Taiwan Country Risk Report Q4 2018
We expect Taiwan's real GDP growth to slow over the coming quarters as uncertainty in the global trade environment will likely act as a drag on exports and investments. The government's expansionary fiscal policy will prevent a sharp deceleration in growth.
The future of Taiwan is likely to exacerbate ongoing trade disputes between the US and China, with the Trump administration shoring up support for the island. Beijing views Taiwan's future status as its top geopolitical priority, and will thus react very negatively towards any US attempts to link Taiwan to trade or other issues in Asia.
We expect the Central Bank of the Republic of China (Taiwan) (CBC) to keep its discount rate on hold at 1.375% over the rest of 2018 due to rising global uncer-tainty stemming from trade tensions and still manageable inflation.
We expect Taiwan's fiscal policy to remain loose over the coming quarters as the government will likely look to increase expenditure growth to support its infra-structure and innovation initiatives, as well as social and defence spending.
The Taiwan dollar's trend and technical picture is bearish. In addition, rising negative sentiment due to rising trade uncertainty and a weakening Chinese yuan will likely put downside pressure on the TWD in the near-term.Major Forecast Changes
We have raised our 2018 real GDP growth forecast to 2.9% from 2.5% previously to reflect the growth outperformance in H118.
We now expect the CBC to remain on hold for the remainder of 2018, versus a 12.5bps hike to 1.50% previously.
We have revised down our 2018 average forecast for the Taiwan dollar weaker to TWD30.60/USD (versus TWD29.50/USD previously) to reflect the bearish trend and rising negative sentiment owing to rising trade tensions.
Downside Risks To Growth Forecast: Should we see a re-emergence of a crisis in the eurozone, a slower than expected US recovery or a downward spiral in China's economy, we can expect Taiwan to head into a sharp recession.