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S&P says Taiwan rating hinges on political deadlock

Taiwan's hopes of maintaining its "AA" credit rating ride on President Chen Shui-bian's (陳水扁) ability to break a political deadlock that stymied his attempts to head off the worst recession in more than a quarter century, Standard & Poor's said.

The agency affirmed the rating, its third-highest, and kept its "negative" outlook. It said Chen's inability to rule effectively may choke an economy already hurt by a growing budget deficit, rising bad loans and increased competition from China.

"The ratings on Taiwan may be lowered if public finances are eroded further or if banking-system risks materialize," S&P said in a statement. "President Chen may still be unable to overcome the political gridlock that characterized the first 18 months of his administration."

Tumbling exports of computer chips and other electronics, along with stalled spending at home, caused Taiwan's economy to shrink 4.21 percent in the third quarter from a year earlier, the second straight decline. Bad loans may rise to 15 percent of the total from about 11 percent at risk at the end of September as the economy slumps, S&P said.

Taiwan's deteriorating public finances may increase the risk of default, S&P said. This year's budget deficit will probably be equal to 6 percent of GDP, and government debt has risen to about 42 percent of GDP this year from 16 percent in 1991. To plug the gap, S&P urged the government to speed sales of shares, real estate and other assets.

The nation's "negligible" overseas debt, US$115 billion in foreign exchange reserves and innovative exporters may counter some of those risks, S&P said.

The agency last cut Taiwan's rating by one notch in July, saying Chen's administration was doing too little to repair the financial system and revive the economy.
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