Fitch sticks to Thailand's BBB+ rating despite Lingering Political and Fiscal Uncertainty

Political and fiscal uncertainty looks set to remain a near-term drag on Thailand’s credit profile after the recent general election, even as the country continues to benefit from robust external finances, a strong macroeconomic policy framework and economic recovery as tourists return, says Fitch Ratings.

Key Takeaways

Political and fiscal uncertainty following Thailand’s recent general election may hinder the country’s credit profile in the near-term.
The formation of a coalition government could be delayed, potentially impacting the passing of the fiscal year 2024 budget.
Fiscal consolidation prospects may be challenged due to the potential need for significant additional expenditure as advocated by major parties during the campaign.

Thailand held a general election on 14 May 2023, but the official results are still pending. The preliminary figures suggest that the opposition Move Forward Party (MFP) won the most seats in the lower house of parliament, followed by the Pheu Thai Party (PTP), the previous largest opposition group. However, it is unclear whether MFP can form a coalition government with PTP and other smaller parties, as they need at least 376 votes from a joint sitting of parliament to choose the next prime minister.

Political Uncertainty Could Hamper Effective Policymaking

The coalition building process could take several months, as potential partners have diverse policy priorities. This could delay the formation of a new government and disrupt the implementation of the budget for the fiscal year ending September 2024 (FY24). The FY24 budget needs separate approval from the lower house and the Senate, which was appointed by the previous military-led government before the 2019 election. The king also needs to endorse the budget.

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Fitch Ratings expects political and fiscal uncertainty to remain a near-term drag on Thailand’s credit profile, even as the country continues to benefit from robust external finances, a strong macroeconomic policy framework and economic recovery as tourists return. When Fitch affirmed Thailand’s rating at ‘BBB+’ with a Stable Outlook in November 2022, it stated that a broad, fragmented coalition government could emerge, complicating effective policymaking, but that it was unlikely to lead to major shifts in the country’s key economic development policies.

Fiscal Outlook Remains Uncertain But Manageable

Fitch forecasts general government debt/GDP and interest/revenue to remain broadly in line with the median for ‘BBB’ category sovereigns over 2023-2024. Thailand’s public finance metrics significantly deteriorated during the Covid-19 pandemic, eroding its headroom at the current rating level, but Fitch assumes that the next coalition government will remain committed to some of the outgoing administration’s key economic policies.

There could be some disruption to spending under the FY24 budget if coalition negotiations drag on, as occurred with the FY20 budget after the 2019 elections. Delays to the FY24 budget would be negative for Thailand’s economic prospects, but Fitch still expects growth to accelerate in 2023 and remain robust in 2024, with the tourism sector’s recovery and private consumption serving as the main drivers.

However, near-term credit effects will be limited in Fitch’s base case. Thailand continues to benefit from robust external finances, a strong macroeconomic policy framework and economic recovery as tourists return.

If the next government fails to stabilise the government debt ratio, for instance due to continued spending pressures or external shocks outside Fitch’s baseline assumptions, that would put downward pressure on the sovereign rating.