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Analyst
Jing Chen
cherrychen@Dagongcredit.com
Sovereign Credit Rating
Local
currency/outlook AA-/stable
Foreign
currency/outlook AA-/stable
Rating time October 2010
Rationale
Dagong assigns “AA-” on both local and foreign currency credit ratings for
Taiwan Province of China (hereinafter referred to as “Taiwan”) based on a
comprehensive analysis of Taiwan’s current financing requirements and its debt
repayment risks.
The fiscal position of the authorities in Taiwan has been deteriorated since
2000, resulting in a rapid expansion of debt scale and naturally an increasing
debt burden. In 2008, the debt outstanding of its authorities is 2.9 times as
much as that in 1999. In response to the economic crisis, Taiwan authorities
adopted corresponding counter-cyclical policies, which have led to a further
significant increase in its debt size. As of the end of August 2010, the
outstanding debt of Taiwan authorities has reached New Taiwan Dollar (“NTD”) 4.3
trillion, equivalent to 32.3% of the island's GDP. Despite the fast growth of
its debt, it is nearly the same compared with the emerging markets average level
of 32.5% and its debt scale is still reasonable. Meanwhile, the debt structure
of Taiwan authorities is relatively good. Currently, its debt is entirely
composed of domestic debt, and the short-term debt only accounts for a small
proportion, naturally a moderate debt pressures in a short term. According to
the 2010 and 2011 fiscal budgets, its debt size will keep an upward trend in the
future. The debt ratio will reach 37.8% in 2011 and after that will be
stable at a level a little bit lower than 40%.
As a whole, though the unreasonable tax arrangement has resulted in a lasting
fiscal deficit for many years, yet based on the gradual easing in the relations
across the Taiwan Straits, the good economic growth capability and the ample
foreign exchange reserves, we believe that Taiwan authorities hold relatively
high local and foreign currency solvency. The basic reasons are as
follows：
There is a significant improvement in the relations across the Taiwan Straits
since 2008. The “three direct links across the Taiwan straits” and the ECFA
agreement could bring two benefits to its economy. On the one hand, it could
reduce the uncertainty of Taiwan's economic environment to some extent. On the
other, it also helps to stop the marginalizing trend of Taiwan in the
international economy, removing development obstacles for its export-oriented
economy;
The narrow tax base has led to a lasting fiscal deficit in Taiwan. Despite
the ease of deficit rate in recent years, the counter-cyclical policies against
the international financial crisis has resulted in a dramatic increase in the
deficit, amounting to 3.9% of its GDP, causing its outstanding debt to expand
rapidly;
The high international competitiveness of Taiwan’s electronic information
industry keeps its current account surplus for a long time. Pushed by the strong
demand in the international market and the good economic development of mainland
China, Taiwan's exports have increased significantly since 2010, which has
driven the related industries to recover first and its economy showed a
strong growth tendency;
The ample foreign exchange reserves and its net international investment
position provide support for the stability of its currency and the finance of
the authorities.
Outlook
Driven by the better recovery prospects in mainland China, Hong Kong and
other major trading partners, Taiwan's export-oriented economy will continue its
growth tendency in 2011, but the growth rate is a little bit lower than the
pre-crisis average level of 5.2%. Meanwhile, the current program of tax reform
could increase the fiscal revenue of Taiwan authorities to some extent in the
future, but the social aging tendency limits the space for tax base to expand,
which is not conducive to the improvement of future fiscal deficits. The lasting
deficit will make the authorities’ debt continue to grow, but the size of the
highest authorities’ and general authorities’ debt will be stable at a level
less than 40% and 48% of its GDP respectively. Therefore, Dagong keeps a stable
outlook for both local and foreign currency debt ratings of Taiwan in the next
1-2 years.
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