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Rating Action:

Moody's changes Taiwan's outlook to positive from stable, affirms Aa3 rating

24 Feb 2021

Singapore, February 24, 2021 -- Moody's Investors Service ("Moody's") has today affirmed the Government of Taiwan's Aa3 long-term issuer and senior unsecured ratings and changed the outlook to positive from stable.

The decision to change the outlook to positive from stable reflects increasing signs that Taiwan's economy is more resilient and that its governance strength is stronger than previously assessed. Taiwan's high-tech, export-oriented manufacturing sector is likely to boost Taiwan's competitiveness in the medium term, as changes in behaviors and work practices, underway before the pandemic and accelerated by it, continue to boost demand for its goods in the medium term. Meanwhile, Taiwan has a lengthening track record of sound policy effectiveness, aided by robust fiscal and external positions, that supports its credit profile, through shocks such as trade tensions or the pandemic.

The affirmation of the Aa3 rating considers Taiwan's credit strengths and challenges, with strong intrinsic financial strength standing in contrast to a relatively high degree of event risk for an Aa-rated sovereign. Moody's assesses that Taiwan's strong fiscal and external buffers will remain intact through the pandemic shock and, as a result, continue to strengthen relative to Aa-rated peers. Nevertheless, ongoing geopolitical tensions and aging demographics remain long-standing credit constraints.

Taiwan's local- and foreign-currency ceilings remain unchanged at Aaa. The Aaa local currency ceiling reflects limited risks for non-government issuers in Taiwan both related to the government's footprint and actions and to common risks affecting the government and non-government issuers, such as risks related to macroeconomic imbalances. The foreign currency ceiling at the same level as the local currency ceiling reflects minimal transfer and convertibility risks for foreign-currency bondholders and depositors in Taiwan.

RATINGS RATIONALE

RATIONALE FOR CHANGING THE OUTLOOK TO POSITIVE FROM STABLE

ONGOING STRENGTHENING OF ECONOMIC FUNDAMENTALS, DRIVEN BY TECH-HEAVY EXPORT COMPETITVENESS, WITH UPSIDE RISKS

While Taiwan's economy has been partially affected by the ongoing global coronavirus pandemic through trade, investment and tourism channels, the export-oriented economy has simultaneously benefitted from strong demand for semiconductors amid the global surge in remote work. This has been further amplified by a structural improvement in demand for high-quality integrated circuits as new technologies, such as 5G-enabled smartphones, electric vehicles and high-performance computing, are rolled out globally.

Taiwan's highly competitive export-oriented manufacturing sector is heavily concentrated in information and communication technology (ICT) equipment and electronic products, which make up nearly 50% of Taiwan's total exports and around 30% of GDP. During 2020, Taiwanese merchandise exports grew 4.9% year-on-year in US dollar terms[1], despite the global economy contracting around 3.5%, according to IMF estimates. Strong demand for Taiwanese chips continues to support capital investments, in addition to continued relocation of supply chains from overseas Taiwanese businesses amid US-China trade tensions and domestic incentives.

In Moody's assessment, the ability of the economy to benefit from continued supply chain reconfigurations amid tensions between Taiwan's largest two trading partners speaks to a very strong degree of resilience and improving shock-absorption capacity.

Apart from strong external demand, Taiwan's public health authorities' success in containing community virus spread has enabled the domestic economy to escape economically damaging lockdowns, while also benefitting from the government's relief measures.

After expanding by 3.1% in 2020[2], Moody's expects Taiwanese real GDP growth to accelerate in 2021 to 3.7%, as external demand among the country's trading partners is gradually lifted jointly by effective vaccination campaigns and continued easing of movement restrictions, and robust investment flows into Taiwanese supply chains that will maintain their competitive edge in semiconductor manufacturing and continue to enhance the economy's resiliency.

Over the medium-term, Taiwan's economy's high competitiveness may boost the economy's growth potential to a greater extent than currently assessed, especially if changes in behaviors and work patterns after the pandemic continue to boost demand for Taiwan's goods.

MANAGEMENT OF SHOCKS POINTS TO STRONGER GOVERNANCE THAN PREVIOUSLY ASSESSED

As an externally oriented, tech-heavy economy with a relatively narrow set of export markets, Taiwan's economy is not entirely immune from further downside risks in global economic conditions, including changes in global trade policies between the US and China that would affect its technology sector.

Nevertheless, as Taiwan's credit profile has been buffeted by successive external shocks over the last few years, including the US-China trade tensions and the global coronavirus pandemic, strong policy effectiveness, supported by robust fiscal and external buffers, point to stronger governance strength than previously assessed.

Taiwan's countercyclical fiscal response amid the coronavirus shock reflects both a robust fiscal position heading into the crisis, as well as effective containment efforts allowing for a rapid economic normalization. Moody's expects Taiwan's fiscal deficit to consolidate to 1% of GDP in 2021, after having reached an estimated 2.1% of GDP last year. This is considerably narrower than the Aa-rated median fiscal deficit of between 3 -- 5% of GDP over 2020-21. Over the medium term, Taiwan's fiscal rules that have long been adhered to and that constrain spending growth and government borrowing will help preserve the government's fiscal buffers to a degree stronger than many Aa-rated peers.

Taiwan's large external buffers, alongside a flexible exchange rate regime, also support the economy's shock-absorption capacity and have enhanced monetary and macroeconomic policy effectiveness through successive shocks. Moreover, effective deployment of macroprudential measures have also kept a lid on financial stability risks from elevated household debt and rising property prices in some urban areas.

RATIONALE FOR THE AFFIRMATION OF THE Aa3 RATING

The Aa3 rating balances Taiwan's credit strengths and challenges, namely a combination of the government's strong intrinsic financial strength standing in contrast to a relatively high degree of event risk for an Aa-rated sovereign.

Moody's expects Taiwan's strong fiscal and external buffers to remain intact, preserving shock-absorption capacity ahead of future potential shocks.

Moreover, ongoing structural reforms to maintain competitiveness are aimed at offsetting the impact of an aging population, which will increasingly weigh on the economy's growth potential. Implementation of large infrastructure investment, including those that would improve energy sustainability through development of renewable energy resources, will also support potential growth and overall resiliency.

Nevertheless, geopolitical event risk remains a rating constraint. Moody's continues to assess the likelihood of an escalation in geopolitical relations with China with significant implications for Taiwan's economy, financial system, policy effectiveness and broader national security, as a low-probability, high-impact scenario. A marked and likely prolonged intensification of tensions could have marked and sudden negative implications on Taiwan's creditworthiness.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

Taiwan's neutral to low (CIS-2) ESG Credit Impact Score reflects low exposure to environmental and social risks, and strong institutions and governance and financial strength that provide capacity to respond to and address potential risks.

The Environmental Issuer Profile Score, denoting Taiwan's exposure to environmental risk, is neutral to low (E-2). As an island state, Taiwan is subject to rising sea levels over the long run, and extreme associated events such as flooding, cyclones, typhoons, and saltwater intrusion. However, the government has a long track record at building climate-resilient infrastructure.

Moody's assesses Taiwan's Social Issuer Profile Score as neutral to low (S-2). Like many developed economies, Taiwan faces pressures from an aging population, as well as skills shortages fueled by outward labor migration. Although the passage of recent pension reforms delays the occurrence of significant negative fiscal costs from an aging population, demographic and labor-related considerations will over time, pose challenges to Taiwan's growth potential, household savings, and fiscal strength. Nevertheless, Taiwan's exposure to social risks is mitigated by very strong levels of population-wide educational attainment and ample government spending on education, world-class access to basic services and high gender equality.

Taiwan's strong institutions and governance profile support its rating, as captured by a positive G issuer profile score (G-1) with a sound institutional structure supported by detailed national planning and credibility and effectiveness in both monetary management and fiscal policy. Strong governance is a driver of today's action.

GDP per capita (PPP basis, US$): 53,275 (2019 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 3% (2019 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 1.1% (2019 Actual)

Gen. Gov. Financial Balance/GDP: 0.1% (2019 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: 10.6% (2019 Actual) (also known as External Balance)

External debt/GDP: 30.2% (2019 Actual)

Economic resiliency: aa3

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

On 19 February 2021, 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 economic fundamentals, including its economic strength, have materially increased. The issuer's institutions and governance strength, have materially increased. The issuer's fiscal or financial strength, including its debt profile, has materially increased. The issuer's susceptibility to event risks has not materially changed.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

WHAT COULD CHANGE THE RATING UP

Moody's would consider upgrading Taiwan's rating amid increasing evidence that the economy's competitiveness and resiliency continues to increase. Such an occurrence may occur alongside successful execution of the government's ongoing economic and structural reforms, which would durably improve potential growth levels. This would likely entail effective improvements in physical infrastructure and investment climate and may denote yet stronger governance than currently assessed.

A significant and lasting improvement in relations with China, such that the probability of a deleterious conflict was significantly reduced, would also be positive for Taiwan's rating. Such an outcome may also improve Taiwan's economic prospects, policy effectiveness and trade and investment linkages.

WHAT COULD CHANGE THE RATING DOWN

Moody's would consider downgrading Taiwan's rating amid a flare-up in relations with China that precipitated material risks to Taiwan's credit fundamentals.

While the positive outlook implies that a sharp worsening in economic competitiveness is unlikely, prospects that the positive signs emerging in recent years may be short lived would be consistent with a change in the outlook to stable. A material and long-lasting shock to economic fundamentals that eroded economic strength would also increase the probability of a downgrade. Should the government be unable to successfully utilize countercyclical policies to buffer the impact of the shock, this would also be negative for Taiwan's rating.

The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631. Alternatively, 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 further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 credit rating action on the support provider and in relation to each particular credit 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 credit rating action, and whose ratings may change as a result of this credit 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

REFERENCES/CITATIONS

[1] Ministry of Finance, R.O.C. 08-Jan-2021

[2] Directorate-General of Budget, Accounting and Statistics 29-Jan-2021

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.

Michael Higgins
Analyst
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
Client Service: 852 3551 3077

Marie Diron
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

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

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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