Taiwanese corporate credit quality to dip as trade woes rise

September 4, 2019

TAIPEI -- Softer overseas demand and rising tariffs could lead to moderately weaker profitability and operating cash flow for Taiwan's major exporters in 2019-2020, but average corporate debt could improve slightly over the same period if capital spending and shareholder distributions remain moderate, according to Taiwan Ratings, a Taipei-based subsidiary of S&P Global Ratings.

"We expect growing trade tension between the U.S. and China and a slowing global economy to have an increasingly negative effect on Taiwanese corporate credit profiles in the coming year," said Taiwan Ratings credit analyst, Raymond Hsu.

"The degree of impact varies across major sectors but technology firms are particularly vulnerable to the ever-widening tariff net and the rising strength of Chinese competitors."

The surge in global trade tension over the past year has decelerated economic growth in many key export markets, with demand for Taiwanese electronics and high-tech components noticeably shrinking, Hsu said.

However, lower debt coupled with prudent capital spending and dividend payouts, could limit the negative impact of weakening profitability on cash flow protection ratios over the next one to two years.

"We believe Taiwanese corporates, particularly in the technology, chemical, and commodity sectors, are likely to implement measures to overcome the growing array of economic and business pressures they face," he added.

"This includes diversification of production and markets away from tariff-prone areas and toward the U.S., India, and Southeast Asia, although initial set-up costs will push back the benefits of such diversification for several years."

Major risk factors for Taiwanese corporates include:

Trade and technology tension between the U.S. and China along with growing global protectionism;

The emerging technology supply chain in China;

Challenges for technology companies and their brands to remain competitive overseas;

Disruptive new technologies such as internet of things, artificial intelligence, and automation;

High exposure to weakening iPhones sales;

Rising chemical production in the U.S. using cheap shale gas; and

An ongoing competitive disadvantage due to significantly higher trade barriers than those faced by regional competitors in key export markets.

www.spglobal.com/ratings. (ATI).