Moody’s Investors Service changed its economic outlook for Taiwan from “positive” to “stable” on concern that rising tensions with China offset positive economic momentum, but kept its credit rating at “Aa3.”
“The decision to change the outlook reflects Moody’s assessment that cross-strait tensions have picked up, alongside rising strains in the relationship between China and the US,” Moody’s said on Thursday.
The affirmation of the “Aa3” rating came after considering Taiwan’s credit strength and challenges, and the assumption that Taiwan’s fiscal and external buffers will remain intact relative to similarly rated peers, it said.
Despite increasingly adversarial rhetoric in cross-strait relations, a direct military conflict between Taiwan and China remains a low-probability event, it said.
A military conflict would pose significant economic costs to the parties involved and to the global economy, Moody’s said.
The likely threat of economic sanctions imposed by China with negative consequences worldwide and the global consequences of a loss of access to Taiwanese electronic components are deterrents to a conflict, it added.
Taiwan’s inflation-adjusted GDP growth would remain above its potential at about 3 to 3.5 percent this year, slowing from 6.6 percent last year, Moody’s said, adding that it expects 2.5 percent growth on average in the coming years, higher than most economies.
Taiwan’s growth momentum is one of the least volatile among its peers despite its heavy reliance on external demand, thanks to its leadership in the information and communications technology sector, it said.
Taiwan maintains several competitive advantages in the technology sector, including the availability of trained engineers, geographic proximity to key supply chains and customers, and competitive wages and electricity costs, it said.
Globally, more than 90 percent of advanced semiconductor manufacturing capacity is in Taiwan, underscoring its critical role in spurring global investments in high-growth industries such as cloud infrastructure, electric vehicles, industrial automation, wireless telecommunications and high-performance computing, Moody’s said.
Over time, permanently heightened geopolitical risks would result in the acceleration of technology companies and other end users of advanced semiconductors seeking to relocate or replicate manufacturing capacity outside of Taiwan to fortify their supply chains, therefore weakening Taiwan’s economic strength, it said.
Longer-term concerns about Taiwan’s exposure to geopolitical risks have prompted governments to reassess their chip supply chains, Moody’s said.
Taiwan has maintained an overall prudent fiscal stance despite several rounds of stimulus to households and businesses, and a substantial increase in defense expenditure, it said.
Fiscal policy effectiveness continues to be supported by the government’s strong commitment to maintaining stable budget deficits through economic cycles, which has led to the successful execution of fiscal policy against planned targets, it said.
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