Taipei Times: Will spiraling credit and cash card bad debt shake the nation's finance sector and dent economic growth?
James McCormack: We don't expect the credit and cash card bad debt problem in Taiwan to be as bad as it was in South Korea, as the level of bad debt grew faster than here, which is good news.
From the sovereign ratings perspective, the bad loan issue may not be the factor driving our ratings. It is more likely to be a factor in changes to ratings of individual financial institutions. But the problem could be something that will affect Taiwan's economic growth negatively, and that is something we need to look at closely and may lead to downward revision of our growth forecast.
Consumers may have to change their borrowing behavior to borrow less and save more, and the downside of that is a possible consumption contraction, or a consumer credit crunch, which would in turn affect economic growth.
Fitch's forecast for Taiwan's economic growth this year is 4 percent, and there is a likelihood for downward revision when we look at the risk of weakening consumption and decelerating export growth in the second half of this year, as the US economy is expected to slow down.
TT: Are you concerned about a proposal to lower the interest rate cap to 12 percent from 20 percent?
McCormack: We don't think the proposal is a good one and we disagree with the proposed measures, which run counter to market principles.
When a government interferes in the market directly, it often gets an end result that is an unintended consequence. Legislation that distorts the behavior of market participants by attaching inappropriate interest rates could result in debt burdens that people and enterprises would not otherwise incur, or push people to borrow from other sources like underground lenders as banks tighten lending.
Debt could grow faster than it [normally] would and this uncertainty causes concern to ratings agencies. The bad-debt issue should be resolved in the market through ways like resolution with creditor banks. Capping interest rates is not a solution at all.
TT: Would such action impact on the nation's sovereign ratings?
McCormack: Probably not. We focus on the government's ability to repay its own debts, to which our ratings refer. It is difficult to draw a link between the capping of interest rates on consumers and the government's debt burden. It is not a good policy backdrop for the economy but we don't rate the policy environment and do not see necessarily a deterioration in public finance in this matter.
Fitch gave Taiwan A+ in its sovereign rating with a stable outlook, the same as South Korea's A+, higher than China's A and beneath Hong Kong's AA-.
Taiwan has a fundamental strength in its external sector as a net external creditor, which means the rest of the world owes Taiwan money. This is a fundamental support to Taiwan's ratings. Also, Taiwan is strong in balance of payments, including positive export earnings, foreign income earnings and foreign exchange reserves.
Negatives include weakening public finance, as we expect a continued increase in government debt this year. ... The outlook this year could be less rosy as the risk of bad debts could dent Taiwan's economic growth, while government debt is highly likely to go up. Political risk in Taiwan's relations with China is another risk we need to be aware of and factor in when reviewing ratings.
RSS