Fitch Ratings, one of the global credit rating agencies, has lowered its forecast of Taiwan's gross domestic product (DGP) growth for 2016, citing the country's disappointing export performance.
In its Taiwan Banks Report Card released on Thursday, Fitch said that Taiwan is short of a boost from its outbound sales, and after taking the adversity caused by weak global demand into account, the rating agency has cut its forecast of the country's GDP growth to 1 percent from an earlier estimate of a 1.5 percent increase.
The latest forecast by Fitch showed the rating agency has been in a more cautious mood about Taiwan' economy than the government.
In mid-August, the Directorate General of Budget, Accounting and Statistics raised its forecast of Taiwan's economic growth to 1.22 percent in 2016, an increase of 0.16 percentage points from its previous estimate due to improving exports and private consumption.
In the first eight months of this year, Taiwan's exports totaled US$180.1 billion, down 6.6 percent from a year earlier. But the country's outbound sales in August rose 1 percent from a year earlier, marking the second consecutive month exports have recorded a year-on-year increase.
The Ministry of Finance said earlier this month that the export growth momentum is expected to continue into September during the current peak season for the global high-tech industry. Exports play a critical role in Taiwan's economy, accounting for about 60 percent of the country's GDP.
After a slowdown in 2016, Fitch said, the momentum of Taiwan's economic growth will pick up next year, adding that the GDP is expected to grow by 1.7 percent in 2017.
In its report, Fitch said that Taiwan's economic weakness and China's slowdown in fundamentals are expected to impose an adverse impact on the bottom line of the Taiwanese banking sector, which has a large exposure to China.
The unfavorable economic circumstances are expected to take a toll on the loan quality of Taiwanese banks, Fitch said.
According to Taiwan's central bank, as of the end of March, outstanding international claims by Taiwanese banks to China on a direct risk basis stood at about US$43.2 billion, down US$6 billion or 12.12 percent from the end of December. But, China remained the second largest debtor to Taiwan.
Fitch said that a narrowing interest rate spread and an increase in defaults caused by a weaker economy will cut the local banking sector's profit during the 2016-2017 period.
The smaller private banks in Taiwan, in particular, could feel a more obvious impact at a time when the local property market has been slow, Fitch said.
However, Fitch said the outlook for Taiwanese banks' ratings remains largely stable, since downside risks faced by these banks are generally manageable due to their enhanced and adequate risk-buffer, modest leverage and healthy liquidity.
Source: Focus Taiwan News Channel