France Ratings Downgrade Implications; Taiwan Election A Boost For Cross-Strait Ties
In Business Monitor Online today, we discuss two important weekend events.
It was an unlucky Friday the 13th for France, which lost its AAA credit rating from Standard and Poor’s. Among other things, the downgrade is likely to be prompt a reassessment by investors and the electorate of the Franco-German relationship in ongoing eurozone rescue plans, in which France is increasingly looking less like an equal partner. We cannot rule out the possibility that the change in this dynamic may prompt French President Nicolas Sarkozy to adopt a new tactic in ongoing negotiations, acutely aware that any suggestion of subservience towards Germany is likely to pour salt on France’s wounds, while opening the door for his rival presidential candidates (the election is in April) to manipulate this by adopting a populist strategy. National Front presidential candidate Marine Le Pen has employed this tactic with some success, accusing Sarkozy of selling out to ratings agencies while pushing her neo-mercantile economic policy, which has seen her make gains in the polls. Indeed, we now cannot rule out the possibility that Le Pen makes it through to a second-round runoff election.
That said, the downgrade is not as calamitous as some have posited. Fitch Ratings has affirmed France at AAA for the time being, meaning that technically France maintains AAA-status, although this is unlikely to remain so for long. Secondly, we do not envisage that the additional 100 basis points or so demanded on French sovereign securities will create an unsustainable burden on France’s public financing requirements; they imply an additional cost of US$4bn or so in 2012 – significant, but by no means disastrous.
Far across the world in Taiwan, President Ma Ying-jeou was comfortably re-elected, and his KMT party retained its majority in the legislature. We thus expect to see a continuation of the KMT’s cross-Strait economic integration policies. Indeed, Ma’s election campaign focused on the economic benefits that Taiwan has gained since he assumed office in 2008, touting the Economic Cooperation Framework Agreement (ECFA) signed with China and the resumption of direct air, sea transport, and postal links, as well as the surge in mainland tourist arrivals, as crowning achievements during his tenure.
Ma will now engage in further cross-Strait cooperation, which, in our view suggests brighter growth prospects for Taiwan in the medium term. Beijing has persistently dangled the economic carrot as a means of achieving its final aim of reunification with the island. While such an end-game is unlikely to materialise for a great many years (if ever), we certainly expect a proliferation of deeper integration policies, which should boost businesses on both sides of the Taiwan Strait. China’s share of Taiwan’s exports has surged from just over 2% in 2000 to almost 30% presently, with bilateral trade amounting to approximately US$145bn in 2010. Taiwanese investment in China has totaled almost US$100bn in the last two decades, with almost US$40bn coming during Ma’s first term. Following the conclusion of the ECFA in 2010, free trade negotiations with economies such as Singapore, Indonesia and the EU have either resumed or are likely to commence in the near future.