Wed, Nov 20, 2002 page10

• Policy shift doesn't alter Fitch's rating

  BACKSLIDING While a weakening of the government's resolve to deal with poorly managed credit cooperatives hasn't hurt credit-risk ratings, it's creating some doubts

  • By Kevin Chen / STAFF REPORTER
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  The government's decision on Sunday to suspend a three-tier risk-control mechanism over grassroots credit cooperatives, though raising questions about its commitment to aggressive financial reform, does not post credit-rating risks for Taiwan, a Fitch Ratings official said yesterday.

  "The non-performing loan [NPL] problems in this [grassroots financial] sector are well-highlighted, but they are relatively localized and there is little contagion from the problems at the cooperatives," Paul Grela, Fitch's director of financial institutions-Asia based in Hong Kong, told the Taipei Times yesterday.

  Viewing the high NPL rate as by far the largest problem facing the banking system, the government has been grappling with the cooperatives' problem for some time, although very little headway has been made, he said.

  "But this has not heightened financial-system risk in our view," Grela said. "At this stage, we do not view the apparent change in the Taiwanese government's attitude to reform as detrimental to the sovereign rating or signaling a change in its determination to deal with local commercial bank's NPL problems."

  While the grassroots cooperatives constitute a very small segment of the financial system in Taiwan, Roxanne Liu (劉藹愉), a representative of Fitch Ratings in Taipei, said the policy turnaround would affect overall confidence in the government's determination to deal with mismanaged banks.

  "What can [the finance ministry] do?" she asked. "Some reform proposals are there, but are top government officials really serious about that? Despite all the rhetoric to fix the local cooperatives, the available solutions are limited unless government leadership can follow through on what they promised."

  Fitch will issue its official sovereign rating report at the end of this month or early next month. The agency's current outlook on Taiwan is stable and the sovereign rating stands at A+.

  Grela said that if the government could not present a clear blueprint for reforming the financial sector, then Fitch would be forced to question the resolve of the government, he said.

  Taiwan's average NPL ratio was at 10.17 percent as of September, according to central bank. But Fitch estimates that the figure may actually be between 12 percent and 15 percent.

  Standard & Poor's maintains a negative outlook for the Taiwanese banking system, it said in a statement yesterday.

  A senior official from the international rating agency declined to elaborate whether stalled grassroots financial reforms would place downward pressure on the nation's sovereign rating, but it did not appear optimistic.

  "The failure to implement effective public policy [does indicate] a constraining factor in Taiwan's credit ratings," Chew Ping (周彬), S&P's associate director of Asia & Pacific Sovereign Ratings, told the Taipei Times yesterday. "The latest incident confirmed this."

  S&P's currently holds an AA long-term rating on Taiwan with a negative outlook.

  The Singapore-based Chew said the rating may be lowered if public finances are eroded further or if banking system risks materialize, citing the previous sovereign rating report on Taiwan it published last December.

  "Conversely, Taiwan's ratings may stabilize at their current levels if policymakers overcome political stalemate, promote additional structural reforms in the banking and public sectors and improve Taiwan's revenue-generating capacity." Chew said.

  While both Fitch and S&P's are doubtful that the government's determination in banking reform can be sustained without political interference, they stressed that the financial system overhaul is "crucial."

  "The passage of a new financial restructuring fund bill in the legislature, for example, may not be that easy, given the current political dynamics in Taiwan," Grela said. "We would tend to view negatively any significant delay, watering down or change in government policy in this regard."
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