Financial reform key to East Asian ratings level

Financial reform key to East Asian ratings level

NEW YORK (Dow Jones): The pace of financial reform in East Asia will affect the ability of the region to utilize its high savings rate to improve sovereign credit ratings, Moody's Investors Service said in a report.

The danger, Moody's warned, is that the pace of reform may be slowing because the sense of crisis felt in 1997-98 has passed, and economic recovery in many of these economies has taken hold.

"This is unfortunate, holding out the prospect of continued vulnerability to financial instability," the rating agency said.

Moody's pointed to banking sector reforms in Korea, Thailand, Malaysia and Indonesia as being very important to their future performance.

It also noted that China as well as other countries have begun to address the problem, but much remains to be done. It said that high savings and the resultant high level of fixed capital formation should be positive factors for economic development.

In East Asia's case, however, the high level of saving was not always put to the best possible use due to poor financial intermediation, Moody's said.

As reasons for this, it pointed to government intervention that saw the financial sector as an instrument of development policy, connections between financial intermediaries and borrowers, and corruption.

If their financial intermediation had been better, Moody's said, some countries in the region might not have had to resort to using foreign savings at all. Without greater efficiency of financial intermediation, Moody's said that "one cannot be assured that future financial difficulties at the country level will be avoided."

It cautioned that "without such improvement, it is possible to predict that future crises will occur."