Standard & Poor’s (S&P) Ratings Services yesterday lowered its outlook on Taiwan’s sovereign rating to “negative” from “stable,” citing concerns about the government’s rising debt burden.
The nation’s “AA-” long-term credit ratings outlook had been rated “stable” by S&P since last April, reflecting the agency’s expectations that cross-strait political tension would ease after President Ma Ying-jeou’s (馬英九) election victory.
But the Chinese Nationalist Party (KMT) government’s series of fiscal stimulus packages launched or planned in the past few months in a bid to help the nation ride out the current economic recession raised S&P’s concern about the nation’s poor fiscal situation.
The move came three months after Fitch Ratings Inc’s similar action on Jan. 19, when the ratings agency cut its outlook on Taiwan’s AA long-term credit rating from stable to negative, citing the nation’s increasing public debt and declining tax revenue.
DETERIORATION
“The negative outlook reflects our expectation of a marked deterioration in the government’s fiscal position in the next two to three years and this could weaken its credit fundamentals below levels appropriate for the ‘AA’ rating category,” Kim Eng Tan (陳錦榮), an S&P credit analyst based in Singapore, said in a statement released yesterday.
Last week, the legislature approved a stimulus budget for this year totaling NT$149.16 billion (US$4.41 billion), down 1 percent from the Cabinet’s original proposal of NT$150.66 billion.
The government plans to spend NT$160.67 billion next year, NT$105.07 billion in 2011 and NT$83.6 billion in 2012, with the four-year stimulus package totaling NT$500 billion.
The government also earmarked NT$85.7 billion for a consumer voucher program earlier this year in a bid to revive private consumption.
With the slew of government measures and legislature-approved NT$134.6 billion government deficit for this year, Taiwan’s general government debt is estimated to reach 142 percent of its revenue at the end of this year, putting it in the highest level in S&P’s ‘AA’ category, which also includes Hong Kong and Japan.
The Ministry of Finance issued a statement last night to defend the government’s fiscal policy, saying aggressive borrowing was necessary to battle the economic downturn as recommended by experts at home and abroad.
The ministry said accumulated government debts were expected to reach NT$4.786 trillion at the end of this year, or 37.9 percent of the nation’s GDP, much lower than the 48 percent threshold set by the government.
“The debt ratio is low compared with Singapore, Japan, the United States and other countries,” the ministry’s statement said.
LIABILITIES
The ministry also argued that not all spending items would end up as government liabilities and that related agencies were considering measures to reform the health insurance system to make it more responsible and accountable.
The increased government spending is intended to prevent the decline in GDP from exceeding 2.97 percent this year while keeping the unemployment rate at 4.5 percent, the statement said.
S&P’s statement said Taiwan’s banking sector constitutes another weakness in the nation’s creditworthiness, despite the cushion offered by the nation’s strong net external asset position such as foreign reserves and current account surpluses as well as the dynamic and entrepreneurial information technology sector.
“Taiwan’s fragmented banking sector, with its comparatively low profitability, is another weak point in its credit fundamentals,” Tan said.
He added that the local banking system is considered less healthy than those in most economies in the AA category.
In response, the finance ministry conceded the financial market is overcrowded, but said that domestic banks can lift their competitiveness through mergers and other remaking efforts, rather than relying on government funds to stay alive.
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