The report last week by Standard & Poor's Ratings Services that affirmed its AA-/A-1+ credit ratings for Taiwan with a negative outlook must have given relief to government officials, after Fitch Ratings last month also maintained its sovereign ratings for the nation at A+/AA with a stable outlook.
The S&P report applauded the nation's strong external financial position and its dynamic information technology sector as a firm foundation for the nation's economy, which is projected to grow 4.6 percent next year after a projected increase of 4.39 percent this year.
The Democratic Progressive Party (DPP) government, which was given a political reprieve with its better-than-expected performance in the Taipei and Kaohsiung mayoral elections, received a confidence boost on economic policy with the S&P report.
But as S&P warned, persistent political paralysis could still spoil the nation's current ratings, particularly if no action is taken to deal with the condition of the banking sector or to improve cross-strait relations.
There is an even more urgent need to amend the deteriorating public debt problem, as S&P has estimated that the ratio of debt payable by all levels of government will grow to 46.4 percent of GDP by the end of this year from less than 45 percent in 2003.
Fitch Ratings warned only last month that any further increase in public debt would likely prompt a ratings review, as Taiwan's structural fiscal deficit and high general government debt relative to GDP were viewed as crucial rating concerns.
The agency expected the general government debt to rise to 46.9 percent of GDP this year -- not only an historical high but also well above the forecast median of 31.8 percent among A-rated sovereigns.
The Switzerland-based International Institute of Management Development is also worried about Taiwan's weakening fiscal flexibility, as it said in this year's World Competitiveness Report that public financial management was one of the nation's worst performing categories. Taiwan's ranking fell seven-notches to 18th in this year's report.
This fiscal problem could be even more severe if the deficits of the Labor Insurance and National Health Insurance programs are taken into account.
It is therefore encouraging to see the government slash its budget deficit forecast for this year by nearly 80 percent to approximately NT$50 billion (US$1.53 billion) on the back of rising tax revenues, which the Ministry of Finance has estimated will surpass its original target by more than NT$120 billion to reach a total of NT$1.6 trillion.
But just how stable the revenue increase will be as relocation of Taiwanese manufacturers abroad continues is the matter of debate. The impact on private capital spending as the nation's tax base expands is also difficult to estimate. In addition, whether the government should continue to give certain industries and sectors preferential tax breaks, while placing the tax burden on the nation's salaried middle classes, is an open question.
The other wildcard in fiscal management is the politicians' pork-barreling ahead of elections -- ranging from tax cuts to more expenditure on public welfare or infrastructure projects.
Downward pressure on Taiwan's ratings will certainly exist if the government continues to pay little heed to rising public debt and contentious cross-strait issues. The nation needs a constructive political environment to make possible of any of policy initiatives needed to deal with those problems.
Unfortunately, the paralysis will likely be the defining feature of the political environment through 2008 election.
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