Moody’s Credit Rating Company has maintained Taiwan’s sovereign credit rating at Aa3, projecting a stable outlook. This announcement comes amidst a backdrop of downgrading China’s sovereign credit rating outlook to “negative”. The “China Sovereign Credit Rating Report” released on December 14th underlines Taiwan’s economic resilience and its adept handling of external shocks.
The report acknowledges Taiwan as a small, open economy that is susceptible to external economic fluctuations. However, it also highlights the effective management of economic and financial stability by Taiwan’s central bank. This includes the regulation of currency quantity, inflation expectations, and exchange rates. Taiwan’s flexible exchange rate system is particularly commended for providing a buffer against external disturbances. The country’s substantial foreign exchange assets play a critical role in maintaining order in the foreign exchange market and ensuring financial market stability.
In response to the inflationary pressures observed over the past couple of years, Taiwan’s central bank has implemented several policy interest rate hikes since March 2022. The cumulative increase of 75 basis points has brought the rate to 1.875% as of November this year. These measures have proven effective in stabilizing inflation, which has remained between 2% and 3% since the Russo-Ukrainian War, a rate lower than other similarly rated economies.
The report also sheds light on the low-risk nature of Taiwan’s banking system. A key factor contributing to this is the limited reliance of banks on wholesale funding, coupled with a stable local currency deposit base. The banking system in Taiwan is characterized by good asset quality, ample liquidity, and a robust deposit base.
Furthermore, Taiwan’s strong external position is underscored by its ample foreign exchange reserves and a minimal external debt burden. The country has consistently maintained a current account surplus for over two decades, amassing a significant net international investment position. As a result, Taiwan’s vulnerability to external risks is considered exceptionally low.
This assessment by Moody’s reflects confidence in Taiwan’s economic stability and the effectiveness of its monetary policies. It underscores the country’s ability to navigate global economic uncertainties while maintaining robust financial health.
