Taiwan gets A+ credit rating

This article was written by Liu King-pong and published by the Taiwan Journal on September 21, 2007. It reports that Fitch Ratings Ltd. recently announced that Taiwan has maintained a sovereign credit rating of “A+” with a stable outlook, despite concerns over the rising budget deficit and tensions across the Taiwan Strait.

The international rating agency stated that Taiwan's rating remains unchanged on the basis of the strength of its sizable foreign exchange reserves and large holdings of external assets, relative to its gross domestic product. However, Fitch Ratings warned that both politics and excessive debt can still stifle growth. “Taiwan's election calendar is full, and the cross-strait issues are always in focus,” agency representatives said.

These remarks were made at the company's annual Asian Sovereign and Banking Conference in Taipei. According to Fitch Ratings, the Taiwanese government's debt ratio is on the rise and is expected to hit 43.3 percent of GDP in 2007. This figure has exceeded the median value of 35 percent and below for all “A”-rated countries.

Taiwan's debt level has been increasing while other “A”-rated countries' debt levels have been going down. Taiwan's tax revenues are also lower than the average of all other countries with the same rating. According to Fitch Ratings, the Taiwanese government's budget deficit is a factor that can easily drag the country's rating down.

In response to the comments made by Fitch Ratings, the Ministry of Finance said that the government's financial outlook is improving. According to the ministry, tax revenues continue to grow steadily in the first half of 2007, with the total annual collections expected to surpass the budgeted target by more than US$1.82 billion.

Meanwhile, according to the Ministry of Finance, the ratio of government debt to the GDP is likely to fall rapidly in 2007, as a result of the government's tightened control over expenditures.

According to the Ministry of Finance, the government in Taiwan has been implementing financial reforms to maintain the country's competitiveness. “Our government borrowed a mere US$1.93 billion in 2006, making it the first time our annual debt had fallen below US$3.03 billion,” ministry officials said.

Public construction projects are also making efforts to lessen the budget deficit. The Ministry of Finance predicts that the government's budget gap for 2008 will be narrowed to US$2.96 billion, down from US$4.23 billion in 2007.

Fitch Ratings assigned an “AAA” rating to Singapore, an “AA” rating to Hong Kong and Japan, and an “A” rating to China. Like Taiwan, South Korea also received an “A+” rating. However, Taiwan's economy is growing more slowly than other Asian countries, because the capital of Taiwanese businesses operating in China is not returning home.

Nonetheless, Fitch Ratings predicts that Taiwan is able to withstand credit-market corrections because it possesses large foreign reserves, enjoys a surplus in international balance of payments, and has a floating exchange rate.

According to the agency's forecast, Taiwan's economic growth is expected to reach 4.5 percent in 2008, on par with Thailand, but lower than Hong Kong's 6 percent and Singapore's 7 percent. According to the agency, Taiwan and the rest of the region are well-equipped to deal with credit-market adjustments, given that their public finances are stable. Still, this does not mean that the region is immune to economic slowdowns. Furthermore, large capital inflows in recent years can challenge regional policymakers if investor sentiment suddenly change and investors start to pull money out.