A full list of rating actions is at the end of this rating action commentary.

KEY RATING DRIVERS

External Strengths, Structural Constraints: Thailand's ratings reflect its robust external finances and sound macroeconomic policy framework, balanced against some weaker structural features compared with 'BBB' category peers, including lower per capita income and World Bank governance scores. Public finance metrics have deteriorated in the past few years, and are currently aligned with those of peers. Uncertainty surrounding the financing of the new government's spending pledges implies a fiscal risk in the near term, while unfavourable demographics form a medium-term risk.

Growth to Gain More Traction: Fitch forecasts Thailand's GDP growth will accelerate to 3.8% in 2024 after a weaker expansion than expected of 2.8% in 2023. We expect stronger growth will be bolstered by a steady tourism recovery, a gradual strengthening of merchandise export momentum, and higher domestic demand from stepped-up public spending and other supportive policy settings.

The new government has launched temporary visa exemptions for tourists from targeted source markets, such as China and India. A faster tourism recovery and larger fiscal spending than we currently anticipate could boost near-term growth further, while downside risks may come from a more pronounced global economic slowdown, severe drought due to El Nino and significant budget delays.

Newly Formed Coalition: We believe the formation of the coalition government led by the Pheu Thai Party (PTP) after a four-month impasse reduces near-term political uncertainty. Bringing the various factions together could encourage consensus-led policymaking, although balancing diverse forces could affect policymaking effectiveness and fiscal prudence. Some political uncertainty remains, as the senate will no longer be able to join the lower house to select the premier from May 2024. Fitch believes the World Bank Governance Indicators will improve to reflect a greater degree of political stability.

Key Policy Priorities: Economic headwinds are an imminent challenge for the new government, whose expansionary budget proposal for the fiscal year ending September 2024 (FY24) focuses on stimulating domestic demand. We expect the budget enactment to be delayed by seven months to late April 2024, which will weigh on disbursement of capital spending for new investment projects. However, we believe the government will ramp up efforts to support the economy in the FY24 budget, without shifting significantly the country's key medium-term strategy of fostering investment and productivity growth.

Wider Deficits, Slower Consolidation: Fitch projects the general government deficit (Government Finance Statistics basis) will increase to 3.7% of GDP in FY24 (BBB median: 2.9%), from an estimated 3.0% in FY23. We assume stepped-up expenditure to accommodate the digital cash handout scheme and other measures advocated by the coalition parties during the election campaign, more than offsetting steady revenue collection as growth strengthens. We forecast the fiscal deficit to decline only modestly to 3.5% in FY25 (BBB median: 2.6%), due largely to sustained social and capital spending.

Pro-Growth Spending Pledges: The PTP has promised wide-ranging digital cash handouts to targeted citizens of 16 years and older at a one-off cost of roughly THB500 billion (2.6% of GDP). The plan announced by Prime Minister Srettha Thavisin is to propose a special loan decree to fund the handouts, which will be postponed by three months to May 2024. However, we see some near-term uncertainty in terms of parliamentary approval for the government to fully fund the scheme with new debt. This could imply slippage in near-term consolidation targets and further constrain fiscal headroom.

Public Debt Ratio to Stabilise: Fitch forecasts that gross general government debt (GGGD) will rise to 56.8% of GDP by FYE25, as much as 21pp above pre-Covid-19 pandemic levels and broadly aligned with the 'BBB' peer median of 56.3%. The slightly wider fiscal-deficit targets over the next few years - of around 3.4% of GDP, as published recently by the new government in its medium-term fiscal framework - will weaken the government debt trajectory, particularly if the rising spending fails to sustain growth in a more durable way.

Our baseline case projects the GGGD/GDP ratio will stabilise at around 57.5% by FYE27. We believe that the government's access to deep domestic capital markets through the cycle and a favourable debt structure with long average maturity and mostly in local currency mitigate the public finance risks associated with the large increase in the GGGD/GDP ratio.

Robust External Finances: Thailand's resilient external position remains a core strength, and should provide a sufficient buffer to tightened global financial conditions and geopolitical risks. Fitch forecasts Thailand to maintain its large net external creditor position at 40.1% of GDP in 2024, well above the projected median for 'BBB' (-0.9%) and 'A' (5.9%) category peers. We forecast the current account will flip back into a surplus of 1.0% of GDP in 2023, from a 3.2% deficit in 2022, with foreign reserves covering 7.1 months of current external payments, above the projected 'BBB' median of 5.0 months.

Moderate Inflationary Pressures: We forecast headline inflation to average 1.4% in 2023 on extended energy price subsidies and high base effects. We project inflation to remain within the Bank of Thailand's (BoT) 1.0%-3.0% target band at 1.8% in 2024, reflecting the impact of a continued tourism recovery, government stimulus measures and mild pass-through from the minimum wage hike from late 2024. Our baseline expects the BoT to keep its policy rate unchanged at 2.5% through end-2024, although risk from El Nino to agricultural output and rising oil prices could lead to more price pressures.

Household Debt Remains High: Thailand's household debt remained elevated at 90.7% of GDP by end-2Q23, above that of most regional peers. Deterioration of indebted low-income households' and SMEs' ability to service debt amid growth headwinds and monetary policy normalisation could pose asset-quality challenges to banks. However, we expect banks' earnings to further recover in 2024, while they maintain solid capital and loan-loss allowance coverage with stable liquidity, which provide sound buffers against the risk of further impairments on restructured loans.

ESG - Governance: Thailand has an ESG Relevance Score (RS) of '5' and '5[+]', respectively, for both Political Stability and Rights, and for Rule of Law, Institutional and Regulatory Quality and Control of Corruption. These scores reflect the high weight that the World Bank Governance Indicators have in our proprietary Sovereign Rating Model (SRM). Thailand has a medium World Bank Governance Indicator ranking at the 45th percentile, in part reflecting sound institutional capacity and regulatory quality, and established rule of law, offset by persistent political volatility.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

- Public Finances: Inability to stabilise the general government debt ratio; for example, due to an extended period of weaker economic growth or continued spending pressures.

- Structural Features: Heightened political disruption on a scale sufficient to alter Thailand's economic policymaking effectiveness and growth prospects, or affect its tourism recovery.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

- Macroeconomic: An improvement in medium-term growth prospects without a significant rise in non-financial private-sector debt.

- Public Finances: A decline in the general government debt/GDP ratio; for example, due to smaller fiscal deficits and/or improving medium-term growth potential.

SOVEREIGN RATING MODEL (SRM) AND QUALITATIVE OVERLAY (QO)

Fitch's proprietary SRM assigns Thailand a score equivalent to a rating of 'BBB' on the Long-Term Foreign-Currency IDR scale.

Fitch's sovereign rating committee adjusted the output from the SRM to arrive at the final Long-Term Foreign-Currency IDR by applying its QO, relative to SRM data and output, as follows:

- Structural: We have introduced a new positive notch, to reflect expectations for an improvement in the World Bank Governance Indicators.

- Macro: We have removed the temporary +1 notch introduced in October 2020 to offset the deterioration in the SRM output driven by the pandemic shock, which would have otherwise added excess volatility to the rating.

Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a Long-Term Foreign-Currency IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.

COUNTRY CEILING

The Country Ceiling for Thailand is 'A-', one notch above the Long-Term Foreign-Currency IDR. This reflects moderate constraints and incentives, relative to the IDR, against capital or exchange controls being imposed that would prevent or significantly impede the private sector from converting local currency into foreign currency and transferring the proceeds to non-resident creditors to service debt payments.

Fitch's Country Ceiling Model produced a starting point uplift of +1 notch above the IDR. Fitch's rating committee did not apply a qualitative adjustment to the model result.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG CONSIDERATIONS

Thailand has an ESG Relevance Score of '5' for Political Stability and Rights as World Bank Governance Indicators have the highest weight in Fitch's SRM and are therefore highly relevant to the rating and a key rating driver with a high weight. As Thailand has a percentile rank below 50 for the respective Governance Indicator, this has a negative impact on the credit profile.

Thailand has an ESG Relevance Score of '5[+]' for Rule of Law, Institutional & Regulatory Quality and Control of Corruption as World Bank Governance Indicators have the highest weight in Fitch's SRM and are therefore highly relevant to the rating and are a key rating driver with a high weight. As Thailand has a percentile rank above 50 for the respective Governance Indicators, this has a positive impact on the credit profile.

Thailand has an ESG Relevance Score of '4' for Human Rights and Political Freedoms as the Voice and Accountability pillar of the World Bank Governance Indicators is relevant to the rating and a rating driver. As Thailand has a percentile rank below 50 for the respective Governance Indicator, this has a negative impact on the credit profile.

Thailand has an ESG Relevance Score of '4[+]' for Creditor Rights as willingness to service and repay debt is relevant to the rating and is a rating driver for Thailand, as for all sovereigns. As Thailand has a track record of 20+ years without a restructuring of public debt and captured in our SRM variable, this has a positive impact on the credit profile.

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/topics/esg/products#esg-relevance-scores.