Analysis: Taiwan must pass financial bills

SINGAPORE, June 25 (UPI) -- An emergency legislative session will be held on July 4-8 by the Taiwanese Legislative Yuan to push through six key economic bills that were not passed in time before the last session ended for the summer recess.

Some of the bills are seen as key to push forward with the much needed reforms of the financial sector, which is still dragged down by non-performing loans. Yet, the government's lack of majority in the Yuan is raising concerns the bills may not be approved.

"If the lawmakers fail to pass legislation in the session, banking reform will reach a deadlock," warns Daniel Chan, economist at DBS Bank (HK).

The key bill on the proposed agenda concerns the revisions to the Financial Restructuring Fund, which includes injecting NT$540bn ($15.6 billion) into the recapitalisation fund, which has already been heavily drawn upon. The new monies are intended primarily to cover the bailout of insolvent banks rather than acquiring non-performing loans from the whole sector as originally planned.

Currently, only NT$40 billion ($1.15 billion) of the original NT$140 billion ($4.1 billion) funding for the fund remains, according to Finance Minister Lin Chuan.

This amount will not be enough to deal with the non-performing assets of both the failed Kaohsiung Medium Business Bank and the Chung Hsing Bank and failure to pass the new funding will result in additional losses of NT$260 million ($7.5 million) a month, he has warned.

"Financial institutions need the funds to raise capital and reduce NPLs. At the moment we do not have details and special views on the bills and waiting for the outcome. However, ahead of Presidential election next year, I do not anticipate any breakthtough in these bills due to power struggles among parties and interest groups," Chan says.

Takahira Ogawa, director of sovereign rating, Asia Pacific at Standard & Poor's Ratings Services, also says "Taiwan is still half way through its banking reforms and is behind some of the others in the region. Unfortunately, the government doesn't have a majority, and as past history has shown, it might not be able to push through the bills."

But CSFB analyst Joseph Lay was slightly more optimistic, writing in a recent research note: "The fact that the government managed to get the cooperation of the opposition pan-blue alliance of the Kuomintang and People First Party is positive for the hope that at least some of the more important bills will be approved belatedly."

Late last year, Standard & Poor's Ratings Services lowered its long-term issuer credit ratings on Taiwan to 'AA-' because of the "slow pace in dealing with banking and fiscal reforms."

Last month, Fitch Ratings affirmed the long-term foreign currency of Taiwan at 'A+' but also indicated that the rating remained constrained by vulnerabilities in the banking sector and diminishing fiscal flexibility. In a report released last week, Fitch also expressed concerned Taiwan was letting slip the opportunity to restore the health of its weak banking sector by failing to pass the new Resolution Trust Committee's funding budget, one of the 6 bills which will now be discussed in early July.

Despite some efforts in restructuring the banking sector in 2001-2002, analysts said the sector has not yet achieved adequate financial health and still demonstrates a number of vulnerabilities.

A viable banking sector restructuring plan presented by the government in August 2002 has languished without legislative passage, while the original funding has been nearly halved.

As of the end of March, the nation's non-performing loan ratio was 8.6 percent, or $35 billion equivalent, down from 8.85 percent at the end of last year following aggressive write-offs of bad loans by domestic banks. But some analysts believe that the official data might understate the actual level of bad loans. Rating agency Standard & Poor's Corp pegged Taiwan bank's NPL ratio at 15 percent at the end of 2002.

"The way I see it, we're likely to see the original proposals for increasing the FRF's funding scaled back. This has been fueled by the relatively decent progress by banks in writing off non-performing loans that has allowed the overall bad loan ratio to fall down," says Mike Moran, an economist at Standard Chartered.

"This is good news but the bad debt problem wasn't so much concentrated amongst the big banks. but more the small agricultural cooperatives that are still struggling with much higher rates of non-performing loans. These need continued support and the more backing the FRF has the better. I don't think the government should ease up on the progress made on cleaning up the banking system. Taiwan remains overbanked and reform is still a priority," Moran adds.

On Monday, the Ministry of Finance also announced new definitions for non-performing loans that will raise official ratios higher. However, the adjustment period from the old definitions will be gradual, over two years, and the change in bank non-performing loans is unlikely to trigger any sudden

confidence crisis in the sector, analysts said. The new definitions take NPLs closer to commonly used international standards

The other bills to be discused in July concern the Financial Services Supervisory Commission Organic Law, agricultural financing, a major package of amendments to the Statue Governing Relations between the People on Both Sides of the Taiwan Strait, the proposed Free Trade Port Zone Regulatory Provisions and the draft Real Estate Securitization Regulatory Law.

Premier Yu Shyi-kun has urged opposition parties to agree to pass the six economic and finance bills as they are "vital to the enhancement of national competitiveness and essential to the promotion of policies for the promotion of economic revitalization." He warned that further delay in approval of these laws will harm Taiwan's international competitiveness.

Government officials have also warned that a failure to have the free-trade harbor zone regulatory provisions would deprive Taiwan of a good chance to become a business operational hub in the Asia-Pacific region at a time when many neighboring countries are already aggressively competing in that sector.