Standard & Poor's Ratings Services affirmed its 'AA-' long-term and 'A-1+' short-term unsolicited issuer credit ratings on Taiwan. The outlook is stable. The transfer and convertibility assessment remains 'AA+'. At the same time, we affirmed the 'cnAAA/cnA-1+' Greater China scale ratings on Taiwan.
Taiwan's extremely strong external position, sound monetary management, and dynamic information technology (IT) companies in the private sector support the ratings. Tempering these strengths are a moderately high government debt and a small, open economy that is vulnerable to global economic conditions.
Taiwan is a strong net external creditor, the result of persistent current account surpluses generally ranging 7%-10% of GDP and net outward equity investments. Liquid external assets exceeded gross external debt by 93% of current account receipts as of end-2011.
"Taiwan's consistently large current account surpluses have enabled it to accumulate high foreign exchange reserves, which we project will exceed US$400 billion by the end of 2012--among the biggest in the world," said Standard & Poor's credit analyst Yee Farn Phua. "Apart from the large trade surpluses, the service account is emerging as a substantial contributor to Taiwan's balance-of-payment surpluses."
Standard & Poor's views Taiwan as having strong monetary flexibility. The central bank has demonstrated sound monetary management, which has kept inflation low and stable, despite the profuse liquidity in the system. Taiwan's consumer price index (CPI) rose in the first half of the year, and prices are likely to continue to increase in the months ahead due to the typhoon season and electricity tariff hikes. Nevertheless, inflation for the year remains modest.
Although much of Taiwanese manufacturing has shifted to China, huge repatriated profits ensure sizable income account surpluses in the balance of payments. However, 2012 is proving to be a difficult year for Taiwanese exporters due to weak demand in major developed markets.
Taiwan's main credit weaknesses, in our view, are the somewhat elevated government debt burden, the country's modest prosperity as indicated by GDP per capita of just over US$20,000, and its political factors, Phua said.
The stable outlook reflects our expectation that Taiwan will maintain its substantial net external asset position and that sustained economic growth will help consolidate the government's debt position. Although the small and open economy is vulnerable to external shocks, with the concentration in the electronics sector exacerbating that, we note that Taiwan's deep foreign exchange reserves and substantial monetary flexibility provide ample cushion.
We may raise the ratings if the government can implement structural reforms to diversify the economy and significantly raise per capita income. Taiwan's GDP per capita (US$20,100 in 2011) is modest compared with most other high investment-grade sovereigns. We may also raise the ratings if government reforms lower its budgetary and off-budget shortfalls in a sustainable way. This scenario is likely if reforms lift economic growth sufficiently for the government to lower subsidies and raise revenues materially.
We may lower the ratings if the fiscal deficits structurally widen due to a failure to adjust to unfavorable demographics or severe external shocks, resulting in rising public-sector liabilities. We may also lower the ratings if cross-straits relations deteriorate sharply, resulting in material geopolitical risks.