Standard & Poor's sticking to its guns

Standard & Poor's is standing by its recent negative report on Taiwan, in which it downgraded the country's credit rating and said the government would be hard pressed to get the nation out of its current economic mess.

Minister of Finance Yen Ching-chang (顏慶章) criticized the report yesterday, saying S&P had used inaccurate numbers in its report.

Still, S&P researchers were adamant that their assessment on Taiwan was accurate.

"We're sticking to our numbers," Chew Ping (周彬), author of the report, told the Taipei Times by phone yesterday.

The report, from one of the world's top credit rating agencies, downgraded the nation's long-term credit rating to "AA," its third-highest, from "AA+." That puts Taiwan on the same level as Italy, Portugal and Bermuda.

According to the agency, the downgrade and negative outlook "reflects Taiwan's diminished fiscal flexibility, a weakening banking sector and ineffective policy execution. The agency also pounded the administration of Chen Shui-bian (陳水扁) for lax management of the economy.

"The government's economic management has been unconvincing during a worse-than-expected cyclical downturn," S&P said.

The downturn may not be the end of the nation's financial problems, as demand for Taiwan's technology exports evaporates globally and banks tighten lending in a market burdened with an estimated NT$1 trillion in bad loans.

"A likely ensuing credit crunch could prolong this slowdown and increase the potential fiscal cost," S&P said.

Exacerbating the problems is the fact that its "budgetary flexibility is hamstrung by an antiquated tax system, rising spending pressures and poor privatization prospects," the agency said.

While the administration had banked on the privatization of several state-run firms to fund campaign promises of welfare reform -- and continues to use those figures in revenue growth predictions -- attempts to sell off state-run companies have sputtered.

According to Chew, using anticipated proceeds from the sale of state-run businesses is like counting chickens before they're hatched -- and an example of bad math by government number-crunchers.

"According to IMF methodology, privatization is usually not viewed as a source of revenue, but the government views that as a future source of revenue," Chew said.

That isn't the only area where the S&P and the government disagree on the numbers.

Though the government believes the economy will grow 4 percent this year, S&P uses a more conservative number of "slightly below 2 percent" in its calculations.

The agency also forecast that government debt as a proportion of the nation's production of goods and services may be 40 percent this year, whereas the finance ministry puts the figure at 30.25 percent.

The Taiwan arm of S&P -- Taiwan Ratings Corp (中華信評) -- said it was natural for financial officials and S&P to hold differing views on the economy.

"It's quite common for governments and companies to disagree with negative reports," said Chris Irwin, vice president of Taiwan Ratings.