Fitch affirms rating, improvement in cross-strait ties

Fitch Ratings Ltd yesterday affirmed Taiwan's rating with a stable outlook, citing cross-strait relations as a critical factor in the nation's rating level.

The British ratings service affirmed Taiwan's long-term foreign currency and local currency ratings at "A+" and "AA," respectively -- both with a stable outlook, and Taiwan's short-term rating at "F1" and the country ceiling at "AA-."

The security risk across the Taiwan Strait is a critical consideration for Taiwan's ratings, and Fitch said in a statement that some developments had helped to ease tensions brought about by the passage of China's "Anti-Secession" Law in March.

The positive developments included visits by Taiwanese opposition politicians to China, renewed discussions on the possible establishment of regular, direct air transport links and President Chen Shui-bian's (陳水扁) commitment earlier this year not to pursue constitutional and other changes that would alter the status quo in relations with China, it read.

"In our view, there has been a notable change in the president's position, and that, combined with progress in a number of other areas, increases the likelihood that the status quo will be preserved for the remainder of his term and reduces the security risks," Fitch's Head of Asia Sovereigns James McCormack said.

Factors providing fundamental support to the sovereign ratings include Taiwan's net external asset position, which is far superior to the rating peer group median, and the nation's external liquidity ratio, which is among the highest of all rated sovereigns, Fitch said.

With outbound investment amounting to about 10 percent of GDP since 2000,

foreign exchange reserves have more than doubled from five years ago to

reach US$252 billion at end of last month, the company said.

Public finances in Taiwan compare less favorably over time with “A” rated

medians, as general government debt is approaching 40 percent of GDP. But

Fitch said it was encouraged by Chen's initiatives outlined earlier this

year to increase the tax-to-GDP ratio.

Nevertheless, implementation of the proposed alternative minimum tax and a

higher value-added tax rate and eliminating tax incentives could be

difficult, as the political stalemate between the executive and legislative

branches of government shows no sign of improvement, implying policy

enactment will remain slow, Fitch said.