Taiwan: Headwinds and storm warnings

Taiwan: Headwinds and storm warnings

Taiwan: Headwinds and storm warnings

Asia Pacific Economic Outlook, December 2013

A shaky global economic recovery is adversely affecting trade-dependent Taiwan. With a challenging domestic political environment alongside a strained economy, the government has its hands full.

TaiwanThis typhoon season, Taiwan has had more to worry about than winds and waves. A shaky global economic recovery is adversely affecting the trade-dependent island, while tepid domestic demand and deteriorating fiscal indicators are adding to its woes. The government’s stimulus measures and efforts to boost exports will take a while to rejuvenate the economy. In the meantime, Taiwan could struggle to achieve even the already lowered official growth projections. With an increasingly challenging domestic political environment alongside a strained economy, the government has its hands full.

Growth stumbles as exports disappoint

Preliminary data for Q3 2013 suggest that growth in the latest quarter was the slowest this year. In Q3 2013, GDP grew 1.58 percent year over year compared with 2.49 percent in Q2 and 1.62 percent in Q1, due mainly to a sharp deceleration in exports. Exports grew just 1.7 percent year over year in the third quarter compared with more than 5 percent in each of the previous two quarters. This slower growth was due to declining exports to China, Japan, and the United States (together 57 percent of total Q3 2013 exports). Domestic demand also struggled, rising a modest 1.1 percent year over year, as consumption slowed and investment remained lackluster.

Manufacturing (nearly a third of total GDP) grew a modest 1.7 percent year over year in the third quarter, while the country’s index of industrial production for the first nine months of 2013 was up a mere 0.5 percent year over year, due to weak external and internal demand. The bleak industrial scenario has adversely affected average real wages and kept the rate of unemployment stubbornly above 4 percent. These conditions are expected to persist in the near term, restricting private consumption growth. Furthermore, with the International Monetary Fund cutting its 2013 global growth forecast for Taiwan to 2.9 percent from 3.1 percent, Taiwanese exports may continue to struggle through the rest of the year and rise only in low single digits. As a result, in 2013 the country could find it challenging to meet even the government’s reduced growth projection of 2.3 percent. Taiwan cut growth forecasts from 3.6 percent to 2.4 percent in May and then again to 2.3 percent in August.

Monetary policy is supportive, but not without risks

To spur growth, the Taiwanese central bank has retained the benchmark interest rate at a low 1.88 percent through the year, and monetary policy is likely to remain accommodative in the near term. Such a stance could also help improve the competitiveness of the Taiwanese dollar, which is stronger than the Japanese yen and South Korean won. Japan and South Korea are Taiwan’s major competitors in the export of electronics, which accounts for 28.5 percent of total Taiwanese exports. Furthermore, inflation levels (under 1 percent since May 2013) support the central bank’s dovish stance.

However, with a loose monetary policy the central bank will need to keep a close watch on the country’s already high household debt and house prices. Currently, household debt stands at nearly 122 percent of disposable income, while the ratio of house prices to income is valued at 8.4.

Government’s growth push could take time to bear fruit

The government is taking several measures to boost the economy; however, due to the long-term nature of some of these efforts, growth may not increase immediately. In addition, some steps have proven controversial. For instance, spending under the stimulus package of TWD 3.2 billion (approximately USD 106.9 million) announced earlier in 2013 is spread over a five-year period and is not projected to elevate private consumption significantly for this year. Meanwhile, the liberal fiscal policy will likely keep the nation’s budget in deficit (approximately 2.5 percent of GDP) and raise public debt to 38.9 percent of GDP from 35.8 percent in 2012. With tax revenue rising only 0.1 percent year over year in the first nine months of 2013, the government plans to raise money by selling shares in certain state- owned corporations.

At the same time, controversy dogs an important trade pact that the government is trying to push through. In late June this year, Taiwan and China, its largest trade partner, signed the Cross-Strait Agreement on Trade in Services (CSATS), which still awaits Taiwanese legislative ratification to become operational. According to the government, the CSATS will gradually reduce or remove restrictions on services trade with China and help Taiwanese businesses grow their market share there. However, opponents of the CSATS claim the deal will benefit China more, hurt small Taiwanese businesses, and jeopardize Taiwanese national security. The CSATS impasse is expected to prove a hurdle to concluding a similar deal planned for goods trade. A free-trade agreement with Singapore (which accounts for 6.7 percent of Taiwanese exports) has also remained under consideration since late 2010. While the government did conclude a free-trade agreement with New Zealand in July 2013, trade with that country is currently rather limited and unlikely to see a substantial increase immediately.

Domestic politics prove challenging

In recent months, Taiwan has witnessed discord within the ruling party, a lack of consensus between the government and the opposition, and multiple public protests over various issues. Government popularity, which was already under pressure due to the tough economic conditions, has fallen further. As a result, the government faces significant hurdles on policy matters with potential economic implications, such as the ratification of the CSATS, expansion of nuclear power capacity, and implementation of pension reforms. Meanwhile, improving economic cooperation with China and dispute resolution with Philippines over fishery resources indicate the government has been more successful on the international political platform than at home.

Controversy dogs an important trade pact that the government is trying to push through.


Navya Kumar

Navya Kumar is an assistant manager at Deloitte Research, Deloitte Services LP.

Asia Pacific Economic Outlook, December 2013: Taiwan
Cover Image by Jessica McCourt