Last week, Standard & Poor's (S&P) Ratings Services issued a statement denying a local newspaper report that it might downgrade the nation's sovereign rating before the end of the year due to concerns about political instability.
The report, in the Chinese-language Commercial Times, said that Taiwan's sovereign rating is "on the brink of a downward adjustment" by S&P as "the criteria for downgrading have been met." But the company immediately denied the report and said it currently rated Taiwan at AA- and A-1+ for foreign and local currency sovereign credit ratings, with a negative outlook.
This news caught people's attention, because whenever there is a sovereign downgrade, corporations within the target country tend to follow suit, raising their borrowing costs. In addition, the downgrade also tends to negatively affect foreign direct investment.
So far, there are no clear signs of that happening. Still, the news seemed to suggest there were increasing economic risks from the recent spate of political protests.
S&P said in June that the nation's internal political conflict had stalled the economic and fiscal reform process, and this could lead to a downgrading in the nation's credit rating in the future. At that time, S&P was referring to the legislative stalemate between the pan-blue and pan-green camps.
But this time around, the news of an alleged downgrading touched nerves because it came just two days after former Democratic Progressive Party chairman Shih Ming-teh (
Some economists predicted that the economy would suffer NT$30 billion (US$910.9 million) a day in lost production in the event of a strike. Others suggested that the real impact would be far greater, through a decline in investor confidence and loss of export orders in the long term.
Without detailed strike plans, it is hard to estimate precisely the psychological effect a strike would have on consumer spending and the overall economy.
But already, the nation's consumer spending has been plagued by loan defaults, forcing the Directorate General of Budget, Accounting and Statistics last month to cut its GDP forecast to 4.28 percent for this year, down from 4.31 percent in May. If a strike materializes, it could place Taiwan at risk of a sharp downturn in the second half of this year due to a sharp retrenchment in household spending.
If a strike were to continue for days or even weeks, it would surely lead to plant closures, job losses and a plummeting financial market, on top of a situation where private investment is already soft because of industry migration to China. Like draining a swamp, the ugly side of the nation's recent economic development would be revealed for all to see.
S&P's denial of its intention to downgrade the nation's credit rating last week only referred to the firm's current outlook. In other words, things could change rapidly if a strike is called, exacerbating the impact of existing political and financial troubles. People should be reminded that while the strike card is inexpensive for individual politicians to play, the cost to the nation will be great.
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