Emerging

PDF
st  
24  
EcoEmerging// 1 quarter 2019  
economic-research.bnpparibas.com  
Taiwan  
Exposed to external shocks, but solid  
Export and real GDP growth have started to suffer from US-China trade tensions and from the mounting difficulties of China’s  
external trade sector. Taiwan is highly exposed to this type of external shocks due to its heavy reliance on exports of tech products  
to the Chinese and US markets. However, Taiwan is also well-armed to absorb shocks. External accounts and public finances are  
strong, and the authorities have a good margin of leeway to act. They are expected to maintain accommodative monetary and fiscal  
policies in order to stimulate domestic demand in the short term, and should continue some structural reform measures aimed at  
improving Taiwan’s longer-term economic prospects.  
Exposed to US-China trade tensions  
1- Forecasts  
Economic growth strengthened gradually from 2016 to early 2018  
thanks to a more favourable external environment and policy  
support. The global tech cycle rebounded and boosted exports in  
2
017 2018e 2019e 2020e  
Real GDP growth (%)  
2.9  
2.8  
2.2  
2.0  
Inflation (CPI, year average, %)  
Budget balance / GDP (%)  
0.6  
1.4  
1.3  
1.3  
2
017, but then lost steam in 2018, while fiscal stimulus measures  
-2.0  
-2.1  
-2.3  
-2.3  
and the loose monetary conditions have supported domestic  
consumption. However, real GDP growth slowed again in Q3 2018,  
reaching +2.3% year-on-year (y/y) vs. 3.2% in H1 2018. Investment  
rebounded after four consecutive quarters of negative or flat growth,  
but private consumption growth lowered and government spending  
contracted. Moreover, export growth slowed rapidly and net exports  
had a negative contribution to real GDP growth in Q3 2018.  
Gen. Gov. debt / GDP (%)  
35.7  
34.4  
13.1  
34.6  
12.6  
35.0  
13.0  
Current account balance / GDP (%)  
External debt / GDP (%)  
14.5  
31.8  
452  
31.3  
462  
31.5  
473  
31.0  
486  
Forex reserves (USD bn)  
Forex reserves, in months of imports  
Exchange rate USDTWD (year end)  
16.8  
29.8  
16.0  
30.7  
15.5  
31.0  
15.0  
31.0  
e: BNP Paribas Group Economic Research estimates and forecasts  
Recent foreign trade and manufacturing PMI data point to further  
weakening in economic activity in Q4 2018 and early 2019. Exports  
started to lose steam during the summer (rising by 4.1% y/y in USD  
value in July-Oct18 vs. 10.7% in H1 2018) and contracted in the last  
two months of the year (-3.3% y/y). The deterioration has initially  
stemmed from the slowdown in global trade and, more recently,  
from the weakening performance of Chinese trade resulting from the  
US-China dispute (Chart 2).  
2- Taiwanese exports hit by the fall in Chinese external trade  
Taiwan’s total exports in USD, y/y change  
▪▪ of which: Exports to China and Hong Kong in USD, y/y change  
50  
%
40  
3
0
In the short term, the main uncertainty comes from US-China trade  
tensions (see note on China, page 4). Taiwan is highly vulnerable to  
this type of external shocks due to its very high degree of trade  
openness (exports represented 60% of GDP in 2017), high  
exposure to the Chinese market (28% of total good exports, or 40%  
including Hong Kong) and US demand (12% of total exports) and  
high participation in regional value chains. Its export base is solid  
but not widely diversified, given the heavy weight of tech products  
20  
10  
0
-10  
-
20  
30  
-
(
electronic goods account for 34% of total exports and information &  
2
013  
2014  
2015  
2016  
2017  
2018  
communication goods for another 11%).  
Source: Ministry of Finance  
Some Taiwanese enterprises are already adjusting their production  
strategy. Given US tariff hikes on Chinese good imports, added to  
rising labor costs in China, certain industries have announced partial  
relocation of production units from the Mainland to Taiwan.  
Moreover, the authorities have recently announced a plan to assist  
corporates to return to invest in the island. Some enterprises may  
also plan to shift production capacity to other countries with lower  
labor costs such as Vietnam, the Philippines or even Mexico.  
increasing US interest rates, given both external trade uncertainty  
and low inflation pressures. Inflation accelerated last year but has  
abated rapidly since October as a result of lower energy and food  
prices.  
Taiwan’s economic growth is affected not only by cyclical factors but  
also structural constraints, which will contribute to a continued  
slowdown trend in the coming years. On the internal front, the main  
constraints come from the decline in the labor force (which started in  
2016) and the insufficient diversification of its manufacturing base.  
Positively, the Tsai government has taken actions to improve  
The authorities have adopted an accommodative economic policy  
mix over the past two years and will continue to do so in the short  
term. Public infrastructure and social spending will be sustained.  
Meanwhile, monetary policy should remain accommodative despite  
st  
25  
EcoEmerging// 1 quarter 2019  
economic-research.bnpparibas.com  
competitiveness and develop new industrial sectors: in addition to  
an infrastructure development program for 2018-2021, an industrial  
innovation plan has been launched, aimed at boosting higher value-  
added tech sectors. Measures to ease restrictions on employing  
foreign workers have also been announced.  
3
- Accommodative monetary conditions  
 Base lending rate, average ▪▪▪ Key policy (discount) rate  
Consumer price inflation, y/y change  
4
%
%
On the external front, Taiwan faces economic challenges (rising  
protectionism, uncertain prospects for world demand of tech  
products) and geopolitical challenges. Cross-Strait tensions have  
worsened since President Tsai and her DPP government took  
power in May 2016. Difficult relations with China may dampen the  
activity of some enterprises, notably in the tourism sector. Most  
importantly, the strategy of the DPP government to diversify  
Taiwan’s relations away from China (in particular with its  
3
2
1
0
“Southbound policy” aimed at developing agreements with South  
and South-East Asian countries) is threatened by Beijing’s pressure  
-1  
on potential economic partners.  
2010 2011 2012 2013 2014 2015 2016 2017 2018  
Source : DGBAS, Central bank  
Strong cushions  
Despite multiple headwinds that will weigh on its future economic  
growth performance, Taiwan’s macroeconomic strength is not  
threatened. Firstly, external accounts are very strong and should  
remain so in the coming years. Taiwan’s large current account  
surpluses of more than 10% of GDP, extremely comfortable external  
liquidity cushions (covering 16 months of imports) and solid net  
foreign creditor position largely mitigate concerns arising from the  
island’s exposure to trade war risks or other external trade shocks,  
cross-Strait tensions and diplomatic isolation.  
The government has also introduced important reforms of the tax  
system. Tax reforms enacted at the beginning of 2018 raised the  
corporate income tax rate to 20% from 17% and cut individual  
income taxes. The changes in the tax structure are unlikely to  
address much the problem of the narrow tax base, and are rather  
aimed at stimulating private consumption while maintaining  
moderate fiscal deficits. In fact, the general government deficit is  
projected to deteriorate only slightly to 2.3% in 2019 and 2020 from  
2.0% in 2017.  
Secondly, Taiwan enjoys solid public finances. The fiscal balance is  
structurally in deficit and the tax base is narrow, but policy discipline  
is strong. The deficit of the general government (including social  
security funds) has averaged a moderate 2.2% of GDP since 2014  
Last but not least, a reform of the public service pension system  
was approved in 2017. Taiwan officially became an “aged society” in  
early 2018, i.e. its population aged 65 and over started to make  
more than 14% of the total population (United Nations definition). Its  
dependency ratio (elderly people as a percentage of the working-  
age population) is approaching 20% (vs. 14% ten years ago) and  
could reach an extremely high 64% by 2050 according to United  
Nations projections. In response to fast ageing and its impact on  
long-term fiscal sustainability, the government set up a pension  
reform committee in 2016. Reforms that were approved in 2017  
have led to substantial cuts in the pension benefits of civil servants,  
state school teachers and military personnel. According to official  
projections, the pension fund for teachers was projected to go bust  
by 2030 before the reform and the fund for military personnel by  
(
based on IMF estimates). General government debt is moderate,  
expected at 34% of GDP at the end of 2018. It has declined slightly  
in the past five years (from 39% in 2013). The government benefits  
from very low borrowing costs and a large domestic investor base.  
Moreover, it is little exposed to changes in global financial  
conditions (it has no foreign currency-denominated debt). All this  
gives the government ample leeway to act in case in adverse shock,  
implement counter-cyclical measures and introduce structural  
reforms to improve long-term prospects.  
Fiscal policy: a combination of stimulus and reform  
2
020. The government now estimates that, thanks to the reforms,  
As a matter of fact, the Tsai administration has been active in trying  
to find solutions to stimulate domestic demand, strengthen Taiwan’s  
economic growth potential, and anticipate the ageing of the  
population.  
the viability of the public pension system is ensured for at least 30  
years.  
Fiscal policy has become more expansionary since 2016. The Tsai  
government has launched a four-year infrastructure program since  
2017, with additional budget funding equivalent to 2.4% of GDP.  
Other increases in government spending are focused on social  
welfare programs, education, science and culture, and national  
defence; they are expected to remain of reasonable extent.  
QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
Ce site présente leurs analyses.
Le site contient 2179 articles et 574 vidéos