The momentum behind the corporate and financial sectors’ improving credit quality looks set to weaken next year amid heightened concerns over the slowing global economy, Taiwan Ratings Corp (中華信評), the local arm of Standard & Poor’s, said yesterday.
“We expect the likely deterioration in economic activity and rising capital market volatility to weaken the operating performance of Taiwan’s corporate and financial sectors next year,” corporate credit analyst Raymond Hsu (許智清) told a media briefing.
The gradual economic slowdown in the second half of this year resulted in negative rating actions outpacing positive ones, a trend that has been more evident in the corporate sector in the current quarter, Hsu said.
Taiwan Ratings clientele, including Formosa Plastics Group (台塑集團), Chimei Innolux Corp (奇美電子), Taiwan Mobile Co (台灣大哥大), China Steel Corp (中鋼) and Qisda Corp (佳世達), received 15 upgrades against eight downgrades this year.
“Most of the upgrades took place in the first half of the year while downgrades came mostly in the second half as the economic landscape turned increasingly cloudy,” Hsu said.
In addition, the negative bias came mainly from those elements of the corporate sector that are more susceptible to macroeconomic changes as a result of their reliance on external demand, he said.
The agency forecast that GDP would expand by between 2.3 percent and 2.8 percent next year, while the US and Europe would see growth of 1.8 percent and 0.4 percent respectively, the recent report showed.
China, the nation’s largest export destination, was likely to maintain a GDP growth of 7.7 percent to 8.2 percent next year, the agency said.
Meanwhile, Taiwan Ratings director of financial institution ratings, Eunice Fan (范維華), said the domestic financial sector could see its profitability decline next year or longer as a result of slowing business activity, but could survive potential defaults by domestic DRAM and flat-panel makers.
“The loans at issue account for a small share of the lenders’ loan books although defaults could wipe out their earnings for three years,” Fan said. “The general improvement in asset quality [among domestic financial institutions] lends significant help.”
The financial sector could also emerge unharmed from potential loan losses because of correction in housing prices, Fan said.
“Credit losses are absorbable in the case of a 20 percent fall in housing prices,” she said.
Taiwan Ratings expects market confidence to remain stable on the back of ample liquidity and government’s support for the local corporate and financial sectors in a time of economic downturn, Fan added.