Wed, Dec 01, 2004 - Page 10 News List

S&P revises outlook to negative

DOWNGRADE The ratings agency revised down the sovereign outlook, citing concerns over expanding government debt and rising cross-strait tensions

By Kevin Chen  /  STAFF REPORTER

Standard & Poor's yesterday revised its sovereign outlook on Taiwan to negative from stable on concerns over the nation's weakening fiscal flexibility, the international credit rating agency said in a statement.

But S&P affirmed the nation's "AA-" long-term debt rating, the fourth-highest investment grade, and its "A-1" short-term rating on both foreign and local currency debts.

"The outlook has been revised to negative, reflecting Taiwan's weakening fiscal flexibility due to its high structural fiscal deficits and growing general government debt burden, as well as the prospect of rising tension with China," Philippe Sachs, a S&P credit analyst said in the statement.

"Although peace should prevail in view of mutual economic interests, it is clear that the status quo is changing and thus the risk of conflict is on the rise," Sachs added.

Another international ratings agency, Fitch Ratings, in October maintained a stable outlook on Taiwan, but warned that a hostile cross-strait relationship with China remains a primary obstacle for Taiwan's creditworthiness.

In response to S&P's negative outlook, an official from the Ministry of Finance yesterday said the rating agency failed to factor in the central government's fiscal-reform improvements, which are mostly significant on the expenditure side.

Still, the official, who refused to be identified, admitted that the government's reform measures fell behind the rising deficit, which he suspected may be the reason behind the downgraded outlook.

Cross-strait relations have soured since pro-independence President Chen Shui-bian (陳水扁) was re-elected in March. Both S&P and Fitch believe that the situation may turn more tense amid the prospect of a legislative majority for Chen's pan-green coalition after December's legislative elections.

Even so, the nation's massive foreign exchange reserves, as well as its strong export-oriented economy, have continued to provide much of the rating support Taiwan needs, S&P said.

The nation's foreign exchange reserves expanded to a record US$233.03 billion at the end of October, while export orders rose 25.46 percent to hit a monthly record US$20.25 billion last month from a year ago, according to government statistics.

While Taiwan is expected to achieve an economic growth rate of 4.56 percent next year, from a projected 5.93 percent for this year, the nation faces decreased investment as companies relocate to China and are reluctant to repatriate profits for tax evasion purposes.

S&P said Taiwan's "leaky and narrow taxation system" also helps contribute to its fiscal burdens, in addition to the central government's "limited ability to increase taxes, growing social welfare expenditures and continued propensity for off-budget spending."

Sachs said the negative outlook reflects expectations that fiscal reform may not be sufficient to rein in the continued rise in government debt.

Taiwan's net general government debt as a percentage of revenue is estimated at 220 percent for this year, compared with the "AA" median of 122 percent, according to S&P.

"The credit ratings on Taiwan could be lowered if there are further fiscal slippages, or economic growth slows materially, in part because rising tensions with China undermine investment and consumer spending," Sachs said.

with additional reporting by Joyce Huang

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