Taiwan Country Risk Report Q2 2016
Taiwan's 2015 real GDP growth came in at 0.9%, slightly belowour forecast of 1.0%. Ongoing weakness in the Chinese economycoupled with continued uncertainty in the domestic political situationwill continue to weigh on Taiwan's economic growth. However, weexpect business sentiment to improve gradually in H216 as the politicalsituation stabilises, leading to a slight improvement in growth figures.
As such, we forecast 2016 real GDP forecast to come in at 1.5%.
Taiwan's opposition Democratic Progressive Party (DPP) won alandslide victory in both the presidential and parliamentary electionsheld on January 16. With the pro-independence DPP having yetto fully articulate its cross-Strait policy, we expect political risks toremain high, undermining investor confidence. President-elect andDPP leader Tsai Ing-wen also faces an uphill task in boosting theisland's ailing economy.
We maintain our forecast for two interest rate cuts by the CBC in2016 following the surprise 12.5 basis points (bps) cut on December16, which took the discount rate to 1.625%. Continued exportheadwinds and low inflation will prompt the CBC to cut rates in abid to support growth and keep the Taiwan dollar competitive, andwe expect the central bank to take its benchmark rate to 1.375% bythe end of 2016.
Taiwan's modest stimulus package aimed at supporting growththrough boosting domestic spending will have a limited effect on thecountry's growth, which will continue to be hampered by stiff exportheadwinds as well as domestic political instability. The size of thepackage is also unlikely to have a significant impact on the 2016fiscal deficit, which we forecast to come in at 1.6% of GDP.
Despite its strong fundamentals, the TWD is facing downside pressurefrom the ongoing weakness in the Chinese economy as wellas domestic uncertainty. As such, we see continued weakness inthe near term, with the currency ending 2016 at TWD34.30/USD.
Over the long-term, an undervalued real effective exchange rate anda large current account surplus will lend support to the currency,limiting weakness and providing stability.
Major Forecast Changes
With external headwinds and domestic political uncertainty likely topersist, we have downgraded our 2016 and 2017 real GDP forecaststo 1.5% and 2.3%, respectively (from 1.9% and 3.5% previously),to reflect these challenges.
We are downgrading our 2016 end-year currency forecast toTWD34.30/USD from TWD32.00/USD to reflect the likelihood thatthe central bank will weaken the currency to support exports.
- Executive Summary
- Core Views
- Major Forecast Changes
- Key Risks
- Chapter 1: Economic Outlook
- SWOT Analysis
- BMI Economic Risk Index
- Economic Growth Outlook
- Political Uncertainties Will Constrain Growth In H116
- Taiwan's 2015 real GDP growth came in at 0.9%, slightly below our forecast of 1.0%. Ongoing weakness in the Chinese economy
- coupled with continued uncertainty in the domestic political situation will continue to weigh on Taiwan's economic growth.
- GDP By Expenditure Outlook
- TABLE: GDP GROWTH FORECASTS
- TABLE: PRIVATE CONSUMPTION FORECASTS
- TABLE: GOVERNMENT CONSUMPTION FORECASTS
- TABLE: FIXED INVESTMENT FORECASTS
- Fiscal Policy And Public Debt Outlook
- Modest Stimulus Will Have Little Impact On Growth, Fiscal Position
- Taiwan's modest stimulus package aimed at supporting growth through boosting domestic spending will have a limited effect on the
- country's growth, which will continue to be hampered by stiff export headwinds as well as domestic political instability. As such, we
- maintain our real GDP forecast for 2016 to come in at 1.5%.
- TABLE: NET EXPORTS FORECASTS
- Structural Fiscal Position
- TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES
- Monetary Policy
- Easing Cycle To Intensify
- We maintain our forecast for two interest rate cuts by the CBC in 2016 following the surprise 12.5bps rate cut on December 16, which
- took the discount rate to 1.625%. Continued export headwinds and low inflation will prompt the CBC to cut rates in a bid to support
- growth and keep the Taiwan dollar competitive, and we expect the central bank to take its benchmark rate to 1.375% by the end of
- Monetary Policy Framework
- Currency Forecast
- TWD: Continued Weakness Amid Political Uncertainty
- Despite its strong fundamentals, the TWD is facing downside pressure from the ongoing weakness in the Chinese economy as well as
- domestic uncertainty. As such, we see continued weakness in the near term, with the currency ending 2016 at TWD34.30/USD.
- TABLE: BMI CURRENCY FORECAST
- Outlook On External Position
- TABLE: MAIN IMPORTS AND EXPORTS
- TABLE: MAIN IMPORT AND EXPORT PARTNERS
- TABLE: CAPITAL & FINANCIAL ACCOUNT BALANCE
- Chapter 2: 10-Year Forecast
- The Taiwan Economy To 2025
- Multiple Headwinds Against Structural Growth
- A strong recovery from the global financial crisis by no means suggests that Taiwan's economy will maintain a robust growth trajectory
- going forward. We believe the lingering presence of the government within the banking sector, an increasingly uncompetitive tech
- sector, an overly tech-focused economy and the reluctance to speed up Chinese investment, will impede Taiwan's structural growth
- prospects. expect real GDP growth to average 3.3% between 2016 and 2025.
- TABLE: LONG-TERM MACROECONOMIC FORECASTS
- Chapter 3: Political Outlook
- SWOT Analysis
- BMI Political Risk Index
- Short-Term Political Outlook
- DPP Wins, Will Face Many Challenges
- Taiwan's opposition DPP won a landslide victory in both the presidential and parliamentary elections held on January 16. With the
- pro-independence DPP having yet to fully articulate its cross-Strait policy, we expect political risks to remain high, undermining investor
- confidence. President-elect and DPP leader Tsai Ing-wen also faces an uphill task in boosting the island's ailing economy.
- TABLE: POLITICAL OVERVIEW
- Long-Term Political Outlook
- Legal Status Quo To Prevail In 2010s
- Taiwan's long-term political prospects are inseparable from its relations with China, and while cross-Strait relations have thawed in
- recent years, we believe the status quo will largely prevail. While further economic integration is likely between the two Chinas, we
- exclude meaningful political convergence.
- Chapter 4: Operational Risk
- SWOT Analysis
- Operational Risk Index
- Operational Risk
- TABLE: OPERATIONAL RISK
- Trade Procedures And Governance
- TABLE: IMPORT AND EXPORT DOCUMENTS
- TABLE: TRADE PROCEDURES BREAKDOWN
- TABLE: ASIA – TRADE PROCEDURES AND GOVERNANCE RISK
- Vulnerability To Crime
- Chapter 5: BMI Global Macro Outlook
- Global Macro Outlook
- Downside Risks Gather Momentum
- TABLE: GLOBAL ASSUMPTIONS
- TABLE: DEVELOPED STATES, REAL GDP GROWTH, %
- TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %
- TABLE: EMERGING MARKETS, REAL GDP GROWTH, %
- TABLE: MACROECONOMIC DATA AND FORECASTS