Wed, Sep 10, 2008 page12

• Moody’s remains positive on Taiwan

  CHALLENGES While retaining its strong ratings on Taiwan, Moody’s underlined the need for the nation to quickly adapt to changes to strengthen its competitiveness

  • By Joyce Huang / STAFF REPORTER
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  International ratings agency Moody’s Investors Service yesterday maintained its “Aa3” government bond ratings for Taiwan, with a stable country outlook.

  “The government’s ratings are supported by Taiwan’s strong external payments position, the absence of foreign currency borrowing to finance budget deficits, a moderately high income level, and a maturing democratic and constitutional system, while cross-strait geopolitics constrain the country ceiling,” said Aninda Mitra, a vice president and senior analyst in Moody’s sovereign risk unit.

  Mitra warned, however, that the nation’s economic structure and long-term growth prospects face growing challenges.

  “And unlike the smaller and more dynamic economy of Hong Kong, it has been unable to deftly adapt to changes in circumstances by finding new areas of competitive advantage that could sustainably boost productivity and employment,” Mitra said.

  Mitra urged Taiwan to more effectively utilize China’s long-term growth potential, which may result in enhanced specialization and higher investment and productivity.

  But that would require more than a piecemeal “opening of direct links,” as proposed by President Ma Ying-jeou (馬英九), and involve a sustained transformation of Taiwan-China relations, he said.

  In his report entitled Taiwan: 2008 Credit Analysis, Mitra said Taiwan’s relationship with China “will be crucial to its economic outlook.”

  “A reduction in cross-strait political tensions under the new KMT [Chinese Nationalist Party] government could bring economic pay-offs, although these are not likely to be sufficient enough to materially improve Taiwan’s credit fundamentals in the near term,” Mitra said.

  He added that a sustained economic opening to China could bring short-term benefits but they might not be sufficient to help realize Ma’s “6-3-3” goal — an average annual GDP growth of 6 percent, a jobless rate of less than 3 percent and an annual per capita income of US$30,000.

  What bears watching in the medium term is the effect of China’s post-Olympic response to the KMT administration’s pro-China policies, including allowing more Chinese tourists to visit Taiwan to help boost the Taiwanese economy.

  Taiwanese financial reforms could also reinvigorate the economy, the report said.

  “If financial sector reform initiatives are complemented with closers relations with the mainland, it could raise productivity and result in faster service-sector growth,” Mitra wrote in the report.

  He added that the government’s efforts to turn Taiwan into a regional financial center or asset management hub would require more sector consolidation, better supervision and transparency, and market access to China and other regional markets.

  In terms of the nation’s budgetary position, the report said that Taiwan’s fiscal performance had improved noticeably in the past two years, with the budget deficit shrinking from more than 3 percent of GDP, on average, since the beginning of the decade to under 1 percent of GDP in 2006 and last year.

  However, a renewed spending emphasis on infrastructure upgrades is expected to widen the fiscal deficit back to 2 percent of GDP this year, a level which would not undermine the nation’s credit fundamentals, Mitra wrote.
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