Bangkok--9 Sep--Moody's Moody's Investors Service says in its latest Annual Report on Taiwan that its Aa3 government bond ratings and country ceiling carry a stable outlook. While an easing in cross-Strait tensions -- following the presidential election in March -- may bring limited economic benefits, a political rapprochement is still elusive. "The government's ratings are supported by the Taiwan's strong external payments position, the absence of foreign currency borrowing to finance budget deficits, a moderately high income level, and a maturing democratic and constitutional system, while cross-Strait geopolitics constrain the country ceiling," says Aninda Mitra, a VP/Senior Analyst in Moody's Sovereign Risk Unit and the report's author. The just-released report covers a wide range of themes, including macro-economic developments, fiscal prospects, the political situation, cross-strait relations, and how Taiwan ranks against similarly rated or emerging market economies. Mitra indicates that Taiwan's relationship with the mainland -- which claims sovereignty over the island -- will be crucial to its economic outlook. "A reduction in cross-Strait political tensions under the new KMT government could bring economic pay-offs, although these are not likely to be sufficient enough to materially improve Taiwan's credit fundamentals in the near term," says Mitra. "Indeed, Taiwan's economic structure and its long-term growth prospects face growing challenges and, unlike the smaller and more dynamic economy of Hong Kong, it has been unable to deftly adapt to changes in circumstances by finding new areas of competitive advantage that could sustainably boost productivity and employment," says Mitra. Against such a backdrop, Mitra says more effective utilization of China's long-term growth potential may result in enhanced specialization and higher investment and productivity, but this would require more than a piecemeal 'opening of direct links,' as proposed by Taiwan's President Ma, and involve a sustained transformation of the island's relationship with China. In its discussion on Taiwan's budgetary position, the report says that fiscal performance has improved noticeably in the past two years, with the budget deficit shrinking from over 3% of GDP, on average, since the beginning of the decade to under 1% of GDP in 2006 and 2007. However, a renewed spending emphasis on infrastructure upgrades is expected to widen the fiscal deficit back to 2% of GDP this year, a level which would not undermine Taiwan's credit fundamentals. Copies of the annual report can be found at www.moodys.com