Moody's Pulls Out of Taiwan

Lots of interesting economic stuff out there this week. First, those of you who are tracking the story of Chinese drywall poisoning the US, well it has now gone national -- from Florida, to post-Katrina New Orleans, and now all over the US during the housing boom. My wife and I avoid stuff from China like, well, the plague.

Big story this week was pull-out of Moody's Investor's Service firm, of which the Taipei Times editorialized:

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 Therefore, the Moody’s closure rings a warning bell in a country where the government is slow to revise outdated financial regulations and its companies are not interested in developing their global visibility in terms of bond issues.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 "slow pace" of internationalizing Taiwan's capital markets.... upgrading our financial markets is like fusion research in the states: success is always just a few years away. I was reflecting on this the other day when someone overseas wanted to do a wire transfer into my local account, and found out that our bank, authorized to handle foreign currency, lacks the routing codes that international banks routinely use.

APROC, ah, sweet nostalgia...

The Taipei Times was too kind to invoke "cost sensitivity" as the reason local corporations don't want bond rating firms like Moody's looking at their books. The real reasons are probably more prosaic -- the routine use of multiple sets of books for businesses at all levels -- one for the taxman, one for the investors, and one for the owners -- the complex cross-ownership systems that actually put firms in the hands of relatives and descendants, with funds flowing freely from one corporation to another (see the Rebar Scandal) must have made it difficult for auditors to understand the financial status of individual firms -- there was even a major semiconductor firm here that used to advertise that its ownership was not composed of relatives (they were all school buddies, just as bad). And imagine when someone tried to explain to the Moody's people that, well, they couldn't make any decisions because the boss' wife has all the chops.....

Investors' lack of interest in the bond markets has long been a problem for Taiwan. Back in 2005 the Taipei Times ran a piece that noted that prior to that year, foreign investors had shown little interest in bonds from Taiwan companies.

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