Tuesday, May 26, 2009

Lausanne and Standard & Poor's Warning

Lausanne and Standard & Poor's Warning
United Daily News editorial (Taipei, Taiwan, ROC)
A Translation
May 26, 2009

International rating agencies seem to be out of step with Taiwan's political rhythms. Taiwan's stock market rose sharply. Media polls clearly show support for government leaders increasing. Yet on the first anniversary of President Ma's inauguration, these agencies issued a number of reports unfavorable to Taiwan.

On May 20, the Management School in Lausanne, Switzerland (IMD) released its Global Competitiveness Report. Taiwan fell 10 places. Moreover, Taiwan's setback was the largest of the Four Asian Tigers. It even lost out to mainland China. Standard & Poor's, the leading international credit rating agency, also released its "stress test" data assessments. Assuming that the economic recession lasts until 2012, it concluded that Taiwan's sovereign credit rating would drop five grades, to BBB. It would be bring up the rear in the Asian region. It would fall behind the Chinese mainland. These two messages were issued by an internationally respected rating agency, and merit serious consideration.

Let's look at the IMD and Standard & Poor's ratings. At first they seem to share no common ground. The IMD believes that five challenges face Taiwan: innovation and the attraction of talent, the creation of a sustainable environment, the promotion of cross-strait relations, effective corporate governance, and financial reforms. The Standard & Poor's assessment notes the budget deficit, debt structure, and financial system. Compare the two assessments and the obvious common ground is the government's finances. The Liu cabinet's debt crisis is undeniably Taiwan's Achilles Heel. The two assessments released on May 20 are not the only ones. The Standard & Poor's ratings earlier this year, and the Fitch credit rating last year, downgraded Taiwan's ratings due to the same concerns. The Ma administration's response to Taiwan's downgraded ratings has focused on Taiwan's R&D and innovation. Actually, all the administration's policies need money. A government's financial solvency is unquestionably more important than anything else.

We already know Taiwan's Achilles Heel. Therefore we hope the Ma administration will address the problem, and not offer some officialese excuse. For example, high-level cabinet members have cited "a depressed global economy, and increased government spending" as an excuse for Taiwan's worsening deficit. But this argument is at variance with the facts. The financial tsunami and economic depression have swept the globe. Every nation has responded by increasing government spending. So why have the ROC's finances deteriorated more than other countries, and resulted in a rapid downgrading of our sovereign credit rating? All nations face the same recession. So why have our finances deteriorated while our competitors' have improved? This reveals we have special problems that must be confronted honestly.

Over the past year, the harshest domestic criticism of the cabinet has been reserved for the international economic recession. This substantially increased the administration's public expenditures. Yet the administration chose to launch a series of tax cut measures, including income tax cuts, business tax cuts, inheritance tax cuts, and excise tax cuts. These amount to over 100 billion NT per annum, and represent a serious increase in our deficit. Increasing spending while reducing taxes is self-contradictory. Pleasing both sides is impossible. With the economic downturn at home and abroad, and reduced corporate profits, everyone wants a tax cut. Therefore the time is not right for tax cuts. But the Liu cabinet refused to listen, and insisted on looking into tax cuts. It was unable to say no to special interest groups. The predictable result was a loss of revenue, and a deterioration in the government's finances.

In addition to urgent financial problems, the ROC government needs to increase its efficiency and carry out basic infrastructure projects. The IMD rating included over 300 items. One third of these were a survey of opinion leaders. Government efficiency would not show up in the current economic data. But they would leave an impression in the minds of corporate leaders. For example, the Executive Yuan ritually launches a new industry every week. But much of the content is merely a repackaging of the policies of various ministries. It was in a hurry to release its economic recovery program before May 20. But it lacked depth and substance. The administration does not appear to have followed up on the first few policies it implemented. Various ministries often use product placement to promote their policies. But business leaders see right through the government's ineffectual show. This repackaging of the government's policies fail to achieve anything of substance. This is another crisis the Ma administration faces.

The TAIEX rallied just before May 20. But international rating agencies poured cold water on the rally. Anyone who looked only at the TAIEX would say the cabinet is doing better. Anyone who read only the IMD report would recommend that the Cabinet make immediate changes. The welfare of the public on Taiwan over the next few years depends upon how President Ma interprets this discordant data.

2009.05.26 04:01 am








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