Taiwan Country Report & Economic Status

A trade-led slowdown

A2

MEDIUM RISK for entreprise

  • Economic risk

  • Business environment risk

  • Political risk

  • Commercial risk

  • Financing risk

GDP USD572.594bn (IMF 2017)
Population 23.63mn, (IMF 2017)
Form of state Multiparty Democracy
Head of government Tsai Ing-wen
Next elections 2020, presidential and legislative
  • 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
  • Uncertain and tense relations with Mainland China
  • Heavy concentration on the IT/electronics sector
  • Highly dependent on demand from Mainland China, Hong Kong and USA (export-dependent economy)
  • Openness of the economy leaves it vulnerable to demand shocks

When global trade slows…

Taiwan’s real economic growth is set to slow to +2% y/y in 2019 (after +2.6% in 2018). Exports are projected to grow at a slower pace due to weaker growth in global demand, continued tensions between China and the US and an inventory adjustment for semi-conductors. Domestic demand growth will be the main driver of economic growth. Private consumption is set to benefit from supportive policies from the government (e.g. income tax cuts, rebates to consumers on energy-saving automobiles) and a solid labor market. We see two dynamics for investment: On the one hand, state-driven and domestic demand-oriented investment are set to get some traction, supported by favorable fiscal measures (e.g. public infrastructure spending, Tax Incentive for Repatriation of Offshore Funds). On the other hand, we see limited growth for export-oriented investment due to weak new foreign orders and persistent uncertainties around the outcome of US-China trade negotiation. Another hot topic is next year’s presidential election (January 2020). Terry Gou, founder and chairman of Foxconn, announced in April that he will contest the election as part of the opposition (the China-friendly Kuomintang party). Considering that Foxconn is the world’s largest electronics contract manufacturer, and one of the top private employers in China, it is reasonable to expect Gou to promote pro-trade and pro-business policies.

Policies: keeping growth stable while creating new drivers

Taiwan’s public finances are healthy by international standards. Government debt will likely be at 33% GDP in 2019. The 2019 budget is expansionary, with planned spending up +2.8% y/y. This will bring expenditures to a record TWD2.022tn in 2019 (c. 11% of GDP). The main focus will be infrastructure, social welfare and internet development.

Monetary policy will likely remain accommodative this year. Inflation is low at less than 1% y/y in the first half of the year. Economic growth is slowing and risks to the outlook (trade tensions between China and the US, lower global trade) have increased markedly. External conditions have also become a bit more conducive for a policy rate cut as major central banks start to change their policy stance (both China and the US becoming more dovish). Looking ahead, our view is that the authorities will rely first on fiscal policy to support growth. They will maintain the policy rate at its low level (1.375%) for the remainder of 2019 but remain ready to cut if global demand records a further deceleration. 

External position: healthy

The current account surplus stands at a healthy +12% of GDP. Extensive foreign exchange reserves cover c. 20 months of goods imports. Long-term risks do exist and stem from elevated tensions with the Mainland (its main trade partner) and a strong dependence on the electronics sector. In this context, diversification of trade partners and product innovation will be pivotal. In that respect, the Tsai administration has put the emphasis on various initiatives, including the improvement of infrastructure to improve accessibility; an ambitious industrial policy (5+2 Major Innovative Industries policy) to create new competitive growth drivers and a cooperation policy (New Southbound Policy with South East Asian market) in order to boost and diversify trade with other Asian partners. 

Trade structure by destination/origin

(% of total)

Exports Rank Imports
China 25%
1
19% China
China, Hong Kong SAR 14%
2
17% Japan
United States 12%
3
12% United States
Japan 7%
4
6% Korea, Republic of
Singapore 6%
5
4% Germany

Trade structure by product

(% of total)

Exports Rank Imports
Electrical machinery and apparatus 34%
1
19% Electrical machinery and apparatus
Telecom and sound recording apparatus 5%
2
11% Petroleum products and related materials
Professionnal and scientific instuments 5%
3
6% Specialised machinery
Miscellaneous manufactured articles 5%
4
4% Professional and scientific instruments
Plastics in primary forms 4%
5
4% Organic chemicals

  • Low

  • Medium

  • Sensitive

  • High

  • Payments

  • Court proceedings

  • Insolvency proceedings

Contact

Contact Euler Hermes

Economic Research Team

research@eulerhermes.com

Country Risk Analyst:

Mahamoud Islam

mahamoud.islam@eulerhermes.com

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