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RPT-Fitch affirms Taiwan at 'A+'; stable outlook
July 24, 2013 / 9:11 AM / 4 years ago

RPT-Fitch affirms Taiwan at 'A+'; stable outlook

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July 24 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has affirmed Taiwan’s Long-Term Foreign- and Local- Currency Issuer Default Ratings (IDRs) 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’.

Key Rating Drivers

The affirmation of Taiwan’s sovereign ratings reflects the following factors: -External finances are Taiwan’s key rating strength, providing it with a robust buffer against external shocks. Sovereign net foreign assets rose to 89% of GDP in 2012, among the highest of ‘A’ and ‘AA’ peers, while Taiwan’s net international investment position surpassed all other ‘A’ peers in 2012, reaching 169.1% of GDP. Resilient current account surpluses have been the main driver behind the sustained accumulation of foreign-exchange reserves, which rose to USD426bn or almost 16 months of current external payments at end-2012. -Taiwan’s public finances are broadly in line with the ‘A’ peer median, albeit weaker than the ‘AA’ peer median. The general government (GG) budget deficit rose slightly to 2.5% of GDP in 2012, while general government debt edged up to almost 50% of GDP. Nonetheless, both metrics remain below the ‘A’ medians of 3.6% and 51% respectively.

-Fitch now expects public debt/GDP to stabilise one year later than it had previously forecast, reflecting slower-than-expected growth in 2013. Details of the 2014 budget have yet to be released. Fitch expects continued spending restraint that will be conducive for sustained fiscal consolidation - given strong political consensus and adherence to fiscal rules.

-The financial position of the non-profit special funds (NPSF) sector, previously identified as a potential fiscal risk, has improved, as debt has trended down in absolute terms (by 6.9% yoy in 2012) and as a share of GDP (to 5.5% of GDP in 2012 from 6.1% in 2011).

-The prospect of Taiwan revisiting pre-2008 growth rates of 5-6% per annum is remote given the current uncertain global economic recovery and slower growth prospects in China. The five-year average GDP growth rate drifted downwards to 3% in 2012, which is no stronger than the ‘A’ median. Fitch forecasts GDP growth of 2.7% for 2013, up from 1.3% in 2012.

-Taiwan’s average income of USD20,322 is slightly above ‘A’ range peers but significantly lower than the ‘AA’ median. The banking system is large with private credit at 165.1% of GDP, compared with the ‘A’ and ‘AA’ median at 94.1% and 118.9% respectively. Substantial exposure by Taiwanese banks to the real estate sector (40% of total loans at end-April 2013) could leave banks’ asset quality vulnerable to an abrupt hike in interest rates or a steep rise in unemployment, although the agency does not view this as a likely development. -Taiwan and China have made progress on further economic integration under the Economic Cooperation Framework Agreement (ECFA) talks. Fitch views economic integration with the mainland as a key long-term growth driver for the economy.

Rating Sensitivities

The main factors that, individually or collectively, could trigger positive rating action:

-A sustained downward trend in general government debt/GDP The main factors that, individually or collectively, could trigger negative rating action:

-A swift deterioration in the banking sector’s asset quality, in light of the macro-prudential risks stemming from real estate and rising China exposure

-A much worse-than-expected slowdown in the global economy or in China that lead to sustained output losses and rising unemployment, causing severe economic and financial instability in Taiwan

Key Assumptions

-An international environment that remains conducive to global trade flows, which has underpinned the economic performance of the small open economy for decades

-No substantial changes in the relationship between Taiwan and China and a continued high level of political stability, with no major political or social disruptions that affect the business environment

-Taiwan’s economy regains growth of at least 3% per annum in line with the most recent five-year average

-China attains a smooth economic rebalancing.

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