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Rating Action:

Moody's affirms Taiwan's Aa3 rating; maintains stable outlook

 The document has been translated in other languages

17 Nov 2016

Singapore, November 17, 2016 -- Moody's Investors Service ("Moody's") has today affirmed Taiwan's Aa3 government issuer ratings and the Aa3 senior unsecured rating.

The stable outlook on the ratings is maintained.

Taiwan's Aa3 rating is supported by its significant shock absorption capacity, which derives from its very high fiscal strength, very large external reserves and high per capita income. The ratings also incorporate the credit constraints posed by geopolitical tensions with China (Aa3 negative) as well as by the likelihood that future GDP growth will be subdued and may remain volatile.

The stable outlook is based on Moody's assessment that, given Taiwan's very high institutional strength, the authorities will effectively use the fiscal space provided by moderate debt levels and deploy external buffers in response to negative shocks and thereby maintain Taiwan's credit metrics at levels consistent with a Aa3 rating, even if the external environment remains challenging.

RATINGS RATIONALE

FIRST DRIVER -- VERY HIGH FISCAL STRENGTH, VERY LARGE FOREIGN EXCHANGE RESERVES AND HIGH INCOMES BOLSTER SHOCK ABSORPTION CAPACITY

Taiwan's Aa3 rating reflects its high capacity to absorb potential short- or medium-term shocks, as provided by large financial buffers in different parts of the economy, including sizeable fiscal space, very large external buffers, and high income levels.

With a strong and broad-based commitment to preserving the strength of public finances, Moody's does not expect Taiwan's debt-to-GDP ratio to rise significantly from current levels, at around 38.5% in 2015, while debt affordability will remain very high. Fiscal discipline is strongly anchored and the debt burden will be driven by nominal GDP growth. Even if the economy were to fall in recession, which is not Moody's baseline forecast, Moody's estimates that a somewhat higher debt-to-GDP ratio would remain consistent with a Aa3 rating.

Meanwhile, Taiwan's very large foreign exchange reserves provide the financial means to face potential sharp turns in capital flows, triggered by volatile global or regional economic conditions. As a result of the consistent accumulation of external surpluses over many years, Taiwan's net international investment position increased to around 200% of GDP at the end of 2015, the third largest among sovereigns rated by Moody's. Foreign exchange reserves amount to more than double Taiwan's external debt of $159 billion.

Furthermore, high household incomes, with GDP per capita at $46,832 on a Purchasing Power Parity basis in 2015, provide additional cushion to negative shocks. For instance, in the aftermath of the global financial crisis, a fall in the household saving ratio -- from high levels -- buffered the negative impact of lower income growth on consumption and the wider economy.

SECOND DRIVER -- TENSIONS WITH CHINA AND SLOW AND VOLATILE GDP GROWTH WILL CONSTRAIN TAIWAN'S RATING

Taiwan's Aa3 rating also incorporates constraints from latent geopolitical risk and a long-term slowdown in GDP growth, with persistent economic volatility.

Moody's expects that geopolitical tensions with China will persist, with potential occasional flare-ups, although the risk of abrupt escalation is low. The nature of geopolitical risk for Taiwan is twofold. First, the political stance vis-a-vis China may dominate the policy agenda, reducing policy resources devoted to shoring up future growth.

Second, the lingering tensions could undermine the effectiveness of the government's "New Southbound Policy" aimed at broadening Taiwan's economic, financial and cultural relationships with the region and especially South-East Asia. In particular, if new partners perceived that engaging with Taiwan would jeopardise their trade and financial relationships with China, it would hamper Taiwan's government's efforts to forge new relationships and deepen existing ones.

In turn, failure of the government's policies to intensify trade and investment linkages with other Asian economies tangibly would exacerbate the negative economic impact of lacklustre global trade. In the years ahead, Taiwan faces the double blow of a rapidly aging population and slower global trade. As a result, we estimate that GDP growth will be around 1-2%, markedly lower than the 6-7% annual growth rates experienced before the global financial crisis.

Indeed, Taiwan's old age dependency ratio, which measures the population above 65 years old to the population aged between 15 and 64, will rise sharply from 16.9% in 2015 to nearly 30% by 2025, according to the National Development Council. An aging population will dampen growth through slower increases or outright declines in the labour force and lower productivity growth, as labour and capital inputs are increasingly devoted to supplying aging-related services where productivity growth is usually low. Meanwhile, the relative concentration of exports and economic activity on highly cyclical sectors will expose the economy to high volatility.

RATIONALE FOR STABLE OUTLOOK

The stable outlook reflects our view that Taiwan's credit profile will not change significantly as the economy grows steadily, albeit at low rates, and the nature and intensity of geopolitical tensions does not change materially. In addition, high governance indicators suggest that in the event of negative shocks unfolding, the effective use of fiscal space and external buffers would keep Taiwan's credit metrics consistent with its Aa3 rating.

Taiwan's institutions have a track record of harnessing the economy's potential by creating an environment favouring strong growth in high value-added sectors and implementing consistent policies through shifts in the external environment as well as in its relationships with Mainland China.

Although a policy emphasis on preserving fiscal space and external buffers could attenuate the scale and speed of a policy response to gradually emerging external and competitiveness challenges, this track record suggests resilience to negative shocks, in particular abrupt negative changes in the economic environment.

WHAT COULD CHANGE THE RATING UP

Economic reforms that point to a material and durable strengthening of Taiwan's growth potential would have a positive impact on its credit profile.

A marked and long-lasting improvement in relations with China would also be positive for the economic outlook and likely effectiveness of policymaking, both of which are factors that could lead us to upgrade the rating.

WHAT COULD CHANGE THE RATING DOWN

Evidence that the government's policies are not effective in response to sudden negative shocks or at mitigating the long-term negative impact on growth of slower global trade, high competition in Taiwan's product markets and population aging could lead to negative rating pressure.

A serious escalation of tensions in the relationships with China and/or regional military tensions pointing to negative implications for the economy and the ability of the government to effectively implement reforms could also lead to negative rating pressure.

GDP per capita (PPP basis, US$): 46,833 (2015 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 0.6% (2015 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 0.1% (2015 Actual)

Gen. Gov. Financial Balance/GDP: 0.1% (2015 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: 14.5% (2015 Actual) (also known as External Balance)

External debt/GDP: 30.4% (2015 Actual)

Level of economic development: High level of economic resilience

Default history: No default events (on bonds or loans) have been recorded since 1983.

On 15 November 2016, a rating committee was called to discuss the rating of the Taiwan, Government of. The main points raised during the discussion were: The issuer's fiscal or financial strength, including its debt profile, has not materially changed. The issuer's susceptibility to event risks has not materially changed.

The principal methodology used in these ratings was Sovereign Bond Ratings published in December 2015. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Marie Diron
Associate Managing Director
Sovereign Risk Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Atsi Sheth
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

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