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Taiwan Country Risk Report Q2 2016

Taiwan Country Risk Report Q2 2016

Core Views

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

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