Taiwan’s recovery could slow as interest rates rise: S&P


TAIPEI, Taiwan, The China Post Staff

Standard & Poor’s Rating Services yesterday warmed that Taiwan’s recovery momentum could slow down during 2005, as prices stabilize and demand from key export markets cools. In a report on Taiwan’s economic outlook, Standard & Poor’s Credit Analyst John Baily said Taiwan’s industrial sector is likely to maintain a high rate of earnings growth in the second half of 2004, on the back of increasing domestic demand and strong export performance.

However, he said he believes that as interest rates rise and mainland China acts to cool its overheated economy, strong earnings growth and cash flow generation in Taiwan are likely to lose momentum. Standard & Poor’s does not expect the likely slowdown to negatively affect electronics and machine manufacturers, which make up a major part of Taiwan’s mainland-bound shipments. Yet heavy investments in China’s real estate and construction projects could face greater downslide risks.

The report also highlighted the growing capital expenditure needs of some Taiwan enterprises. “During the downturn, manufacturers were reluctant to build capacity, but with stronger cash flows and improving market fundamentals, aggressive building would resume,” Bailey said. Cyclical upturns usually get exaggerated, leading to over-investment that in turn could result in a supply-driven downturn, he said.

“The level of capital expenditure growth is expected to play a significant role in the overall credit quality of Taiwan companies, especially in highly cyclical industries,” he warned.