Fri, Sep 04, 2009 - Page 12 News List

Government debt hurts rating

DEVIATING FROM THE NORM: Fitch said the nation’s government debt would climb to 50 percent of GDP this year, 55 percent next year and a record 57 percent in 2011

By Joyce Huang  /  STAFF REPORTER

Rising government debt will continue to undermine Taiwan’s chance of receiving an upward revision anytime soon on its current sovereign rating, which was given a “negative” outlook by Fitch Ratings in January, the international rating agency said yesterday.

Fitch Ratings said the nation’s government debt would climb to 50 percent of its GDP this year — a 7 percentage point increase from 43 percent last year — and to 55 percent next year and a record 57 percent in 2011, James McCormack, managing director and head of the rating agency’s Asia-Pacific Sovereign Ratings team, told a press conference yesterday prior to its 2009 Asian Sovereign, Banking and Insurance Conference.

“This year’s [projected] 7 percentage point increase is a result of the declin[ing] GDP,” he said.

Fitch Ratings said the nation’s economy would contract 4.9 percent this year, including year-on-year growth in the fourth quarter, before recovering to 2.3 percent growth next year, McCormack said.

Improving GDP growth in the coming quarters would help ease the nation’s fiscal deterioration, whose levels, however, will continue to go up and fall out of the comfort zone, he said.

The nation’s debt-to-GDP is not only “higher than the [Asia-Pacific] region’s average, but also deviating from that average,” he said, adding that in South Korea, the debt-to-GDP ratio would be lower than 40 percent by the end of this year.

On Wednesday Fitch revised upward its sovereign rating on South Korea from “negative” to “stable.”

Following the government’s use of tax cuts to stimulate the economy, McCormack expressed concerns at the nation’s tax-revenues-to-GDP ratio, which he said has been relatively weak and below 20 percent for years.

“While [tax incentives] help investment, [they] created a negative effect on government revenues,” he said.

After giving an AA to the nation’s local currency rating, Fitch said the nation’s foreign currency rating was “exceptionally strong” at A+, McCormack said.

He said the agency’s next review of the nation’s sovereign rating could be made in 18 to 24 months.

In general, the agency said that Asian banks have fared better and proved more resilient than their US and European counterparts, which will continue to experience losses from rising credit costs, David Marshall, managing director of the agency’s financial institutions, told the press conference yesterday.

Jonathan Lee (李信佳), senior director of the financial institutions group at Fitch Ratings Ltd Taiwan branch, maintained his forecast that the domestic banking sector would ease its contraction in returns on assets at 0.14 percent this year, from a previous estimate of a 0.5 percent contraction.

The banking sector’s bad-loan ratio will also remain at a healthy 1.5 percent level, he said.

He said, however, that domestic banks could soon experience an influx of NT$100 billion (US$3 billion) in bad loans from its loan exposure, at between NT$220 billion and NT$250 billion, to the troubled DRAM sector.

Given a 50 percent recovery rate, the banking sector could soon see a loss of NT$50 billion resulting from DRAM bad loans in the near future, Lee said.

The life insurance sector, however, will likely see heavier financial pressure in face of negative spreads and could require a minimal capital injection of NT$100 billion in the near term, he said.

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