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Fitch Ratings-Hong Kong/Singapore-23 November 2009: Fitch Ratings has today affirmed Taiwan's Long-term local currency Issuer Default Rating (IDR) at 'AA' and maintained its Negative Outlook. At the same time, the agency has affirmed the Long-term foreign currency IDR at 'A+', the Short-term foreign currency IDR at 'F1' and the Country Ceiling at 'AA'. The Outlook on the Long-term foreign currency IDR remains Stable.
The Negative Outlook on Taiwan's local currency IDR reflects the uncertainty with respect to the implementation and effectiveness of the government's fiscal consolidation programme, and the possibility of continued increases in government debt, which is entirely denominated in local currency. The consolidation programme is to run from 2009 to 2016, but few details have been revealed. There may be some positive impact on the economy over this period from closer economic cooperation between Taiwan and China, although it is unclear how meaningful the changes may be and whether they will have a material effect on public finances. In addition, the outlook for the contribution to government revenue from profits generated by the central bank is uncertain, especially if inflation increases along with policy interest rates.
"The fiscal deterioration in 2009 is expected to be severe due to a sharp reduction in tax revenue amid the recession and the effects of one-off tax relief measures," says Vincent Ho, Associate Director in Fitch's Asia Sovereign Ratings team. "In addition, the reduced tax-revenue base in GDP terms is not expected to expand in 2010-2011 as revenue generated from the fiscal consolidation programme would only offset taxes cut outside the programme," adds Mr. Ho.
Fitch forecasts the general government fiscal deficit to be 6% of GDP for 2009 (largest since 1994), due mainly to a substantial reduction in tax revenue to 12.1% of GDP from 13.9% of GDP in 2008. The agency expects a narrower fiscal deficit of 4.4% of GDP and 3.6% for 2010 and 2011, respectively, and expects the general government debt/GDP ratio to rise to its all-time high of 51.6% in 2011. Fitch expects Taiwan's general government fiscal deficits relative to GDP to be in line with the 'A' peer group medians in the rating horizon, and the gap between Taiwan's general government debt-to-GDP ratios and the 'A' medians to remain unchanged.
Fitch forecasts the central government's long-term non-self-redeemed debt relative to the three-year-average GNP will be approaching its ceiling of 40% as stipulated in the Public Debt Act. The agency is not certain whether the government will be able to abide by the ceiling as it has few sources of non-debt fiscal financing.
The flexibility of fiscal policy is constrained by the government's debt ceiling and rising government debt. Even so, the policy responses to address economic issues could be effective, as President Ma Ying-jeou is also the chairman of the ruling-party, Kuomintang, which implies a better working relationship between the executive and legislative branches of government.
Taiwan's creditworthiness in foreign-currency terms is very well supported by the strong external financial position and minimal foreign-currency sovereign debt. Fitch expects Taiwan's external finances to strengthen continuously due to continuous sizable current account surpluses. Taiwan's government would likely not be able to issue debt internationally in the rating horizon, in Fitch's view.
Taiwan's sovereign ratings are constrained by the cross-Strait issues, and a meaningful resolution of those issues would help to strengthen Taiwan's creditworthiness. The agency views the reduction of cross-Strait tensions since President Ma took office in May 2008 as potentially a cyclical, rather than structural improvement.
Contacts: Vincent Ho, Hong Kong, +852 2263 9921/
vincent.ho@fitchratings.com; Ai Ling Ngiam, Singapore, +65 6796 7216/
ailing.ngiam@fitchratings.com.
Media Relations: Karen Cho, Hong Kong, Tel: +852 2263 9935,
Email:
karen.cho@fitchratings.com.
Additional information is available at www.fitchratings.com.
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