Taiwan's debt rating was cut one level by Standard & Poor's, which cited the government's slow pace in carrying out banking and fiscal reforms.
The nation's foreign- and local-currency debt ratings were cut to AA-, the fourth-best investment grade out of 10 levels. The reduction brings Taiwan's rating within four levels to that of political rival China, which has a BBB rating.
The downgrade comes three weeks after President Chen Shui-bian's (
"The downgrade reflects the slow pace in dealing with banking and fiscal reforms," S&P credit analyst Ping Chew (
"This will lend support to the central bank's desire to have a weaker New Taiwan dollar," said Daphne Hsu, a currency trader at the Chinese Bank (
State-owned Chunghwa Telecom Co's (中華電信) long-term debt rating was cut in tandem. A lower debt rating may increase borrowing costs by raising the perceived risk of lending.
Minister of Finance Lin Chuan (
"The Taiwan government has backpedaled on its reforms of the fishermen and farmers association, and that failure has sparked concerns about its ability to make good on its policies," said Vicky Hsieh, chief economist at President Securities Corp (
S&P noted that the government may be allowing politics to intrude into business.
"The island's young democracy has yet to develop effective institutions and mechanisms to implement public policy, and many issues remain politicized," S&P said in its statement.
S&P warned a few months ago that the progress of reforming Taiwan's overcrowded banking industry -- one of the most debt-laden in the region -- would be a factor in the ratings review. The reform push started quite well early this year, but it has lost momentum, largely due to political gridlock, the agency said.
"Although the banks have written and sold off bad debts, the level of nonperforming loans to gross loans [on an internationally comparable basis] is only expected to decline slightly from 15 percent, due to banks' low profitability," Chew said.
Since President Chen took office in 2000, he has struggled to formulate an economic policy and push through reforms. He has been hampered by an inexperienced administration and powerful opposition parties that have tried to block most of his major policies.
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