Standard & Poor's lowered its outlook on Taiwan to negative yesterday, citing the rising risk of conflict with China. "The credit ratings on Taiwan could be lowered if there are further fiscal slippages, or economic growth slows materially, in part because rising tensions with China undermine investment and consumer spending," Philippe Sachs, sovereign credit analyst, said.
The move by S&P, which affirmed its ratings on Taiwan at AA-/A-1, mirrors comments by rival Fitch two months ago that China-related political risk was limiting Taiwan's chances of a stronger rating. Mr Sachs said that while the ratings on Taiwan continued to be supported by its massive foreign exchange reserves - $235bn as of October - its robust economy and its strong external balance sheet, growing government debt and high structural deficits were weakening the island's fiscal flexibility. The Taiwanese government has said it will undertake broad tax reforms if it wins a majority in the December 11 legislative election and has pledged to balance the budget by 2010.
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