Prolonged policy paralysis and volatile politics are expected to continue to overshadow Taiwan's financial markets and dampen the investment climate next year, Standard & Poor's Ratings Services (S&P) said yesterday.
The policy environment in Taiwan is not expected to clear up significantly in the next two years, S&P said in its 2007 Asia-Pacific Markets Outlook released yesterday.
Government moves to halt fiscal deterioration by raising taxes could further discourage private capital spending, while consumer demand is projected to see little growth as unemployment bottoms out and sentiment remain depressed by the political situation, S&P said.
"Further tightening of monetary policy by the government is putting added weight on growth of domestic demand," said Ping Chew (周彬), S&P's Managing Director of Corporate and Government Ratings, Asia.
Although inflation in Taiwan has recently been low and falling, the real interest rate remains uncomfortably low and the central bank's benchmark interest rate is likely to see further upward adjustments, he predicts.
In general, Taiwan's economic environment should remain stable next year with forecast GDP growth of 4 percent, up from S&P's previous forecast of 3.7 percent.
Yet, the nation's fiscal condition remained a concern in the future, with public debts rising to an equivalent of 46 percent of GDP this year, S&P said.
Even though the fiscal deficit stabilized this year backed by the nation's taxation reform and the robust international economic environment, the outlook is uncertain considering weakening global economic growth coupled with a deadlock of cross-Strait liberalization in trade and investment, Chow said in a teleconference yesterday.
"Political issues or government policy could have a prolonged impact on the long-term competitiveness of Taiwanese companies and banks, as they are restricted from investing in mainland China, though the government is under pressure to relax the restriction," said Ryan Tsang (曾怡景), S&P's Director and Team Leader of Corporate, Infrastructure and Financial Institutions Ratings, Greater China.
Credit quality for high-tech companies is expected to remain stable or positive next year, while high raw material prices would continue to pressure the credit quality of small-and mid-scale downstream producers in the value chain of Taiwan's petrochemical industry, Tseng said.
Meanwhile, the credit outlook for financial institutions in Taiwan next year is expected to be relatively stable, backed by expectation of a relatively stable macro environment as well as gradually improving risk management skills, he added.
Furthermore, the government is expected to remain strongly committed to maintaining a stable financial system, the analyst said.
On the equity market, Taiwan along with South Korea and Shanghai's H shares stand out among regional markets and received an over-weight rating from S&P.
The rating is bolstered by Taiwan's cheap valuation and expected healthy earnings growth next year and the resurgence in the high-tech sector in which Taiwan's TAIEX Index is heavily weighted, said Lorraine Tan (陳麗子), S&P vice president of Equity Research for Asia.
Earnings per share growth remains attractive at 18.8 percent in Taiwan, the highest in the region, and liquidity is trending higher, despite many companies investing overseas, Tan said.