There are more reasons behind Moody’s Investors Service’s recent decision to shut down its operations in Taiwan than a mere “review of business strategy” in the wake of weakening global economic and market conditions.
The untold story is the lack of interest foreign investors have in corporate bonds and securitized debts from Taiwanese companies, which has long limited the scale of global ratings agencies’ business in Taiwan and is now forcing Moody’s to close its Taipei office. Moody’s pulling out of the local market is a warning sign for Taiwanese capital markets.
In the face of the global financial crisis, it makes sense that the New York-based company itself is undertaking business restructuring to maximize resource allocation. The question is: Why is Taiwan under the spotlight this time?
Many market watchers said that the Moody’s move reflected the fact that the company was facing a saturated market dominated by rivals Fitch Ratings Ltd and Standard & Poor’s Ratings Service.
But that’s a short-sighted assessment. What these market watchers seemed to miss — as suggested by Polaris Research Institute president Liang Kuo-yuan (梁國源) in an interview with the Central News Agency on Friday — is that the Moody’s withdrawal is indicative of Taiwan’s slower pace in internationalizing its capital markets.
Efforts to internationalize the nation’s capital markets are the best way to develop Taiwan into a regional fundraising hub as the government planned. Therefore, the Moody’s closure rings a warning bell in a country where the government is slow to revise outdated financial regulations and its companies are not interested in developing their global visibility in terms of bond issues.
Another statistic released by S&P’s local partner, Taiwan Ratings Corp, showed how few Taiwanese companies have contracted international ratings agencies to evaluate their corporate credit ratings. It said only around 50 of some 1,200 listed companies in Taiwan have their credit reviews published by ratings agencies on a regular basis.
This figure suggests that nearly 96 percent of Taiwan’s listed companies didn’t feel the need to hire ratings agencies to conduct a credit review of their corporate bonds or securitized debts. There are many reasons behind this, but the simple answer is these companies are just too locally focused and cost-sensitive to do so.
The Moody’s closure also indicates unbalanced development in Taiwan’s capital markets, where the stock market has been growing bigger with the increasing presence of foreign investors, while the bond market still plays a very small role with little interest from investors abroad.
Bonds are generally less attractive than stocks because bond price changes are not as volatile. However, corporate bonds can sometimes show where the economy is headed even more clearly than stocks because bondholders usually pay more attention to a company’s ability to repay its debts. Stock investors, in comparison, are more speculative in attitude and mindset, and so are their forecasts of economic ups and downs.
The withdrawal of Moody’s poses both a crisis and an opportunity for Taiwan’s capital markets. It could be a crisis if people just think of the withdrawal as an isolated incident. It could be an opportunity if the government acts to revise outdated regulations, and local companies become more aware of the importance of internationalizing their debt instruments.