Standard & Poor’s (S&P) Ratings Services yesterday affirmed Taiwan’s sovereign credit rating of “AA-,” its fourth-highest grade, and forecast the nation’s economy would grow 2.8 percent this year and close to 4 percent next year.
The international ratings agency said that it had kept a stable outlook on the nation’s sovereign ratings, affirming its “AA-” long-term and “A-1+” short-term unsolicited issuer credit ratings.
S&P said Taiwan’s strong external position, sound monetary management and dynamic information technology companies supported the country’s sovereign ratings.
S&P’s latest assessment of the nation’s ratings came at a time when foreign investors are withdrawing from emerging markets in anticipation that the US Federal Reserve may soon wind down its quantitative easing program.
Economists say Taiwan’s solid current account surplus and ample foreign exchange reserves, as well as its central bank’s monetary flexibility, have prevented the country from the negative impacts of capital outflows, which have recently caused greater market volatility in India and Indonesia.
“Taiwan’s consistently large current account surpluses have enabled it to accumulate high foreign exchange reserves, which we project will exceed US$400 billion (85 percent of GDP) by the end of this year — among the highest in the world,” S&P credit analysts Phua Yee-farn (潘怡帆) and Tan Kim-eng (陳錦榮) wrote in the report.
S&P also expects Taiwan’s current account surplus to remain about 10 percent to 11 percent of GDP in the medium term.
At the end of last month, Taiwan’s foreign exchange reserves totaled US$409.12 billion, while its current account surplus reached US$13.8 billion in the second quarter this year, according to the central bank’s latest statistics.
However, the main credit weaknesses facing the nation are its rising government debt, the moderate increase in GDP per capita and its relationship with China, S&P said.
Moreover, the economy is increasingly challenged by the fiscal pressure in view of its low tax burden and higher social security and pension-related spending to support the fast-aging population, the agency said.
“There remains a general lack of political will to expand the tax base in a substantive way,” Phua and Tan wrote in the report. “Therefore, the main push behind deficit reduction is likely to come from GDP growth, which we deem plausible barring major external shocks.”