OREANDA-NEWS. Fitch Ratings has downgraded Thailand's Long-Term Local Currency (LTLC) IDR to 'BBB+' from 'A-' and affirmed the Long-Term Foreign Currency (LTFC) IDR at 'BBB+'. The Outlooks are Stable. Thailand's senior local currency bonds have been downgraded to 'BBB+' from 'A-'. The Country Ceiling has been affirmed at 'A-' and the Short-Term Foreign Currency (STFC) IDR at 'F2'. Fitch has assigned a new Short-term Local Currency (STLC) IDR of 'F2'. The issue ratings on Thailand's Short-Term foreign currency securities have also been affirmed at 'F2'.

The downgrade of Thailand's LTLC IDR to 'BBB+' from 'A-' reflects the following key rating drivers:

In line with the updated guidance contained in Fitch's revised Sovereign Rating Criteria dated 18 July 2016, and as part of a broader portfolio review, Fitch concluded that Thailand's credit profile no longer supports a notching up of the LTLC IDR above the LTFC IDR. This reflects Fitch's view that neither of the two key factors cited in the criteria that support upward notching of the LTLC IDR are present for Thailand. Those two key factors are: (i) strong public finance fundamentals relative to external finance fundamentals; and (ii) previous preferential treatment of LC creditors relative to FC creditors.

Assignment of a STLC IDR

The assignment of a STLC IDR of 'F2' to Thailand is consistent with Fitch's approach to assigning ST ratings by using its LT/ST Rating Correspondence table to map the STLC IDR from the LTLC rating scale. According to Fitch's Rating Definitions, the Fitch Rating Correspondence Table is "a guide only and variations from this correspondence will occur". However, variations to this approach are rare in the case of sovereign ratings.

Thailand's STLC IDR is derived from the mapping to its revised LTLC IDR of 'BBB+' and was assigned as part of the portfolio review referenced above.

KEY RATING DRIVERS

Thailand's external and public finances stand out as strengths relative to 'BBB' rated peers, and have remained robust despite a string of domestic and external economic shocks. However, weak growth prospects and an uncertain political environment weaken the credit profile.

External Finances Further Strengthen

Thailand's current account balance rose to a surplus of 8.0% of GDP in 2015, driven by lower oil prices, rapid tourism growth, and weak import demand. International reserves have increased by over 10% year to date, as of May 2016.The benefits of Thailand's strong external balance sheet was evident during recent bouts of financial market volatility, as other emerging markets faced economic and financial disruptions from rapid reversals of capital inflows.

Sound Public Finances

Thailand's general government balance was in surplus at 0.2% of GDP in fiscal year (FY) 2015 (end-September). Fitch expects stimulatory measures undertaken by the government and an increase in capital expenditure to reduce the general government balance to a deficit of 0.8% of GDP in FY16. Fitch expects gross general government debt to rise to 33.1% of GDP in FY18, still low compared with the 'BBB' median of 42.2%. Overall public debt should increase more quickly due to the government's multi-year infrastructure development plan, which is financed primarily through government guaranteed borrowing by state-owned enterprises. The plan prioritises THB1.8trn (13% of GDP) worth of public finance projects between FY15 and FY22.

Public Investment To Spur Growth

Fitch expects the Thai economy to grow 2.9% in 2016 and 3.2% in 2017. Fitch expects consumption to strengthen as farm incomes improve, after the effect of a severe drought dissipates. Public investment in 1Q16 was over 50% higher than in 1Q14, and appears to have sparked an improvement in business confidence and private investment over the past six months. Fitch also expects strong tourism growth to boost the services sector, although at a slower pace than in 2015.

Structural Growth Challenges

High household debt, an aging population and declining export competitiveness could weigh on economic growth in the medium term. The government has undertaken measures to improve growth prospects, including infrastructure investment and creating special economic zones and tax credits for 10 target industries.

Political Uncertainty

Fitch considers there are still potential risks of economic disturbances that could arise from tension between political and social factions in Thailand, as demonstrated by anti-government protests in 2013 and 2014. A referendum on the country's constitution is due to be held on 7 August 2016, and the military government has indicated a general election will take place in 2017. The prospects of an outcome that could resolve political and social divides remain unclear.

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 FC IDR scale.

Fitch's sovereign rating committee adjusted the output from the SRM to arrive at the final LT FC IDR by applying its QO, relative to rated peers, as follows:

- Structural Features: -1 notch, to reflect political uncertainty over the terms and timing of Thailand's transition back to civilian rule, and risks to economic stability from the country's ongoing political divisions.

- External Finances: +1 notch, to reflect strengths in Thailand's external finances not captured in the SRM, including the large net creditor position and strong external liquidity

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 LT FC 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.

RATING SENSITIVITIES

The main factors that could, individually or collectively, lead to positive rating action include:

- A sustained improvement in growth above expectations without the emergence of imbalances.

- Resolution of social and political cleavages sufficient in scale to improve governance and development indicators.

The main factors that could, individually or collectively, lead to negative rating action are:

- Renewed political instability on a scale sufficient to have a significant impact on Thailand's economy.

- A sharp and sustained rise in Thailand's government debt ratios, for example due to a fiscal deterioration or materialisation of contingent liabilities on the sovereign balance sheet.

KEY ASSUMPTIONS

- The global economy performs broadly in line with Fitch's Global Economic Outlook.