Moody's: Taiwan's high income levels support the credit profile; geopolitical tensions, narrow export base pose key challenges

Moody's Investors Service says that Taiwan's (Aa3 stable) credit profile is supported by the sovereign's high income levels, competitive infrastructure framework, and very strong institutions. Debt levels are modest, and fiscal discipline is well anchored, although the government's revenue base is relatively narrow.

However, key credit challenges stem from underlying geopolitical tensions, and the concentrated nature of the country's exports, which leave the economy exposed to cyclical trends.

Moody's conclusions were contained in its just-released credit analysis titled "Government of Taiwan - Aa3 stable" and which examines the sovereign in four categories: economic strength, which is assessed as "high (+)"; institutional strength "very high"; fiscal strength "very high (-)"; and susceptibility to event risk "moderate (-)".

The report constitutes an annual update to investors and is not a rating action.

Moody's report points out that Taiwan's economy has been strengthening since mid-2016, supported by a marked acceleration in exports; a trend that has extended into the first quarter of 2017. However, average growth over the next two years should stay relatively muted, as competition within the electronics export market remains strong, and global trade growth stabilizes at lower rates than before the global financial crisis.

The outlook for economic growth will partly depend on the effectiveness of reforms to maintain competitiveness and address wage stagnation, as well as structural headwinds from an ageing population.

As for geopolitical tensions, cross-strait relations with China (A1 stable) have deteriorated over the past year and-a-half, and tensions continue to simmer; undermining the effectiveness of government policies aimed at diversifying Taiwan's trade and investment relationships.