OREANDA-NEWS. The decision by the Bank of Thailand (BOT) to cut its policy rate by 25bp to 1.75% on 11 March is unlikely to have a significant effect on credit risk in the country, says Fitch Ratings. Inflation remains well below the BOT's target. Headline CPI falling into negative territory at -0.5% yoy in February 2015 has given the central bank some space to cut the policy rate. The relative strength of the Thai baht is also likely to have influenced the rate decision.

That said, high private sector leverage and rapid credit growth prior to 2014 remain a key source of vulnerability for the wider economy and banking sector. Should further monetary easing result in a rapid re-acceleration in credit growth, this would increase the risks to banks' asset quality.

Fitch estimates Thailand's private sector leverage reached 159% of GDP in 2014, significantly higher than the median (61%) of its 'BBB' category peers. The aggregate figure has been driven largely by rapid growth in household debt, which rose to 85% of GDP in 2014 from 56% in 2008.

The expansion in credit through to 2014 has left Thai corporates and households more vulnerable in the event of a sudden or unexpected downturn. This, in turn, means that asset-quality problems in the banking system could escalate more quickly than in previous recessions. Downside risks for the banking sector remain pronounced alongside challenging operating conditions, and Fitch maintains a negative outlook on the sector. That said, current buffers in the banking system provide some protection, and the ratings for most individual Thai banks are on a stable outlook.

Thus far, banks' asset quality has held up despite the marked slowdown in economic growth in 2014. Real GDP expanded by only 0.7% last year, weighed down by weak consumption and investment, which is most likely the result of high household indebtedness and continued political stability concerns. At the same time, banking sector non-performing loans (NPLs) were largely unchanged from 2013, at 2.6% in December. Loan growth has slowed significantly in 2014 along with the broader economic deceleration, and this has been a positive credit factor for the banks.

Asset quality as a lagging indicator means that we could yet see a deterioration in NPLs in 2015 should the economic slowdown continue. Nevertheless, Fitch's base-case scenario is for real GDP growth to rebound to 3.5% in 2015.