Monday, April 12, 2010

Our Financial Situation is Dire: Do Not Invert Right and Wrong

Our Financial Situation is Dire: Do Not Invert Right and Wrong
United Daily News editorial (Taipei, Taiwan, ROC)
A Translation
April 12, 2010

The Republic of China's finances are not good. But domestic and foreign financial experts agree that while our financial situation may be far from ideal, it is not yet terminal. As long as the authorities understand the situation. As long as people with clear heads are in charge, we have a chance to turn the situation around. But if those in authority are confused, if they defy the basics of economics and finance, and engage in willful sophistry, then our situation cannot be turned around, and we cannot expect the situation to improve. Last week Treasury Chief Huang Ting-fang made a number of remarks reflecting the erroneous views held by the Ministry of Finance.

Over the past several months, whenever international credit rating agencies and domestic experts criticized our government's finances, Ministry of Finance officials would respond with two forms of sophistry. First, they would conflate "deficit" with "debt balance." Secondly, they would use "current account surplus" as a smoke screen for "overall deficit." Both are violations of the elementary rules of accounting and finance. And yet Ministry of Finance officials from the top down have engaged in such deceptions. But the more they dissemble, the sooner the truth will come out. They cannot deceive international credit rating agencies.

Let us clarify the meaning of debt balance. This is a basic term in accounting. A deficit means the government's annual revenue falls short of its expenditures. It is akin to corporate profit and loss. It represents annual "flow" figures. Flow figures alone cannot accurately reflect a nation's finances. Suppose a nation's total debt is high. Even if its annual income exceeds its expenditures, it may spend most of its annual revenue paying off the interest on old debts. Even if such a government shows a surplus for the year, it may not be able to make its payments.

For this reason, financial experts the world over propose using the debt balance as a replacement for the fiscal deficit when evaluating a government's financial situation. The so-called debt balance refers to a government's total outstanding debt. It is akin to the the "liabilities" on a corporate balance sheet. It refers to the amount of savings. It accurately reflects a government's total liabilities. All of the world's finance textbooks use debt balance to measure a government's finances. Credit rating agencies the world over do too. That financial authorities on Taiwan would seek to escape responsibility and cover up their dereliction of duty is not surprising. But to violate global accounting practices and engage in financial chicanery is intolerable.

Secondly, we would like to point out how the Ministry of Finance habitually uses the "current account surplus" to cover up its overall deficit. The Treasury Chief and the Minister of Finance have repeatedly told reporters Taiwan's "current account" has a surplus. They have said that its "capital accounts" are government investments that will provide future income, therefore the deficit is not that serious. But this is sophistry concealing a dangerous mistake.

Last year's financial tsunami left a number of well-known domestic flat panel manufacturers in financial straits, forcing them to accede to takeovers. The vast majority of these companies' expenses were used on depreciating their machinery. They were all "capital account" deficits. Yet the companies went under nevertheless. Consider Korea in 1997, when it received a knockout punch during the Asian financial crisis, primarily because investment was too fast and the debt ratio was too high. Korea spent most of its money on capital outlays. But its main problem was financial flow. If it could turn this around, it would succeed. It it couldn't, it would endure a painful death. The results would be the same whether it was due to current expenditures or capital expenditures. Examples of this abound. Yet the Treasury Chief and Treasury Minister offered the press so much sophistry.

Treasury officials twisted the truth each time our international credit ratings hit new lows. Their willful sophistry cannot of course fool professionals. Its only purpose is to mislead the president and the premier, who are not financial experts. If they are successful, they will have protected their rice bowls. Protecting the nation is not their concern.

We would like to remind Ma, Wu and other high officials that if they allow themselves to be duped about the basics of finance, and ignore the views of experts at home and abroad, it will reflect badly on them. Experts have invoked Tang Poet Li Bai's phrase, "Floating clouds constantly obscure the sun, I cannot no longer see the capitol and that is my sorrow." Let us hope this does not become the collective concern of Republic of China taxpayers.

財政問題嚴重 不容顛倒黑白
2010.04.12 03:51 am









No comments: