Taiwan

Economic growth to stay sluggish

Country Rating A2

Strengths

  • Functioning, stable democracy
  • Good record of sound economic management, pro-business environment, well educated workforce
  • Demonstrated economic flexibility, enabling rapid shifts along the value-added scale
  • High domestic savings and investment
  • Very strong external liquidity

Weaknesses

  • Uncertain and tense relations with Mainland China
  • Heavy concentration on the IT/electronics sector
  • Highly dependent on demand from China, Hong Kong and USA
  • Openness of the economy leaves it vulnerable to demand shocks

  

 

Economic Overview

Modest acceleration ahead

The Taiwanese economy accelerated to +1.5% in 2016, up from +0.7% in 2015. Activity was driven by a recovery of exports as demand for high tech products rose in the second half of 2016. Domestic demand picked up speed due to favorable fiscal policies such as government subsidies on car sales. Going forward, the economy should accelerate gradually (+2.0% in 2017 and 2018). Yet it remains below potential (long-term average is 3.5%). Stronger global demand growth and proactive fiscal policies should support GDP growth. Private consumption acceleration will be limited due to poor wages growth and soft labor market conditions. Yet, risks stem from tense political relations with Mainland China, a potential rise in US protectionist measures, and tighter global financing conditions. Insolvencies will continue to rise: +6% in 2017 after +25% in 2016.


Macro-economic policies to remain accomodative while structural challenges are inevitable

Public finances are sound compared to other high income economies. Public debt is manageable. The government balance returned to safer level (close to -3% GDP) after a huge slippage in 2009. Going forward, the trend will reverse. The consolidation process will be halted due to weak economic activity. The new government will step up social welfare and infrastructure expenditures to prop up demand. Revenues will most likely be lower as a consequence of lower economic growth. Monetary policy will remain clearly accommodative due to significant deflationary forces and weak economic prospects. Meanwhile, setting a clear external trade strategy will be pivotal. In particular, the new government will have to clarify its position with the Mainland about the cross strait rapprochement process to ensure stable trade and economic environment.


External position: short term strenghs, long term vulnerabilities

Current account surplus stands at a healthy 13% of GDP and the trade surplus (goods and services) reached a strong 12% in 2016. Extensive foreign exchange reserves cover more than 20 months. Long-term risks do exist and stem from rising tensions with the Mainland (its main trade partner) and strong dependence on the electronic sector. In that context, diversification of trade partners and products innovation will be pivotal.

Last review: 2017-21-09

    Taiwan

    A2

    GDP

    USD529bn

    Population

    23.4 million

    Form of state

    Multiparty Democracy

    Head of government

    Tsai Ing-wen

    Next elections

    2020, Presidential and legislative

    Last reviewed: 22/03/17

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