`A+' Sovereign Rating Assigned To Taiwan.

Business Editors

LONDON--(BUSINESS WIRE)--Nov. 19, 2001

In its first assessment of Taiwan, Fitch, the international rating agency, today assigned Long-term foreign and local currency ratings of 'A+' and 'AA', respectively. The Short-term Foreign Currency Rating is 'F1'. The Outlook on the Long-term ratings is Stable. Details of the agency's teleconference, to be held today at 08.30GMT, are available at the end of this release.

Fitch says Taiwan's sovereign ratings are supported by:

-- An exceptional external financial position: With international reserves of
US$116 billion and gross external debt of 9% of GDP, Taiwan holds net external
assets equal to an estimated 56% of GDP. Fitch estimates that Taiwan's external
liquidity is one of the strongest among emerging markets, minimising the
likelihood of an external liquidity crisis.

-- Prudent economic management: Careful economic management has provided for
steady and non-inflationary GDP growth averaging 7.8% per year since 1975,
allowing per capita incomes to reach nearly US$14,000 in 2000 with little
increase in income inequality.

-- A highly competitive export sector: Growth has been substantially powered by
export-oriented small- and medium-sized enterprises, which have achieved
dominance in sectors of the global information technology (IT) markets.

-- Profound democratic evolution: Taiwan achieved a landmark political
transition in 2000, with the peaceful transfer of power to the opposition in
direct multi-party elections.

The combination of a floating exchange rate, net foreign asset and trade surplus positions, high reserves, minimal short-term external debt, and some portfolio capital controls allowed Taiwan to largely escape the ravages of the 1997-98 Asian financial crisis. Yet Taiwan has been hard-hit by the recent slowdown in global economies, and weak demand and overcapacity in IT markets. These have exposed domestic weaknesses that constrain the island's creditworthiness.

In Taiwan's financial sector, problems common to Asian crisis countries in 1997-98, including weak regulation and directed lending have contributed to deteriorating asset quality. Fitch estimates that non-performing loans in the banking sector will reach 12-15% by end-2001, and thereafter rise further. Fitch recognises that the government is putting into place a regulatory framework that will facilitate bank mergers and address non-performing loan resolution using private asset management companies. Quick action to enable the public recapitalisation of banks does not appear likely due to a stalemate in domestic politics. Fitch estimates the cost of cleaning up the banking sector at a still manageable 5-10% of GDP, but lagging recovery of the sector could hinder economic recovery once global technology markets rebound.

Taiwan's worsening fiscal situation is also a credit concern. After averaging 2.3% of GDP throughout the 1990s, the near-term central government deficit could rise to 3-3.5% of GDP in 2001 and 2002. Pressures will remain high for public spending to address welfare needs of a restructuring economy, invest in infrastructure to provide economic stimulus and sustain competitiveness, and restore the banking sector to health. Yet the tax burden fell to 13% of GNP in 2000, while privatisation and the sale of government-held equities are unlikely to provide significant near-term financing. Public sector debt remains reasonable at 31% of GDP in 2001, but indebtedness will surely rise in the near term.

Taiwan's capital controls and, until recently, bans on direct trade with and transport to the People's Republic of China (PRC) have hindered fuller realisation of the mutual benefits of cross-straits trade and capital flows for both mainland China and Taiwan. With both countries now entering the World Trade Organization (WTO), pursuing greater liberalisation of bilateral economic relations could raise trade and investment to new levels. At the same time, promoting domestic deregulation and infrastructure investment could help boost growth in non-traded sectors of Taiwan's economy such as services. This could offset the accelerating relocation of both electronics and lower value-added manufacturing from Taiwan to mainland China.

Finally, cross-strait political relations have constrained Taiwan's economic development and pose longstanding political risks. Fitch considers unlikely a scenario of the mainland forcibly taking over Taiwan, given the profound economic integration to date. Yet domestic uncertainties for the PRC generated by accelerated economic restructuring prompted by WTO accession, and political succession in 2003 could conceivably heighten event risk for Taiwan.

Fitch rates 34 banks and financial institutions in Taiwan.

A copy of the rating report is available on Fitch's Web site, www.fitchratings.com. (See Sovereigns, Sample Reports.)

The Fitch teleconference on Taiwan will be held today, 20 November, at 8:30 GMT/16:30 Taipei. A presentation on the conclusions of its current review of the country's economic and credit prospects by Fitch's Asia sovereign and bank teams will be followed by a question and answer session for participants.

Callers from Europe wishing to participate should ring [phone], from the United States [phone] and participants in Asia may dial [phone]. The access code is 951661. A replay will be available for 72 hours following the teleconference on [phone]; Pin number 376890.

The replay will also be available on Fitch's teleconference page on Bloomberg - FII 12