The Thai Economy will Roar Again, in Time
Leading global ratings agency, Moody’s (Moody’s Investors Service) has issued new guidance on the Thai economy. Given the geopolitical considerations currently taking place, the leading ratings agency has downgraded the Thai credit outlook from positive to stable. In the midst of a growing economic slowdown, Moody’s has revised its forecasts for the Government of Thailand.
Now, a rating of Baa1 has been issued, and the Thai forex commercial paper is now rated at P-2. This currency rating for the Thai baht is a global short-term ratings assessment. The P-2 rating for issuers indicates that the currency is rated Prime-2 (a rung below P-1 which is the premier currency rating). P-2 designations reflect that the country has a ‘strong ability to repay short-term debt obligations’.
The Bank of Thailand is working hard to ease forex rules and regulations as tremendous pressure is brought to bear on the Thai baht. In the absence of the recent Moody’s ratings assessment, global economic pressures have a strong impact on the economies of emerging market countries. The Bank of Thailand (BoT) upped the limit from $200,000-$1 million, for the amount of proceeds that do not need to be repatriated.
This can be used to help exporters with forex expenses, without any need to send the funds back to Thailand. This reduces transfer costs for operators, saving money and increasing profitability for Thai businesses in the process. The currency has appreciated sharply over the past year, but has slowed dramatically in Q1 and Q2, 2020. An estimated 5% + depreciation against the USD has already taken place, as traders and investors shore up their portfolios with a focus on USD, GBP, EUR, and CHF.
The Moody’s Downgrade
In July 2019, Moody’s rated the Thai economy as positive with bullish prospects. In light of current considerations where global trade in goods and services has come to a standstill, the downgrade to stable has been made. Among the many challenges in the Thai economy are political instability and the implementation of government-mandated policies.
The massive economic shocks endured by the Thai economy are particularly devastating to the travel and tourism industry – the major driver of economic activity on the islands. A failing economic outlook for the world economy (short to medium term) is perpetuating instability and furthering the impact of the credit shock.
The ramifications of the current ‘new normal’ are a threat to the social aspects of society, particularly public health and safety considerations. The unprecedented decline in travel, tourism, and entertainment-related revenue streams has hamstrung the Thai economy. These economic shocks are compounding problems across the board.
Yet, despite the instability over the short-term, the Moody’s rating of Baa1 is a strong indication that Thailand will be able to counter the economic shocks that are currently being felt. Such is the strength of the Thailand economy that ratings agencies believe the sound fiscal structure will allow the country to sustain a short-to-medium term economic shock and still rebound. The diversity of the economy is its saving grace:
- Exports include processed foods, automobiles, and agricultural commodities
- 90% of GDP is comprised of the service sectors and industry sectors
- 10% of GDP is made up of small-scale farms in the agricultural sector, which employs 33% of the workforce
Thailand’s GDP in 2019 was $520 billion, up from $504.99 billion in 2018. The current year’s estimate is between $520 billion and $540 billion. The economy generates a GDP per capita of $6,361.60 (2019) with a GDP growth rate of 0.20%. All projections for GDP growth moving forward are positive despite the geopolitical uncertainty over the short term.
Several challenges remain for the Thai economy, notably the ageing population, and shortages of skilled labor. Provided these issues are addressed, the country can remain competitive. As far as foreign currency bond holdings are concerned, the forex deposit ceiling - long-term - will be pegged at Baa1, and the forex currency deposit ceiling – short-term – is a lock at P-2.
Sectors Hard-Hit by Current Turmoil
Notable among the many struggling industries in Thailand are restaurants, bars, hotels, and resorts. The Thai economy gets a $5.5 billion GDP boost from bars and nightclubs around the country every year. Current regulations have locked down the industry, preventing any further contributions from tourists. With restaurants limited to take-out and delivery services only, the entire country is ailing. The nightlife in Bangkok – a staple of the economy – has all but ground to a halt. This internationally lauded party city has been relegated to hibernation status for the time being.
The effects of the lockdown have halted currency inflows, which has negatively impacted the exchange rate value of Thai baht. The broader tourism industry in Thailand ranks #4 in the world in terms of revenue streams at $6.52 billion. Much of that has been drained from the economy due to ongoing travel restrictions. Social distancing limits gatherings to small numbers of patrons, spaced at least 6 feet apart – an unsustainable business model given restaurant capacity requirements. The expectation is that the lifting of limits will bring tourists back in their droves, but current economic realities tend to suggest a long-term recovery is on the cards.