A year after Lehman Brothers’ collapse triggered a global crisis, Taiwan — like other countries around the world — is gradually emerging from a recession, aided in part by massive economic stimulus measures.
However, those measures, in addition to a special reconstruction package to rebuild areas devastated by Typhoon Morakot last month, are adding to the government’s already deteriorating fiscal position.
Last week, Fitch Ratings — which in January cut its outlook on Taiwan’s AA long-term local currency issuer rating to negative from stable — hinted at the high possibility of a downgrade of the nation’s local currency rating in the face of rising public debt and falling tax revenue.
The agency estimated that government debt as a percentage of GDP would climb from 43 percent last year to 50 percent by the end of this year, before rising to 55 percent next year and 57 percent in 2011. This compares with a forecast debt-to-GDP ratio of less than 40 percent for South Korea, which saw its sovereign rating outlook raised from negative to stable on Wednesday by Fitch.
A look at the government’s budget proposal, which is awaiting legislative review later this month, shows a forecast budget deficit of NT$187.8 billion (US$5.7 billion) next year. That represents an expansion of 50.5 percent from this year’s estimated deficit of NT$124.8 billion and would mark the highest level in the last five years.
To cope with an estimated budget deficit of NT$187.8 billion and debt repayments of NT$66 billion for next year, as well as to raise funds for an economic stimulus budget of NT$192.2 billion (part of the four-year NT$500 billion economic stimulus package) and a special budget of NT$49 billion (part of the four-year NT$120 billion typhoon-related reconstruction package), the government will need to borrow money or issue bonds totaling nearly NT$500 billion next year, compared with NT$421.7 billion this year. Overall, outstanding government debt is expected to hit NT$4.6 trillion next year, up from NT$4.3 trillion this year, the Directorate-General of Budget, Accounting and Statistics (DGBAS) said.
But the actual size of the government debt may be much more than the DGBAS has placed on the book. A recent report by the Chinese-language Business Weekly said Taiwan’s public debt exposure could reach NT$14 trillion — with each citizen shouldering a debt of NT$630,000 throughout his or her lifetime — if pensions reserved for military and civil servants, as well as other spending items not subject to the Public Debt Act (公共債務法), are taken into account.
Ratings agency Standard & Poor’s has yet to say if it will adjust downward Taiwan’s sovereign rating. The agency in April lowered the outlook on Taiwan’s sovereign fundamentals to “negative” amid concerns over its fiscal health over the next three years.
Individuals may not directly feel the impact of a sovereign rating downgrade. But a cut in a country’s rating would mean less favorable terms of access to international capital markets for its companies.
Fitch’s warning is likely to accelerate the government’s move to introduce a mid-term fiscal stabilization plan, which Premier Liu Chao-shiuan (劉兆玄) briefly mentioned in an interview with Dow Jones Newswires earlier last month.
Whatever measures there may be to deal with the government’s weakening sources of revenues and soaring public debt, a mid-term plan like this should remind the government of the need to pursue fiscal discipline immediately — and let taxpayers know that they may have to pay more taxes, whether they like it or not.
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