Fri, Sep 07, 2007 page12

• Fitch retains `A+' sovereign rating on Taiwan

  GOING UP The rating agency's data showed that on the public finance front the nation's government debt ratio was expected to hit 43.3 percent of GDP this year

  • By Jason Tan / STAFF REPORTER
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  Despite concerns over the nation's public finances and cross-strait tensions, Fitch Ratings yesterday maintained its sovereign credit rating on Taiwan at "A+" with a stable outlook.

  The international rating agency said it decided to keep Taiwan's rating unchanged given its strong foreign exchange reserves and large holdings of external assets relative to GDP.

  But Fitch cautioned that both politics and public finances could still obstruct growth.

  "Taiwan's election calendar is full, not to mention cross-straits issues are always in focus," James McCormack, head of Asia sovereign ratings at Fitch, told its annual Asian Sovereign and Banking Conference in Taipei yesterday.

  On the public finance front, Fitch's data showed that the nation's government debt ratio was on the rise and expected to hit 43.3 percent of GDP this year.

  The figure surpassed the median values of below 35 percent for all "A" rated countries, McCormack said. In fact, Taiwan's debt level is going up while other "A" rated countries' debt levels are going down, he said.

  In response to Fitch's warning, the Ministry of Finance said that the government saw a stable growth in tax revenues in the first half of this year and expects tax revenues this year to exceed its target by NT$60 billion (US$1.82 billion).

  As the government has tightened control over expenditures, the ministry expects the government deficit to account for less than 1 percent of GDP this year, the ministry said in a statement posted on its Web site.

  The ministry added that the government deficit for fiscal year 2008 of NT$97.9 billion would be NT$41.8 billion, or 29.9 percent, lower than the NT$139.7 billion deficit recorded in fiscal year 2007.

  In general, McCormack said that Taiwan and the rest of the region were well placed to deal with credit market adjustments, "given the large stock of foreign exchange reserves, strong balance of payments positions and more flexible exchange rate regimes."

  Still, this does not exempt the region from being vulnerable to slowdowns in global economic growth and large capital inflows in recent years could test regional policymakers if investor sentiment changes quickly, he said.

  Commenting on the local financial sector, the ratings agency said that the profitability of local banks was weakening on slowing loan growth and narrowing interest margins.

  Joyce Huang (黃佳琪), associate director of financial institutions at Fitch, said that lending growth had slowed after the unsecured consumer credit bubble burst last year.

  Total loan growth in the first half of the year rose only 2.5 percent from the same period last year, she said.

  Growth last year was also slow at 2.5 percent, compared with 8.3 percent in 2005 and 10.1 percent in 2004.

  Wealth management and offshore banking will become the key growth drivers for banks, she said.

  The wealth management sector, including deposits, mutual funds and equities, continue to be in demand among investors, she said.

  On the US subprime lending issue, Fitch said it would not have a large impact on Asian banks given their relatively low subprime-related investment.

  The largest exposure held by a Taiwanese bank is only 7 percent of equity, said David Marshall, Fitch's managing director of Asia-Pacific financial institutions.

  A Thai bank has the highest exposure among Asian banks, at around 20 percent of equity, he said.

  However, concerns over the indirect effects from providing liquidity to conduits and investors' losses in banks' asset management arms remain, he said.
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