Last week, financial markets worldwide were briefly rattled by Fitch Ratings’ unexpected downgrading of US government debt, but analysts generally agreed that a significant, long-term effect on the US bond markets is unlikely, as US debt is still the safest and most liquid asset in the world, while the US economy is still recovering strongly.
On Tuesday, Fitch lowered the US federal government’s credit rating to “AA+” from “AAA”, citing concerns about a growing debt burden and the governance challenges tied to a debt-ceiling showdown on Capitol Hill. Fitch stripping the US of the highest rating to reflect its debt repayment capacity was the first time since 2011 that a major ratings agency has changed its assessment of Washington’s economic and financial health, when S&P removed its “AAA” rating of the US.
Fitch’s move immediately sparked criticism from Washington and Wall Street, despite the market’s lingering unease over potential repeats of a standoff between the Republicans and Democrats on raising the US government’s debt ceiling early this year. Even though a compromise was eventually reached in late May, the damage to Washington’s reputation took shape, as a historic US default almost became reality.
While the timing of Fitch’s downgrade was genuinely unexpected, the reasons the agency gave for its action — such as “expected fiscal deterioration,” “a growing debt burden” and “the erosion of governance” — were nothing new, with some even saying that it was a belated move and that Fitch should have done so when the White House and Congress were struggling to resolve a standoff on whether to raise the US government’s borrowing limit months ago.
After all, the US’ loss of a “AAA” rating appeared symbolic and the downgrade would likely cause few immediate consequences for its economy, as the market is still confident in the US dollar and the demand for US bonds remains strong, given a rise in the yield on the benchmark 10-year US Treasury note and a fall in gold prices by the end of last week. Even Fitch said in its downgrade report that “the US dollar is the world’s pre-eminent reserve currency, which gives the government extraordinary financing flexibility.”
In Taiwan, the financial situation of the central government has continued to improve in the past few years and the nation’s debt problem is not as serious as what is going on in Europe or the US. That is because borrowing by the central government remains below the legal limit stipulated in the Public Debt Act (公共債務法) at 40.6 percent of average GDP over the past three years, while Taiwan has hardly any external debt.
According to Ministry of Finance data, the central government’s long-term debt — outstanding debt with a maturity of more than one year — stood at NT$5.83 trillion (US$183.96 billion) at the end of June, an amount equivalent to 27.2 percent of average GDP over the past three years and remaining NT$2.87 trillion below the legal debt limit. The debt ratio dropped from 29.3 percent at the end of last year, from 33 percent at the end of 2016 when President Tsai Ing-wen (蔡英文) took office in May of that year.
While the central government’s outstanding balance of long-term debt has increased from NT$5.398 trillion in 2016, the good news is that the debt ratio has been maintained within an appropriate range over the past few years.
Yet what is important for the nation is not the debt per se, but whether the money borrowed is used to drive economic growth and further national development effectively, which in turn would generate more tax revenue and put the government in a better position to repay its debt. In other words, Taiwan’s debt problem might be less serious than that of a lot of other countries, but the government needs to closely observe fiscal discipline and always keep enough revenue to cover expenditures.
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