Fitch Ratings yesterday retained its negative outlook on Taiwan’s AA long-term local currency rating on lingering concerns over the nation’s deteriorating fiscal condition and weaker economic recovery compared with other emerging economies in the region.
The UK-based agency early last year lowered its outlook rating on Taiwan to negative from stable, in view of the nation’s increasing public debt and declining tax revenue after the government adopted measures to mitigate the effects of the global financial crisis.
“We retain the rating on Taiwan because of its weak fiscal outlook,” Vincent Ho (何永燊), associate director on Fitch’s Asia-Pacific sovereign ratings team, told a conference in Taipei.
The government’s debt is rising while tax revenue is shrinking and fiscal consolidation in the medium term may not be credible, Ho said.
To stimulate the economy, Taiwan has since January last year cut inheritance tax to a flat 10 percent from a range of 2 percent to 50 percent and recently lowered corporate income tax from 25 percent to 17 percent.
Meanwhile, the government has raised debt to finance infrastructure expansion and assorted welfare programs for the disadvantaged and the unemployed.
Taiwan’s public debt is approaching its legal limit, as government expenditure remains high, while tax revenues have shown little improvement since emerging from global recession, Ho said.
The analyst expects the nation’s economy to expand by 7.9 percent this year, from a contraction of 1.9 percent last year, but noted that its five-year average performance hovers slightly above 3 percent, slower than emerging Asia’s median of more than 5.5 percent.
Fitch also retained its “A+” stable outlook on Taiwan’s foreign currency rating on strong external finances attributing to robust exports, the report showed.
The current-account surplus continues to boost the nation’s foreign-exchange reserve accumulation, which has reached more than 130 percent of GDP, the report said.
However, Ho voiced concern that high unemployment in the US and Europe may weaken demand for Taiwanese electronics, casting uncertainty on the nation’s economic prospects.
“While a global double-dip is unlikely, risks remain because Fitch hasn’t bought into Asian decoupling yet,” Ho said, referring to the argument that Asia has become independent from the West in shoring up its economy.
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