The nation’s household debt burden may face heavy pressure once the central bank launches a new round of interest rate normalization, raising its policy rates by as much as 2 percentage points, Fitch Ratings Ltd said yesterday.
However, the timing for the US Federal Reserve to raise its policy rates — which is unlikely to happen until 2015 — may be a key driver for the pace of rate hikes in Taiwan, an indication that the central bank may not start its next cycle of rate normalization over the near future, the international ratings agency said
“Debt burden will approach the level recorded during the twin-card financial storm [credit and cash card debt problems] in 2005 if rates are hiked by 200 basis points,” Taiwan-based Fitch Ratings director on financial institutions Cherry Huang (黃嬿如) told a media briefing.
Huang said the risk posed by interest rate hikes has been rising for debt-ridden borrowers, as hikes may raise household debt and cause further concerns over property-related exposures for the nation’s banking sector.
Currently, real-estate-related lending represents more than 40 percent of system loans for Taiwan’s banking sector, Huang added.
Potential growth risk in local small and medium-sized enterprises (SMEs) may pose another risk for Taiwanese banks, Huang said, citing SME loans’ rising importance to more than 20 percent of system loans.
In addition, risks from increasing China exposure may also be a vulnerability for the banking sector, the rating agency said.
However, overall, Fitch Ratings maintained a stable rating outlook for Taiwanese banks, as the sector remains profitable this year and has adequate capital to withstand moderate external shocks.
Meanwhile, Fitch Ratings affirmed Taiwan’s sovereign credit rating of “A+,” its fifth-highest grade, and forecast the nation’s economy would grow 2.7 percent this year, from 1.3 percent last year.
“Taiwan is an export-driven economy, which is volatile and vulnerable to the global environment,” Fitch Ratings head of sovereign ratings in the Asia-Pacific region Andrew Colquhoun said.
A sustained reduction of government debt would support a ratings upgrade for the nation in two or three years, Colquhoun said.
Despite fiscal policy in line with the “A” range, Colquhoun said the rating agency expects a delay in Taiwan’s debt stabilization owing to slower-than-expected economic growth, given the uncertain global economic outlook and sluggish growth prospects in China.
Fitch Ratings will update its forecast for Taiwan’s economic growth later this month.