The recent decision by Standard and Poor's to downgrade Taiwan's credit rating has triggered polarized comments from Taiwan's ruling and opposition camps. The opposition parties believe that the second cut in the country's credit rating in two years shows the government's incompetence in handling the economy. The ruling party believes Taiwan's rating is still good and that people should not make a big deal about it. This newspaper believes that the downgrade was a warning to the government about its financial reforms, but there is no need to panic. This kind of warning can prod the government into pressing forward with financial restructuring. \nTaiwan emerged in 1998 from the Asian financial crisis largely unscathed. The country was given a AA+ rating in 2000, but the situation began to deteriorate in December of that year. Taiwan's rating was cut to AA the next year, and this year policy flip-flops on reform of the credit units of farmers' and fishermen's associations caused other countries to believe that the government was backing away from restructuring the country's financial system. Taiwan's rating was cut to AA- as a result. \nStatistics show that Taiwan's economy has stagnated over the past three years. Nevertheless, Taiwan is ranked second in Asia in terms of financial fundamentals, second only to Singapore and on a par with Japan. This suggests the situation is not so bad. It is true that Taiwan has been in the economic doldrums over the past three years, partly as a result of capital and technology outflows to China. It is not easy to maintain peak performance. Naturally, a lower credit rating reflects that. Taiwan's outlook, however, remains "stable," an indication that prospects for the country's financial reforms are still good. There is therefore no need to panic. \nHowever, the government should take this rating downgrade as a warning because the bungled financial reforms were the primary cause of the cut. This shows that Taiwan, like most other newly developed countries, still faces serious political interference in its reforms. We can expect such interference to become even more complicated as the 2004 presidential election draws near. The banks have been working hard to get rid of bad loans and sell off poorly performing assets. To improve the health of the financial system, the Ministry of Finance has been encouraging bank mergers and overseeing the handling of bad loans. But the finance minister was replaced when reforms of grassroots financial institutions ran into problems. This shows that financial reforms have not been handled effectively and future reforms will be difficult to enact. Taiwan's credit rating will not improve until the country can learn from its mistakes and work to exceed expectations about financial reform, as the South Korean government did. \nPresident Chen Shui-bian (陳水扁) has set two goals for financial reform: lowering non-performing loan ratios to below 5 percent and raising capital adequacy rates to 8 percent within two years. The Executive Yuan has also proposed a plan for a NT$1.05 trillion financial reconstruction fund. If the budget can be passed in the Legislative Yuan, the fund may allow financial institutions to resume their role as a driving force behind economic development. Taiwan has a plan for financial reform, but the key is whether the people in power are willing to resist political pressures and stand firm on the reforms. Only then can Taiwan's financial system move in the right direction. This is the only way to make good use of the recent credit rating downgrade.
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