Standard & Poor’s Ratings Services has raised all its ratings on Thailand by one notch to reflect the rapidly improving fiscal balance and continuing strong external position of the sovereign. Foreign currency ratings are now ‘BBB/A-2’ and local currency ratings ‘A/A-1’. The outlook remains positive. Standard & Poor’s has maintained a positive outlook on Thailand’s sovereign ratings since August 20, 2002.
“Strong fiscal consolidation over the past few years has prompted the upgrade,” says Takahira Ogawa, Standard & Poor’s credit analyst and director in the Asia-Pacific Sovereign Ratings Group. The Thai-Rak-Thai (TRT) government has been able to implement its social agenda without damaging the government’s fiscal stance. The general government deficit, which peaked at 2.9% of GDP in fiscal year 1999, has improved substantially and is estimated at less than 1% in fiscal year 2003. “The government will be able to achieve a balanced budget well ahead of the ongoing target of fiscal year 2008,” Ogawa explains. Gross general government debt to GDP is expected to plateau at the current level of 35%.
Moreover, the country’s balance of payments flexibility continues to improve. “Thailand is within reach of becoming a net external creditor. The country has been producing current account surpluses since 1999 and is expected to record yet another year of surplus in 2003, estimated at 6% of GDP,” comments Ogawa. Net international reserves of the Bank of Thailand are expected to reach 350% of short-term external debt at the end of 2003.
On the other hand, Thailand’s credit standing is constrained by a still fragile, though recovering, banking sector. Although corporate leverage has declined, systemwide gross nonperforming assets are still about 30% of total loans (under Standard & Poor’s definition), based on internationally comparable standards, excluding nonperforming assets that have been transferred to the Thai Asset Management Company. Banks’ non-performing loans are only one-third covered by loan-loss provisions and the country does not have a reliable legal framework for bankruptcy and foreclosure.
Contingent liabilities associated with the government’s quasi-fiscal activities are another source of concern. Although individual initiatives pose relatively small contingent liabilities, if economic growth falters in the medium term, these liabilities together could pressure the government’s fiscal position.
“If the government addresses structural problems by using its strong political foundation, the current strong economic momentum could lead to improved future growth prospects, lower the fiscal costs of bank assistance, and improve the government’s credit standing,” Ogawa says. Alternatively, the outlook could be revised to stable if fiscal policy weakens or bank non-performing loans begin to trend upward again.