insulate Thailand from future potential shifts in international investor sentiment, as most recently evidenced during the period of emerging market volatility in the second half of 2018. Only 1.5% of outstanding government debt is in foreign currency as of April 2019 and only 17.8% of outstanding local government bonds are held by nonresidents as of July 2019, in both cases lower than for other similarly-rated sovereigns.

Moody's also expects robust external finances to provide a significant buffer against potential shifts in capital flows. Moody's projects Thailand's current account surplus to remain between 3%-5% of GDP in 2019-20, narrower than in recent years given slower global demand and greater infrastructure spending raising the import bill, but still higher than many A- and Baa-rated sovereigns. These external surpluses will continue to support the build-up of strong foreign exchange reserves, which amounted to $215.8 billion or about 40% of GDP in June 2019.

Moody's expects the Bank of Thailand's monetary policy to deliver generally low and stable inflation while maintaining financial stability. In turn, well-anchored inflation expectations, alongside a robust external payments position and ample domestic liquidity, will keep government funding costs low and stable, supporting Thailand's high debt affordability.

Thailand's large and diverse economy also supports shock absorption capacity and the rating. Thailand has well-developed automotive production and electronics export industries, and large agricultural and tourism bases that generate employment, incomes and output.

LINGERING, ALBEIT EASING, POLITICAL RISK

Political risk remains a constraint on the rating, although, in Moody's view, it has eased recently. In particular, Moody's expects the new, elected, administration to maintain a broad focus on policies that support infrastructure investment and economic growth and reduce social disparities and income inequality while maintaining fiscal discipline.

But political uncertainties remain, given a large and diverse mix of political parties in the ruling coalition and lingering tensions between the government and opposition parties. Moody's assessment is that there is a moderate probability of a recurrence in domestic political stress that could have a moderate credit impact on the effectiveness of policymaking, economic growth, and, if prolonged, fiscal and external balances.

STRUCTURAL CHALLENGES FROM SKILLS GAPS AND AN AGEING POPULATION REMAIN

Challenges to Thailand's growth and competitiveness from population ageing and labour skills shortages remain.

The working-age population will fall more sharply over the next two decades compared to many similarly rated sovereigns. The working age population peaked at 71.9% of the total population in 2010, and the United Nations forecasts this decline to continue over the coming decades.

Gaps in human capital development contribute to skills shortages in Thailand's labour market that will challenge the country's ability to expand production in higher value-added industries that rely on skilled labour.

The government is committed to investing in human capital development, as included in its 12th National Plan and 20-year national strategy. Unless Thailand can effectively address gaps in human capital development, demographic and skills constraints will weigh on growth potential over time.

WHAT COULD CHANGE THE RATING UP

Moody's would consider upgrading the rating should it became increasingly likely that Thailand's competitiveness will rise and at least partially offset the drag on potential growth from the current skills gaps and ageing population. Such prospects would bolster Thailand's economic shock absorption capacity and denote greater effectiveness across a range of policies than Moody's currently assess.

WHAT COULD CHANGE THE RATING DOWN

The positive outlook implies a downgrade to the rating is unlikely.

Moody's would likely consider changing the outlook to stable in case of an apparent significant deviation from policies that deliver macroeconomic stability and offer prospects of higher competitiveness, which could stem from a renewed escalation of political conflict.

In general, prolonged political tensions that contributed to sustained weakness in foreign direct investment inflows, tourism and manufacturing would lower growth potential, erode fiscal strength and raise external vulnerability risks, likely leading Moody's to change the outlook to stable.

GDP per capita (PPP basis, US$): 19,476 (2018 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 4.1% (2018 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 0.4% (2018 Actual)

Gen. Gov. Financial Balance/GDP: -0.3% (2018 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: 6.4% (2018 Actual) (also known as External Balance)

External debt/GDP: 32.4% (2018 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 22 July 2019, 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 materially increased. The issuer's institutional strength/framework, have materially increased. The issuer has become less susceptible to event risks. Other views raised included: The issuer's governance and/or management, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has not materially changed.

The principal methodology used in these ratings was Sovereign Bond Ratings published in November 2018. 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.

Matthew Circosta
Analyst
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

Marie Diron
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

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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