S&P Global Ratings has affirmed Taiwan’s sovereign credit rating with a stable outlook, saying that the nation might resume economic growth next year from an expected contraction this year caused by the COVID-19 pandemic.
The international agency maintains Taiwan’s long-term and short-term issuer credit ratings at “AA-” and “A-1+” respectively on belief that the nation’s robust asset positions, strong monetary flexibility and competitive private sector would uphold its credit profile amid the pandemic.
The affirmation came even though S&P Global said that Taiwan’s financial health would deteriorate modestly, owing to relief and stimulus measures.
The extra spending would not add much strain to government debt, the ratings agency said.
The pandemic could push Taiwan’s economy into a 1.2 percent decline with unemployment rising to 4.4 percent this year, it said.
Effective containment and mitigation, coupled with a strong healthcare system, has helped Taiwan avoid stringent lockdowns in many other parts of the region, allowing domestic economic activity to weather the storm better than its peers, S&P Global said.
Nevertheless, Taiwan’s open economy would be affected by softening external demand, a collapse in tourist arrivals and a dimming outlook for the semiconductor industry in the second half of this year, it said.
S&P Global said it expects the virus effects to be temporary, and as the crisis recedes, Taiwan would stage a strong economic recovery, led by its electronics manufacturing sector.
Taiwan’s semiconductor foundries have emerged unrivaled in making high-end integrated circuits, it said.
“Demand for advanced chips from 5G network deployment, big data processing, analytics and artificial intelligence will drive investment growth and economic activity,” S&P Global said.
Taiwan’s GDP would rebound 4 percent next year, it added.
The ratings agency looked at the marginal investment benefit from the relocation of some production chains by Taiwanese manufacturers to respond to mounting costs in China, US-China trade tensions and incentives from Taiwan’s government.
S&P Global said it might lower Taiwan’s credit ratings if its fiscal deficit widens structurally due to a failure to adjust to unfavorable demographics or external shocks, resulting in higher government debt.
Taiwan has one of the fastest-aging populations in Asia, which can limit long-term growth potential in the absence of productivity growth, the agency said.
Credit downgrades might also occur if cross-strait relations sour, resulting in heightened geopolitical risks and adverse effects on economic performance, S&P Global said.
For the time being, cross-strait and international trade relations remain conducive to Taiwan’s economic stability, it said.
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