Government’s debt hike prompts caution from agencies

Ratings agencies issued cautionary statements following the surprise decision this week by the government to increase its debt in a bid to stimulate the economy. The move, which may compromise the government’s fiscal consolidation efforts, is likely to stimulate short-term growth.

The medium-term budget plan was revised by the Cabinet on Tuesday, causing a rise in the deficit next fiscal year from 3.56% to 4.42% of gross domestic product. This deficit will be offset by an additional borrowing of 153 billion baht. Government officials have stated that the borrowed funds will be allocated to a variety of stimulus measures designed to bolster the economy.

Prime Minister Srettha Thavisin is advocating for a relaxation of fiscal policy to boost the country’s economy, which has been averaging sub-2% growth over the past decade. His appeals for interest rate cuts have been rejected by the central bank.

The increased deficit has also given rise to speculation that the government may resort to financing a 500 billion baht cash handout through the state budget, as its initial proposal for funding it through borrowing could face legal obstacles.

S&P Global Ratings anticipates that the budget gap will widen from next year onwards, as the government attempts to revert to a more supportive fiscal stance, particularly in light of the sluggish economic growth momentum. This viewpoint was shared by Andrew Wood, a sovereign analyst.

Despite this, Wood stated in an email that Thailand’s economic growth is projected to speed up in the near future as the fiscal impulse moves from negative to positive, the tourism sector shows signs of recovery, and external demand conditions stabilise. The proposed digital wallet scheme’s timing, scale, and implementation will also play a significant role in economic growth, depending on how it is executed, said Fitch Ratings’ director, George Xu.

“Fitch expects burgeoning budget deficits, as part of the recent revision to the government’s medium-term budget framework, to potentially accommodate the pledged digital wallet scheme. This would imply slippage in the planned fiscal consolidation.”

Predicted growth

Xu suggested that if the handout programme is executed in full, it could stimulate private consumption and present a potential upside risk to Thailand’s growth prospects. Fitch predicts the economy will grow by 3% this year and 3.5% next year, up from 1.9% in 2023, reported Bangkok Post.

However, Xu also voiced concerns about the impact of the government’s debt trajectory on the country’s credit profile, particularly if increased public spending fails to address the structural growth deficiencies but only gives a temporary lift to the economy.