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Rating Action:

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

21 Apr 2020

Singapore, April 21, 2020 -- Moody's Investors Service ("Moody's") has today changed the outlook on the Government of Thailand's issuer ratings to stable from positive and affirmed the Baa1 issuer and local currency senior unsecured ratings. Moody's has also affirmed Thailand's foreign currency commercial paper rating at P-2.

The decision to change the outlook to stable reflects Moody's view that the drivers of the outlook change to positive last July have become significantly less likely to materialize. In particular, in light of delays in policy implementation and ongoing political tensions, and more recently, the deep economic shock caused by the coronavirus outbreak, government policy is unlikely to effectively implement large investment in physical and human capacity that would boost the country's competitiveness over the near to medium term.

The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, and falling asset prices are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety.

For Thailand, the current shock transmits mainly through a sharp slowdown in tourist arrivals, exports of goods, and economic activity. Long-term infrastructure investments will be further delayed, as policy focus shifts to offsetting effects of the economic shock, compounding the apparent difficulties in designing and implementing policies for the current coalition.

The affirmation of Thailand's Baa1 ratings reflects Moody's view that the country's strong public and external finances provides Thailand with significant room to counter shocks, including those currently emanating from the coronavirus. Thailand's past record of solid fiscal metrics suggests that fiscal repair is likely after a marked increase in the government's debt burden in the next few years. In addition, Moody's expects that Thailand's large and diverse economy will absorb the current shock to economic growth without a lasting impact on its growth potential. These credit features are balanced by an ageing population, moderate competitiveness and labour skills shortages, which will weigh on the economy's medium- to long-term growth if unaddressed.

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 STABLE OUTLOOK

DELAYS IN INFRASTRUCTURE INVESTMENT, RESULTING FROM SLOW POLICY IMPLEMENTATION COMPOUNDED BY CORONAVIRUS SHOCK, WILL CONSTRAIN THAILAND'S COMPETITIVENESS

The decision to change the outlook to stable reflects Moody's view that the drivers of the outlook change to positive last July have become significantly less likely to materialize.

On-going policy uncertainty and delays in infrastructure investments have not been resolved following the swearing-in of the newly elected administration in July 2019. Reflecting this, the delays in enactment of the Annual Budget Expenditure Act of 2020 have slowed public sector expenditures, particularly investment in large capital expenditure projects that would enhance productivity and competitiveness. A number of infrastructure projects in the Eastern Economic Corridor (EEC), such as expansion of the Laem Chabang port, also remain delayed, despite establishment of the EEC Office to provide inter-agency coordination and the Budget Procedures Act of November 2018, which aimed to address underspending issues hampering state-owned enterprise (SOE) implementation of investment projects.

Furthermore, the coronavirus will result in a sharp slowdown in tourist arrivals, exports, and economic activity. As a response, the government has announced a range of measures. Key elements of the policy stimulus package include health-related spending, assistance for workers, farmers, and entrepreneurs; support for individuals and businesses through the Social Security Office, and soft loans from financial institutions; tax relief; and lower water and electricity bills, and lower employees' and employers' social security contributions. While part of this would be financed within the original fiscal 2020 budget, about THB 1 trillion in additional borrowing is expected[1]. Although support to households and companies will buffer the shock, Moody's expects that Thailand's economy will contract sharply this year.

While the government may return to prioritise longer-term investment once the most acute phase of the economic shock has passed, the current sharp economic shock is likely to compound delays to policy making over the next several years. Continuing political tensions similar to those seen since the elections will likely contribute to constrained infrastructure investment and sustained weakness in foreign direct investment inflows and manufacturing.

Overall, the prospects of materially stronger growth potential driven by infrastructure and social investment have dimmed compared to Moody's previous expectations.

RATIONALE FOR THE RATING AFFIRMATION AT Baa1

LARGE AND DIVERSIFIED ECONOMY PROVIDES RESILIENCE, THOUGH LONGER-TERM CHALLENGES REMAIN

Moody's affirmation of Thailand's Baa1 rating recognizes its key medium-term economic strengths and challenges.

Moody's assessment incorporates the economy's diversification, with well-developed automotive production and electronics export industries and large agricultural and tourism bases that generate employment, incomes and output. The economy has been subject to shocks in the past, from natural disasters to fluctuations in global trade or heightened political tensions. In these various instances, GDP growth has recovered.

This time again, Moody's expects the economy to recover from the coronavirus shock. In particular, the tourism sector, which is deeply affected by the global interruptions to international travel, is highly competitive. Manufacturing also seems likely to return to pre-shock trends, since at this stage, the epidemic does not seem likely to lead to significant relocations of production capacity. Moreover, Thailand's banking sector remains well-capitalized, that will mitigate a sustained impact on financial intermediation in the economy.

Thailand's key structural challenges continue to relate to long-term issues. An ageing society, moderate competitiveness and labour skills shortages, if left unaddressed, will weigh on growth potential. As mentioned above, the effectiveness of the policy initiatives previously outlined by the government remains constrained by delays in implementation.

MACRO POLICY TO CONTINUE TO DELIVER STRONG GOVERNMENT AND EXTERNAL FINANCES

The affirmation of Thailand's Baa1 ratings also reflects the country's strong government and external finances, the result of effective macroeconomic policy, that provide Thailand significant room to counter shocks such as the coronavirus outbreak.

Thailand's low government debt burden and very high debt affordability going into the shock provide space for the government to enact a fiscal package amounting to THB 1.9 trillion[2], around 11.6% of 2019 GDP, in response to the coronavirus shock.

Moody's expects the frameworks which support Thailand's fiscal strength will endure beyond the current shock, including the Fiscal Responsibility Act of 2018, which has supported Thailand's track record of fiscal balance relative to its peers.

After rising to 44.6% of GDP by 2021 from 33.7% in 2019, Moody's expects the general government debt burden to stabilize and start declining. At these levels, Thailand's debt burden will remain moderate compared to similarly rated sovereigns.

Proactive public debt management and a very low share of foreign currency denominated debt will continue to shelter the government's balance sheet from external shocks. The large stock of domestic savings will also provide a stable source of local currency funding at a low cost, which in turn helps to sustain high debt affordability.

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

ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS

Environmental considerations are material to Thailand's credit profile. Natural disasters, including storms, floods, landslides and droughts, happen regularly and have adversely affected agricultural conditions and weighed on economic growth, given that agriculture accounts for around 8% of GDP and 30% of total employment. For instance, following the devastating 2011 floods, GDP growth sharply decelerated to just 0.8%, as Thailand's worst floods in half a century damaged nearly one quarter of the country's rice crop (Thailand's is the world's largest rice exporter) and flooded the capital city of Bangkok, affecting many semiconductor and automobile exporters. Moreover, natural disasters have had temporary but marked negative effects on Thailand's tourism industry, which accounts for over 10% of GDP.

Social considerations are material to Thailand's credit profile. Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety. While Thai authorities have initiated a domestic lockdown to prevent potential community transmission of the virus, this will come at a cost to domestic economic activity. Longer term, structural challenges related to ageing and labour skills shortages constitute material social risks.

Governance considerations are material to Thailand's credit profile. The country's rankings on the Worldwide Governance Indicators are weaker than the Baa-rated median although, as explained above, fiscal and monetary policy effectiveness is strong.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

WHAT COULD CHANGE THE RATING UP

Moody's would consider upgrading the rating should it become increasingly likely that Thailand's competitiveness will rise, at least partially offsetting the drag on potential growth from the current skills gaps and ageing population. Such prospects could denote greater effectiveness across a range of policies than we currently assess.

WHAT COULD CHANGE THE RATING DOWN

In general, a significant deviation from the long-term policy approach that has supported the rating to date, which might stem from political tensions, and which contributed to weakness in foreign investment flows and economic activity would erode economic and fiscal strengths and weigh on the rating.

GDP per capita (PPP basis, US$): 19,484 (2018 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 4.2% (2018 Actual) (also known as GDP Growth)

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

Gen. Gov. Financial Balance/GDP: 0.1% (2018 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: 5.6% (2018 Actual) (also known as External Balance)

External debt/GDP: 32.1% (2018 Actual)

Economic resiliency: baa1

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

On 16 April 2020, 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 institutions and governance strength, have not materially changed. The issuer's governance and/or management, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has materially decreased. The systemic risk in which the issuer operates has not materially changed. The issuer's susceptibility to event risks has not materially changed.

The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019 and available at https://www.moodys.com/research/Sovereign-Ratings-Methodology--PBC_1158631. Alternatively, 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 further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

REFERENCES/CITATIONS

[1] Ministry of Finance 7-Apr-2020

[2] Ministry of Finance 7-Apr-2020

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.

Martin Petch
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

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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