Taiwan's cross-strait ties with China represent a "risk factor" to the island's debt ratings, Moody's Investors Service said yesterday.
The nation's rating outlook is stable, Moody's said in its annual report on Taiwan.
However, it also noted a weakening fiscal position, citing an increase in general government debt since 2000 to 40 percent of gross domestic product.
"The government is now attempting to fashion a more effective tax policy to rein in the budget deficit and contain debt," Moody's vice president Thomas Byrne said in the report.
The US debt rating company will monitor the government's fiscal adjustment efforts, the report said.
Taiwan's government is trying to increase tax revenue as part of its bid to balance the budget by 2011.
The deficit is projected to reach NT$260.7 billion this year, according to the government's 2006 draft budget sent to parliament in August.
The report points out that, despite the absence of direct cross-strait links in communications, transportation and trade, Taiwan's economic engagement with China has flourished and has not been "held hostage" to the political differences.
China provides the market for about one-third of Taiwan's exports, and its companies have invested more in China than in any other country.
The report is a yearly update to the markets and is not a rating action, Moody's said. Taiwan has an Aa3 rating from Moody's and an AA- rating from Standard & Poor's.
Still, "cross-strait geopolitical concerns are a risk factor to Taiwan's ratings," Byrne said.
The Moody's report comes after Taiwanese President Chen Shui-bian (陳水扁) said in his New Year speech that his administration would more actively manage economic relations with China.
Taiwan's economy has become increasingly reliant on China, its biggest export market. Taiwanese businesses and individuals have invested about US$100 billion in China.