Emerging

The economy gets a second wind

st  
15  
EcoEmerging// 1 quarter 2020  
economic-research.bnpparibas.com  
Taiwan  
The economy gets a second wind  
Taiwan’s export sector has been hit by the slowdown in trade between China and the United States since spring 2018, but it has  
also benefited rapidly from some of the positive effects of the trade war. US importers have replaced certain Chinese products with  
goods purchased directly from Taiwan. Plus the US-China trade war provides Taiwanese manufacturing corporates an incentive to  
leave Mainland China and relocate production in Taiwan, with firm government support. Thanks to these developments, Taiwan’s  
economy reported stronger than expected growth in 2019, and this trend should continue in 2020.  
Real GDP growth slowed from 3.3% in 2017 to 2.7% in 2018 before  
1- Forecasts  
holding at this level in 2019. Last year’s economic performance was  
better than expected at this time a year ago. After a period of growth  
slowdown between mid-2018 and early 2019, triggered by US-China  
trade tensions and sluggish global demand, the economy has  
regained momentum. The manufacturing sector has rapidly  
benefited from a substitution effect as US importers replaced certain  
products with goods purchased directly from Taiwan. The US-China  
trade war has also provided Taiwanese export corporates with an  
incentive to leave Mainland China and relocate production in Taiwan.  
2
018 2019e 2020e 2021e  
Real GDP growth (%)  
2.7  
2.7  
2.8  
2.3  
Inflation (CPI, year average, %)  
Budget balance / GDP (%)  
1.4  
0.6  
1.2  
1.0  
-1.9  
-2.0  
-2.2  
-2.4  
Gen. Gov. debt / GDP (%)  
35.1  
11.6  
36.0  
11.4  
36.8  
11.5  
38.0  
12.0  
Current account balance / GDP (%)  
External debt / GDP (%)  
31.4  
462  
34.2  
478  
33.6  
490  
33.4  
500  
Forex reserves (USD bn)  
Forex reserves, in months of imports  
Exchange rate USDTWD (year end)  
19.4  
30.7  
20.0  
30.1  
19.6  
29.8  
19.0  
29.0  
Short-term prospects are still looking upbeat, and we are forecasting  
real GDP growth of 2.8% in 2020. The export sector should benefit  
from the expected rebound in the global electronics market and will  
continue to benefit from the reshaping of supply chains in Asia.  
Domestic demand is expected to remain robust, bolstered notably  
by solid investment growth and accommodative monetary and fiscal  
e: BNP Paribas Group Economic Research estimates and forecasts  
2- Impact of US-China trade tensions on exports  
th  
Merchandise exports, USD, y/y in %, 3-month moving average  
policies. The January 11 elections handed President Tsai Ing-wen  
a second four-year mandate, and her Democratic Progressive Party  
Taiwan’s total exports  
Exports to China (28% of total)  Exports to US (14% of total)  
(
DPP) held on to its parliamentary majority. This means the  
authorities should be able to pursue the economic program in place  
since 2016. Although the election results could aggravate tensions  
with Mainland China, they are unlikely to have a large impact on  
economic activity in the short term.  
3
2
1
0
0
0
0
The economy is holding up well  
Real GDP growth slowed from 3.3% year-on-year (y/y) in H1 2018  
to 2.2% in H2 and 1.8% in Q1 2019, before picking up gradually  
thereafter (2.6% in Q2 and 3% in Q3). According to preliminary  
estimates by the Taiwan statistics office, real GDP growth reached  
-
10  
20  
-
3.4% y/y in Q4 2019 (or 1.7% quarter-on-quarter, seasonally-  
2
012 2013 2014 2015 2016 2017 2018 2019  
adjusted). These trends in GDP growth can be attributed mainly to  
changes in the contribution of foreign trade  which dropped into  
negative territory in H2 2018 before swinging back into positive  
territory in 2019  and to the strong upturn in investment. It began  
picking up in mid-2018 after several quarters of weak or negative  
growth. In the first three quarters of 2019, investment rose 7.4% y/y  
Source: Ministry of Finance  
in H2 2018 (compared to 11% in H1 2018) before contracting by 2%  
in full-year 2019 (chart 2). Initially, the manufacturing sector scaled  
back production (-1.2% y/y in the first 10 months of 2019). But soon  
Taiwan has also benefited from some of the positive effects of the  
US-China trade war.  
(
compared to an average annual rate of 2.5% in 2014-2018), and it  
probably strengthened further in Q4 2019.  
US-China trade war benefits Taiwan’s export sector  
These trends were largely shaped by the US-China trade war.  
Given the economy’s strong dependence on high-tech exports and  
large exposure to the US and Chinese markets, Taiwan was  
immediately hit by the knock-on effects of the slowdown in US-  
China trade. Merchandise exports increased by only 1% y/y in value  
Firstly, the manufacturing sector benefits from a substitution effect  
as US importers replaced certain Chinese products by goods  
purchased directly from Taiwanese companies. Taiwanese exports  
to the United States jumped by 17% in 2019 (compared to an  
st  
16  
EcoEmerging// 1 quarter 2020  
economic-research.bnpparibas.com  
average annual increase of 4% in 2014-2018). This partially  
explains why Taiwan’s total exports did not decline as much as  
South Korea’s, for example (-10% in 2019). The performance of  
Taiwan’s export sector is still highly correlated to China’s total  
exports, which have picked up slightly over the past 2 months. Very  
short-term prospects have indeed improved somewhat following the  
signing of the phase 1trade agreement between Beijing and  
Washington (see pages 3-4). They should also get a boost from the  
expected rebound in the global electronics market. Taiwan’s  
industrial output rebounded in late 2019 (+6.4% y/y in December),  
bolstered by stronger sales and the need for stock rebuilding  
3
- New investment in production facilities  
Investment (GFCF, volume):  Total  Machinery and equipment  
(42% of total) ▪▪▪ Construction (33%)  
Intellectual property (21%)  
Real GDP (rhs)  
y/y %  
0
y/y %6  
3
2
0
0
0
4
2
0
1
(
inventories were scaled back in the first three quarters of 2019). It  
should continue to pick up in the months ahead.  
-
10  
-2  
-4  
Secondly, and this is the most interesting positive effect, the US-  
China trade war has created an incentive for Taiwanese firms to  
invest in factories in Taiwan. Higher US tariffs on Chinese imports  
combined with the increase in China labor’s costs encouraged a  
number of Taiwanese manufacturers to review their production  
strategies and to exit Mainland China by relocating production in  
Taiwan. The authorities have encouraged this strategic shift and set  
up an action plan in January 2019 (the Action Plan for Welcoming  
Overseas Taiwanese Businesses to Return to Invest in Taiwan),  
which aims to provide financial and logistical support to corporates  
that want to relocate production. The initial plan was complemented  
by two additional plans in July 2019 that aim to encourage  
investment by local small and mid-sized enterprises. At mid-January  
-
20  
2
012 2013 2014 2015 2016 2017 2018 2019  
Source: DGBAS  
Robust domestic demand  
The export sector’s newfound momentum has had positive effects  
on the job market and private consumption. Real growth in  
household consumption has already accelerated from 1.7% y/y in  
H1 2019 to 2.3% in Q3. Public investment has also picked up  
(+5.9% y/y in the first three quarters of 2019), driven mainly by a  
vast infrastructure development plan. Accommodative monetary  
conditions are another factor supporting domestic demand growth.  
2020, more than 300 Taiwanese companies had already signed up  
for one of the three government assistance plans, 169 of which  
were operating in China (mainly in the high-tech sector). Investment  
in machinery and equipment (90% of which is private) rebounded by  
Thanks to healthy public finances, the government has comfortable  
manoeuvring room to conduct an expansionist fiscal policy and  
implement programmes to stimulate private investment. By  
consolidating production facilities and raising the economy’s  
competitiveness, these policies are an answer helping to address  
the decline in Taiwan’s long-term growth potential registered in  
recent years, and reinforce the island’s economic prospects in the  
medium term.  
20% y/y in the first three quarters of 2019 (chart 3) and should  
continue to rise rapidly in the short term.  
The recent trends of the export manufacturing sector (reshaping of  
trade flows in Asia, relocation of production) should continue in the  
short to medium term. Yet there are still some downside risks  
weighing on Taiwan’s economic outlook. First, tensions between  
Taiwan and the Mainland could worsen following the re-election of  
President Tsai Ing-wen. So far tensions have not really had much of  
an impact on trade of manufactured goods. Yet Beijing could adopt  
measures to hurt sales in certain sectors, such as agriculture or  
tourism. Since China stopped issuing individual travel visas to  
Chinese mainlanders in August 2019, the inflow of Chinese tourists  
to Taiwan (38% of total tourists in 2018) fell by half. Yet the tourism  
sector accounts for only 2% of Taiwan’s GDP. Consequently, the  
impact of tensions between Taiwan and the Mainland should have  
only a moderate impact on economic growth in the short term.  
However, pressure from Beijing is severely constraining the  
development of ties between Taiwan and the rest of the world.  
Moreover, Taiwan could also become the direct target of US  
protectionist measures while the increasing shift in focus of the US-  
China trade war towards technology could have major  
repercussions on the high-tech sector in Taiwan and the rest of Asia.  
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.
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