Taiwan is facing new credit challenges linked to trade tensions between the US and China, long-standing constraints from an aging population and geopolitical risks, Moody’s Investors Service said.
The challenges will put pressure on the nation’s fiscal buffers, whose strength have helped keep its credit profile stable, the international ratings agency said.
“Prolonged trade tensions between the US and China would have repercussions on Taiwan’s industrial production, particularly for the electronics sector,” it said.
Taiwan relies heavily on cross-border trade to drive growth, with last year’s trade volume equivalent to 117.8 percent of GDP, of which integrated circuits and semiconductors accounted for a sizable share, it said.
US tariffs on Chinese goods would inevitably cool demand for Taiwan’s final and intermediate products, as more than 40 percent of outbound shipments are destined for China, it said.
The concentration on the intensely competitive electronics industry would also make it more difficult for Taiwan to maintain its economic competitiveness, it said.
The risks are not limited to trade flows, as its relations with China are a long-standing credit constraint and have turned acrimonious in recent years, it said.
The risks would extend to Taiwan’s balance of payments and broader geopolitical relations, it said.
In addition, Taiwan’s population might start to decline by 2030 with its old-age dependency ratio on the rise, it said. The emigration of young Taiwanese to China could compound the demographic trend, it said.
The aging population would hurt growth potential, household savings and fiscal strength, even though policy measures could help alleviate the impact, it said.
Nevertheless, Taiwan has the ability to cope with potential shocks, the agency said.
On the fiscal front, Taiwan has ample room to introduce fiscal measures to stimulate economic growth in that its deficit and debt burdens are modest, while its debt affordability is strong, it said.
The nation has long enjoyed current account surpluses, which have helped bolster foreign exchange reserves with support from foreign direct investments, it said.
The nation’s net international investment position, standing at more than 200 percent of GDP, is the fourth-largest among Moody’s rated economies and is more than six times Taiwan’s external debt burden, it said.
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