Moody's: Thailand's below-trend growth signals waning competitiveness and heightened political risk

Moody's Investors Service says that Thailand's below-trend growth over the last two years indicates that the country is facing emerging competitiveness issues that weigh on the long term outlook for GDP growth, and also signals heightened political risks.

At the same time, Thailand (Baa1 stable) also demonstrates a strong fiscal position and low external vulnerability, as well as favorable funding conditions--as shown in the government's low debt servicing costs and limited refinancing risks--reflecting the sovereign's proactive and credible management of debt and monetary policy.

Moody's conclusions were contained in its recently-released credit analysis, titled "Government of Thailand - Baa1 Stable" which examines the sovereign with respect to four rating factors: economic strength, which is assessed as "high (-)"; institutional strength "high (-)"; fiscal strength "very high"; and susceptibility to event risk "moderate (+)".

The report constitutes an annual update to investors and is not a rating action.

Moody's report says that Thailand's fiscal indicators remain stronger when compared to similarly rated peers, despite fiscal accommodation resulting in higher debt levels. Lackluster domestic demand and lower prices for Thailand's commodity imports have supported the current account amid faltering goods exports, and the wide current account surplus serves as a buffer to volatile capital flows.

Moreover, increased public spending and robust tourist arrivals have supported the country's economic growth, against a backdrop of sluggish external demand and weak private sector activity.

Moody's points out that Thailand's merchandise exports have weighed on economic growth; a situation which is in line with the slowing of trade across Asia Pacific. In US dollar terms, Thailand's goods exports have contracted year-on-year for 10 of the past 13 quarters since the beginning of 2013.

In contrast, the country's services exports have been robust over the past year, driven by healthy tourist arrivals, especially from China (Aa3 negative).

Ongoing political uncertainty around the progress of constitutional reform and the timetable for general elections have also weighed on growth, particularly through business sentiment and consumer confidence.

On the issue of Thailand's slipping competitiveness, Moody's points out that this development is manifested in the country's falling share of inward flows of foreign direct investment (FDI) into ASEAN over the past decade.

For 2016 and 2017, Moody's expects that Thailand will achieve GDP growth levels similar to those seen in 2015, reflecting a continuation of the broad trends mentioned: namely, the continued bifurcation in the patterns of private and public demand, as well as the ongoing divergence between goods and services exports. Specifically, Thailand should achieve a 2.8% growth in 2016 and 3.0% in 2017.