Moody's: Thailand's easing political uncertainty aids cyclical recovery

Moody's Investors Service says that Thailand's (Baa1 stable) credit profile balances the country's strong fiscal position and low external vulnerability against lower-than-average growth since 2013.

Moody's also notes that political uncertainty has eased over the past year, and this development will aid the current cyclical recovery, spurred by stronger exports. However, domestic demand remains lackluster despite continued accommodation of monetary and fiscal policies.

Thailand's competitiveness has eroded in recent years, as reflected in weakening foreign direct investment (FDI). In 2016, gross FDI reached its lowest level since at least 2005 in both dollar terms ($1.7 billion) and as a share of GDP (0.4%). In part, this reflects the emergence of other countries in the region as more attractive places for investment in certain areas production, despite Thailand's advantage in the quality of its infrastructure.

This weakening FDI, combined with a rapid aging of Thailand's population and human capital development issues, weigh on economic growth. In response, the government has introduced a number of policies to improve competitiveness, but these initiatives are subject to considerable implementation risks.

Moody's conclusions are contained in its just-released annual credit analysis, "Government of Thailand -- Baa1 Stable -- Credit Analysis". The report elaborates on Thailand's credit profile in terms of economic strength, High (-); institutional strength, High (-); fiscal strength, Very High; and susceptibility to event risk, Moderate. These are the four main analytic factors in Moody's Sovereign Bond Rating Methodology.

Moody's expects Thailand's real GDP growth to recover to 3.4% in 2017, its highest rate since 2012. This is in line with or slightly above Baa-rated sovereigns, but remains low compared with Thailand's long-term average growth rate and with other developing Southeast Asian countries.

Since 2015, fiscal policy, particularly government investment spending on infrastructure, has supported growth. However, private sector demand has been subdued for a prolonged period. Businesses have been reluctant to invest because of industrial overcapacity and political uncertainty, while households have been constrained by the previous build-up in indebtedness.

In terms of event risk, while some issues have receded, the underlying tensions that have contributed to political turmoil since 2006 have not been resolved and Thailand still faces elevated domestic political risks relative to peers.

Moody's expects a successful transition to a stable civilian government to lead to greater political stability. This stability could create a backdrop for a strengthening in the credit profile if tangible progress on competitiveness restores private domestic and foreign investment, and moves economic growth towards previous levels.

A strengthening of public sector finances, including a reduction in budget deficits that contributes to debt consolidation, would also be credit positive