Political upheaval is unlikely to impose a downside risk to Taiwan's sovereign credit ratings but has an adverse effect on the nation's economic growth and reforms, Fitch Ratings said yesterday.
The political turmoil will not impact the nation's sovereign ratings unless there are any big changes in the economic policy environment, James McCormack, head of Fitch's Asia-Pacific sovereign team, said at a banking conference in Taipei.
In November, Fitch gave Taiwan an "A+" for its foreign currency issuer default rating and "AA" for the local currency issuer default rating. Both have a stable outlook.
McCormack said that Fitch was keeping with an A+ level for Taiwan's sovereign credit ratings for the moment, as political conflict has been raging for the past six years.
But he warned that recent political events could damage consumer and investor confidence in the short term.
"The longer the political uncertainty persists, the more pronounced the economic implications are likely to be," McCormack said.
The analyst urged the government to focus more on policy front than politics in a bid to jump-start the stalled economic growth of recent years.
"We are not interested in who governs ... but concerned about the stagnant reforms [caused by political struggle]," McCormack said.
Another ratings agency, Standard & Poor's (S&P), said earlier this month that Taiwan would eventually face a ratings downgrade if the nation's fiscal and economic reforms continued to be weakened by its policy paralysis.
Despite "no immediate impact on the sovereign credit ratings on Taiwan, continued deterioration in its fiscal situation and investment spending has hurt the island's growth prospects and raised concerns of weakening creditworthiness," S&P said in a statement on June 9.
Fitch forecast a 4-percent GDP growth rate for Taiwan this year, marginally down from 4.1 percent last year.
That's relatively poor compared with Taiwan's neighbors like Hong Kong, where GDP is expected to grow 6.3 percent this year, and Korea, which could see GDP growth of 4.7 percent, McCormack said.
Taiwan should try to benefit from China's economy, which is growing at a pace of more than 9 percent, by allowing more cross-strait opening, like direct air links, to boost economic growth, he said.
Expanding GDP could also help lower the nation's rising debt-to-GDP ratio, which has been indicative of deteriorating fiscal fundamentals, he added.
The worsening debt burden is Fitch's major concern, and the major factor that could affect Taiwan's credit ratings.
"From a rating perspective, one of the issues that must be addressed in Taiwan is the rising government debt burden," McCormack said.
Taiwan's government debt makes up 39.5 percent of its GDP this year, up from 38.7 percent last year, according to Fitch's figures.
The ratio is approaching 40 percent, equivalent to a debt burden level seen in a "A" sovereign rating sphere, which could trigger a downgrade risk to Taiwan, the agency warned.
But Fitch is bearish about the outlook, as it is difficult to envisage an aggressive debt reduction program during the remainder of President Chen Shui-bian's (陳水扁) term with his weakened leadership, it said.
The ratings agency urged the government to stop offering tax incentives to keep Taiwanese businesses from moving to China, which is only further aggravating weak fiscal conditions.
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