Taiwan’s economy grew 2.1% y-o-y in Q217, bringing H117 growth to 2.4% y-o-y, and we are upgrading our 2017 real GDP growth forecast to 2.2%, from 2.0% previously. Strong demand from the electronics sector is likely to be the main driver of export growth and investment in the semiconductor sector. In addition, the government’s infrastructure development plan will provide support while improving Taiwan’s logistics network.
The ending of diplomatic relations with Taiwan in favour of China by Panama reinforces our view China will continue to curtail Taiwan’s international space amid increasingly challenging bilateral relations.
Cross-Strait ties are unlikely to improve over the short term in the run-up to the 19th Party Congress in China, but we do not expect this to have a negative impact on Taiwan’s economic growth.
In line with our expectations, the CBC kept its discount rate at 1.375% during its monetary policy meeting on June 22. We maintain our forecast for the central bank to remain on hold throughout 2017 as it seeks to strike a balance between ensuring financial stability while supporting growth and keeping inflation manageable.
The successful passage of bills aimed at reforming the civil service pension system is a positive first step in ensuring Taiwan’s long-term fiscal health. However, the decision to discuss the contentious military pension reform until a later date suggests government will continue to face difficulties enacting all of its proposed pension reforms.
The TWD is likely to resume its gradual appreciatory trend, with weakness against the CNY providing room to strengthen, while maintaining export competitiveness. Over the long term, we expect the currency to appreciate slightly as it remains supported by a positive fiscal position, still undervalued real effective exchange rate and strong external position.
Major Forecast Changes
We upgraded our 2017 real GDP growth forecast to 2.2% from 2.0% previously to reflect the economy’s better than expected performance in H117.