Moody's Investors Service says that Taiwan's Aa3 sovereign bond rating reflects the economy's robust growth outlook over the next five years, which in turn is supported by closer trade relations with mainland China.
The government's track record of macroeconomic stability and its strong institutional frameworks -- as seen by its very cautious monetary policies, and sound governance indicators -- represent additional credit strengths.
Moreover, Taiwan's fiscal strength is demonstrated in its very strong external financing position and high domestic savings rate, both factors of which ensure high debt affordability and the ability to refinance.
Moody's conclusions were contained in its just-released "Credit Analysis: Taiwan" which serves as an update to investors and is not a rating action. Moody's looks at four factors and assesses them as follows for Taiwan: economic strength -- high (+); institutional strength -- very high (+); fiscal strength -- very high (-); and susceptibility to event risk -- moderate (-).
Moody's report says the continued stable outlook on Taiwan's Aa3 rating reflects the economy's fundamentals and a flexible policy framework. Both factors provide resilience to external economic and financial shocks. In particular, the structural strength of its external accounts underpins the stable outlook.
However, while improvements in cross-Strait economic relations will continue to be positive, that factor alone is unlikely to eliminate Taiwan's underlying geopolitical event risk or to lead to an improvement in the island's credit fundamentals. Consequently, a serious escalation of cross-Strait and/or regional military tensions will be credit-negative.
Moody's report also says Taiwan's economic model is constrained by its high dependence on trade and cyclical manufacturing industries and its long-term growth outlook depends on a higher level of investment.
According to the report, fiscal consolidation remains one of Taiwan's key challenges given that its fiscal deficit and general government debt are somewhat above the levels of comparable rated peers.
Nonetheless, upward pressure on Taiwan's sovereign rating and/or rating outlook could arise if the government achieves a sustainable return to primary surpluses, which will in turn help stabilize or reduce government debt. Structural reforms that reduce vulnerabilities stemming from high dependence on exports and reforms that boost investment growth will also be credit-positive, as will banking sector consolidation.