(The following statement was released by the rating agency)
Sept 13 - Fitch Ratings has affirmed Taiwan’s Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at ‘A+’ and ‘AA-‘respectively. The Outlook is Stable. The agency also affirmed the Short-Term Foreign-Currency IDR at ‘F1’, and the Country Ceiling at ‘AA’.
The affirmation reflects Taiwan’s extremely strong external finances and resilient economic performance. Fiscal consolidation since 2010 has eased what had previously been viewed as a rating weakness relative to peers in the public finances. Public indebtedness is in line with medians for ‘A’ range peers, although this partly reflects a rising peer group median.
Taiwan is one of the largest net external creditors (in sovereign, bank and non-bank sectors) among ‘A’ and ‘AA’ peers. Foreign-exchange reserves (including gold) are expected to reach USD425.4bn at end-2012, equivalent to 13.9 months of current external payments cover and 37.2% of broad money supply at end-2012. Taiwan runs a persistent current account surplus, averaging 9.1% of GDP over 2007-2011. This strong external buffer serves to insulate the sovereign in times of severe external shocks.
Taiwan’s strong trend economic performance is a rating strength, although growth has been more volatile than medians for ‘A’ range peers. The trade-dependent economy remains exposed to deterioration in the global economic outlook and Fitch foresees Taiwan’s GDP growth slowing to 1.5% in 2012 from 4% in 2011. Nevertheless, Fitch expects deeper economic integration with mainland China under the Economic Cooperation Framework Agreement (ECFA) will strengthen Taiwan’s economic prospects over the medium- to long-term.
Fitch notes that Taiwan’s resilient economic performance and spending restraint have helped stabilise public finances. The headline general government fiscal deficit narrowed to 2.2% of GDP in 2011 from 3.3% in 2010 and 4.5% in 2009.
However, general government debt rose to 49.2% of GDP in 2011 from 47.1% in 2010 as the financial health of non-profit special funds outside the headline budget (which are used to deliver public services including health and education) continued to deteriorate. Some of these funds are facing heavy financial burdens and their combined debt rose to 6% of GDP in 2011 from 5.2% in 2007.
Taiwan’s banking sector is large and thinly-capitalised, with a Tier 1 capital adequacy ratio of 9.32% at end-2011. Fitch notes Taiwanese banks’ heavy exposure to real-estate loans (41.1% of total loans in May 2012) and their vulnerability to potential credit deterioration from large single-name exposures in the technology sector. However, credit growth is slow and non-performing loans stood at less than 1% of total loans at end-June 2012. Overall, Fitch assesses the banking system to be at low risk of a systemic crisis, as indicated by Fitch’s Bank Systemic Risk Indicator of ‘bbb1’.
Unresolved political issues between Taiwan and China have not prevented progress on negotiations on ECFA. Fitch expects both sides will continue to exercise restraint in their relations. The agency does not view cross-straits political risks as a constraint on Taiwan’s sovereign ratings.
Sustained fiscal stabilisation and greater clarity regarding the management of non-profit special funds would be rating-supportive and could lead to an upgrade. Conversely, continued rising government debt ratios or a material deterioration in economic performance could lead to negative rating action. Likewise, a sharp rise in non-performing loans, though not a Fitch base case, could also lead to a crystallization of systemic risks in the banking sector. As the banking sector is 50% state-owned, this could exert negative pressure on Taiwan’s ratings.