COUNTRY REPORT
Taiwan At a glance: 2001-02
OVERVIEW Political instability will remain a problem in 2001-02. Cross-Strait relations will be disrupted by domestic troubles. The economy is estimated to have grown by 6.5% in 2000 and is forecast to grow by an annual average of 3.9% a year in 2001-02. Consumer prices will rise by an average of 1.6% in 2001 and by 1.8% in 2002. The exchange rate will weaken substantially from NT$33.28:US$1 at the end of 2000 to NT$32.6:US$1 at the end of 2001 before strengthening in 2002. The current-account surplus will fall from an estimated US$9.6bn (3% of GDP) in 2000 to US$6.5bn (1.8% of GDP) in 2002. Key changes from last month Political outlook • The recent court ruling on Taiwan’s fourth nuclear power plant—resulting in a compromise solution between the ruling party and the opposition— has helped to raise the possibility of a slight easing in hostility. Economic policy outlook • The level of non-performing loans in the banking system is rising, and will continue to increase as economic growth slows and the government encourages policy-oriented loans. The Central Bank of China (Taiwan’s central bank) has reduced its support for the Taiwan dollar in the foreign- exchange markets, thereby allowing a competitive depreciation. With inflation subdued, further cuts in interest rates are increasingly likely. Economic forecast • The EIU has revised its forecast for GDP growth substantially downwards to 3.2% in 2001 and 4.6% in 2002. We have revised upwards our figures for current-account surpluses in 2001-02, following our expectation that the trade surplus will be higher than previously anticipated. Political uncertainty (and the resultant outflows of foreign portfolio investment), a preference by the authorities for a weaker currency to support slowing export growth and a likely cut in interest rates will prevent the Taiwan dollar from strengthening against the US dollar.
February 2001
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ISSN 0269-672X
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Printed and distributed by Redhouse Press Ltd, Unit 151, Dartford Trade Park, Dartford, Kent DA1 1QB, UK Taiwan 1
Contents
3 Summary
4 Political structure
5 Economic structure 5 Annual indicators 6 Quarterly indicators
7 Outlook for 2001-02 7 Political outlook 9 Economic policy outlook 10 Economic forecast
14 The political scene
19 Economic policy
23 The domestic economy 23 Output and demand 25 Employment, wages and prices 27 Financial indicators 29 Sectoral trends
30 Foreign trade and payments
List of tables
10 International assumptions summary 11 Forecast summary 12 Gross domestic product by expenditure 24 Growth in gross domestic product by expenditure 26 Prices 26 Unemployment 28 Money supply 29 Banking statistics 34 Balance of payments
List of figures
13 Gross domestic product 13 New Taiwan dollar real exchange rates 31 Foreign trade, 2000 32 Machinery and electronics equipment and exports to the US
EIU Country Report February 2001 © The Economist Intelligence Unit Limited 2001 . Taiwan 3
Summary
February 2001
Outlook for 2001-02 The recent resolution on the building of a fourth nuclear power station may help ease political tensions, but fundamental difference will remain between the government and the opposition. The economy will grow by just 3.2% in 2001 before rising by 4.6% in 2002. Consumer prices will rise by an annual average of 1.7% in 2001-02. The exchange rate will weaken to an annual average of NT$32.75:US$1 in 2001 and appreciate to an annual average of NT$31.46:US$1 in 2002. The current-account surplus will fall from an estimated US$9.6bn (3% of GDP) in 2000 to US$6.5bn (1.8% of GDP) in 2002.
The political scene Tensions have eased on the issue of the nuclear power plant, following a court ruling. The opposition and the cabinet have agreed to continue construction. Efforts to curb corruption have continued. Charges against a former Kuomintang (KMT) member, James Soong, have been dropped. Accusations against the president, Chen Shui-bian, of an extramarital affair have been retracted. The KMT is reorganising. Reunification has re-entered the KMT agenda and this may help Mr Chen benefit from his pro-Taiwan credentials. The opposition has boycotted a new task force. Mr Chen continues to seek co- operation with China. China has accepted mini-links as a right step.
Economic policy The budget was delayed. The working week has been reduced. There is support for financial sector consolidation, which appears to be taking place. Foreign investment is being encouraged. There are hopes that mergers will reduce over- banking. Problems of non-performing loans have been recognised and asset management companies have been set up. The Central Bank of China (Taiwan’s central bank) is following a cautious interest rate policy.
The domestic economy Private consumption and export growth have started to weaken. Fixed invest- ment growth has begun to slow. There is pessimism in the chip industry. Inflation has been on a rising trend. Unemployment has increased. The government has announced an employment-creation and training package. Narrow money supply growth has been soft. Political instability has affected investor sentiment. The stockmarket rallied in January. Manufacturing production has slowed, with the IT sector suffering the most.
Foreign trade and Foreign trade grew strongly in 2000. The US remains the largest export market. payments Trade with Asia has grown rapidly. Imports were also strong. The trade surplus narrowed. The current-account balance has deteriorated. Foreign-exchange reserves dipped in 2000.
Editors: Kilbinder Dosanjh (editor); Leo Abruzzese (consulting editor) Editorial closing date: February 12th 2001 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule
EIU Country Report February 2001 © The Economist Intelligence Unit Limited 2001 4 Taiwan
Political structure
Official name Republic of China
Form of state Representative democracy in the process of emerging from a one-party state
The executive The president nominates a prime minister to head the Executive Yuan (cabinet). The Executive Yuan has three arms: the ministries and commissions; the 19 subordinate administrative organs of state; and the Executive Yuan Council, the supreme policymaking body
Head of state President, directly elected for a term of four years
National legislature The 225-seat Legislative Yuan, formerly a rubber-stamp parliament, has in the past decade become a more powerful body. It has evolved into a genuine forum for debate and the development of policy, and has, at the expense of the National Assembly, assumed responsibility for initiating constitutional amendments
Local government A series of local councils operate but function mainly on an administrative level. The provincial government has been downgraded and the provincial assembly abolished
National elections December 1998 (local government and Legislative Yuan), March 2000 (presidential); next elections, 2001 (Legislative Yuan), 2004 (presidential)
National government The government is an informal coalition led by the Democratic Progressive Party (DPP); the party which governed Taiwan for 55 years until 2000, the Kuomintang (KMT), is still the largest party in the Legislative Yuan; the DPP has just 68 parliamentary seats
Main political organisations The KMT and the DPP are the main political parties. Other parties include the New Party and the People First Party (PFP)
Main members of the President Chen Shui-bian Executive Yuan Vice-president Annette Lu President, Executive Yuan (premier) Chang Chun-hsiung Vice-president, Executive Yuan (vice-premier) Lai In-jaw General-Secretary, Executive Yuan Wea Chi-lin
Presidents Control Yuan Cheng Shui-chi Examination Yuan Chiu Chuang-huan Judicial Yuan Shih Chi-yang Legislative Yuan Liu Sung-pan
Key ministers Economic affairs Lin Hsin-i Finance Yen Ching-chang Foreign affairs Tien Hung-mao Interior Chang Po-ya Justice Chen Ding-nan National defence Wu Shih-wen Transport & communications Yeh Chu-lang
Chairman of the Mainland Affairs Council Tsai Ing-wen
Central Bank governor Perng Fai-nan
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Economic structure
Annual indicators
1996 1997 1998 1999 2000a GDP at market prices (NT$ bn) 7,678.1 8,328.8 8,939.0 9,312.2 10,020.3 GDP (US$ bn) 279.6 290.2 267.2 288.6 321.8 Real GDP growth (%) 6.1 6.7 4.6 5.7 6.5 Consumer price inflation (av; %) 3.1 0.9 1.7 0.2 1.3 Population (m) 21.4 21.5 21.8 22.0 22.1 Exports of goods fob (US$ m) 115,462.0 121,725.0 110,178.0 121,119.0 148,090.0 Imports of goods fob (US$ m) 97,919.0 107,843.0 99,862.0 106,077.0 134,126.6 Current-account balance (US$ m) 10,923.0 7,051.0 3,437.0 8,384.0 9,644.8 Foreign-exchange reserves excl gold (US$ m) 88,038.0 83,502.0 90,341.0 106,200.0 109,386.0 Total external debt (US$ bn) 27.5 33.5 30.0 31.5a 40.0 Debt-service ratio, paid (%) 2.3 2.0 2.2a 2.1 a 2.2 Exchange rate (av) NT$:US$ 27.46 28.70 33.46 32.26 31.14
February 5th 2000 NT$32.31:US$1
Origins of gross domestic product 1999 % of total Components of gross domestic product 1999 % of total Agriculture, forestry & fishing 2.6 Private consumption 60.8 Mining 0.5 Public consumption 13.1 Manufacturing 26.4 Gross fixed investment 22.9 Utilities 2.2 Stockbuilding 1.3 Construction 3.9 Exports of goods & services 47.2 Transport, storage & communications 6.8 Imports of goods & services –45.4 Commerce 18.4 Total at market prices 100.0 Finance, insurance & real estate 20.6 Total at market prices incl others 100.0
Principal exports 1999 US$ bn Principal imports 1999 US$ bn Machinery & electrical equipment 64.2 Machinery & electrical equipment 50.6 Textiles & clothing 14.2 Chemicals 10.6 Base metals & metal manufactures 11.6 Base metals & products 9.5 Plastic & rubber articles 7.5 Precision instruments, clocks & watches 6.2 Vehicles, aircraft & ships 5.2 Crude petroleum 4.6 Chemicals 3.3 Vehicles, aircraft & ships 4.0 Animals & animal products 1.1 Textile products 2.8
Main destinations of exports 1999 % of total Main origins of imports 1999 % of total US 25.4 Japan 27.6 Hong Kong 21.4 US 17.8 Japan 9.8 South Korea 6.5 Netherlands 3.5 Germany 4.8 Germany 3.4 Malaysia 3.5 UK 3.1 Australia 2.7 Singapore 3.1 Indonesia 2.1 a EIU estimates.
EIU Country Report February 2001 © The Economist Intelligence Unit Limited 2001 6 Taiwan
Quarterly indicators
1999 2000 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr Output GDP at 1996 prices (NT$ bn) 2,155 2,231 2,288 2,355 2,326 2,353 2,440 n/a % change, year on year 4.1 6.4 4.7 6.4 7.9 5.4 6.6 n/a Industrial production index (1996=100) 108.6 120.9 118.5 127.2 120.9 129.9 131.3 n/a % change, year on year 6.1 9.6 5.0 10.2 11.3 7.4 10.8 n/a Light industry (% change, year on year) –1.0 2.1 –2.9 3.8 4.2 –2.0 1.1 n/a Heavy industry (% change, year on year) 6.4 13.6 9.2 13.7 17.0 11.9 15.4 n/a Financial indicators Exchange rate NT$:US$ (av) 32.62 32.71 32.02 31.70 30.74 30.68 31.06 32.45 NT$:US$ (end-period) 33.15 32.30 31.78 31.35 30.43 30.80 31.33 33.08 M1 (end-period; NT$ bn) 3,915 4,236 4,176 4,507 4,745 4,534 4,283 n/a % change, year on year 5.1 12.8 16.2 16.9 21.2 7.0 2.6 n/a M2 (end-period; NT$ bn) 16,782 17,103 17,173 17,745 18,208 18,164 18,218 n/a % change, year on year 8.6 9.7 7.9 8.3 8.5 6.2 6.1 n/a TSE weighted stockmarket index (end-period; Jun 30th 1966=100) 6,881.7 8,467.4 7,598.8 8,448.8 9,855.0 8,265.1 6,432.4 4,743.9 % change, year on year –24.3 12.2 11.2 31.6 43.2 –2.4 –15.4 –43.9 Employment, wages and prices Employment (‘000) 9,321 9,345 9,406 9,467 9,443 9,469 9,516 n/a % change, year on year 0.3 0.8 1.4 1.5 1.3 1.3 1.2 n/a Unemployment rate (% of the labour force) 2.8 2.8 3.1 3.0 2.8 2.8 3.1 3.2 Average nominal monthly wages (NT$) 49,907 37,170 37,952 38,567 52,097 38,018 38,464 n/a % change, year on year –0.4 3.1 4.6 5.6 4.4 2.3 1.3 n/a Consumer prices (1996=100) 102.3 102.3 103.0 103.6 103.2 103.8 104.1 105.3 % change, year on year 0.7 –0.1 0.4 –0.1 0.8 1.4 1.2 1.7 Wholesale prices (1996=100) 95.0 94.9 95.6 96.8 95.9 96.8 97.7 n/a % change, year on yea –8.0 –6.1 –4.7 0.9 0.9 2.0 2.2 n/a Sectoral trends Manufacturing index (1996=100) % change, year on year 4.3 10.3 11.8 11.1 13.5 8.3 5.7 n/a Foreign trade (NT$ bn) Exports fob 906 969 968 1,078 1,010 1,159 1,220 1,248 Imports fob –820 –852 –890 –1,006 –970 –1,117 –1,160 1,124 Trade balance 86 116 78 72 40 42 60 124 Foreign payments (US$ m) Merchandise trade balance 3,618 4,224 3,840 3,360 2,493 2,750 3,521 n/a Services balance –1,336 –1,893 –1,916 –2,001 –2,012 –1,589 –1,003 n/a Income balance 832 313 425 1,101 1,082 844 949 n/a Current-account balance 2,711 2,118 1,471 2,084 1,119 1,411 2,866 n/a Reserves excl gold (end-period) 93,005 97,704 101,652 106,200 113,002 113,830 111,667 n/a Sources: Department of Statistics, Ministry of Economic Affairs; Council for Economic Planning & Development, Industry of Free China; Central Bank of China, Financial Statistics; National Statistics of Taiwan, Monthly Bulletin of Statistics.
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Outlook for 2001-02
Political outlook
Domestic politics The domestic political hostility that has characterised Taiwan’s political scene since the current president, Chen Shui-bian, took office in May 2000 may lessen in the next few months. This is because of the resolution of the highly divisive dispute that was triggered by the government’s decision in October to halt construction of the island’s fourth nuclear plant. Neither Mr Chen’s ruling Democratic Progressive Party (DPP), nor the main opposition Kuomintang (KMT) gained in popularity as a result of their handling of this issue.
The dispute was resolved in mid-February, with the DPP accepting a proposal similar to the one put forward by the KMT in October (namely, construction of the fourth plant, but premature decommissioning of the existing three). This suggests that the past three months of turmoil was completely avoidable. (However, the Executive Yuan added other conditions, including the possibility of an energy bill and further discussions on a bill to allow referendums to be held on contentious issues: the latter would, in fact, lead to further tensions between the branches of government.) At the same time, efforts by the KMT- led opposition alliance (which also includes the People First Party (PFP) and the New Party) to force Mr Chen from office over the issue were not viewed favourably by the public. With a Legislative Yuan election due at the end of this year, both sides are likely to want to improve their public images during the coming months.
Despite the fact that the nuclear issue has resulted in the legislature allowing the executive branch to open dialogue—the prime minister, Chang Chun- hsiung, had been barred from entering into entering the legislature since October—the political scene in 2001 is unlikely to be stable. Although perhaps wanting to appear more mature, Taiwan’s four political parties are unlikely in the next few months to pass up opportunities to score points off each other. More importantly, the consequences of last year’s presidential election, particularly the defeat inflicted on the KMT, have not yet been felt fully. The former ruling party is still adjusting to its changed circumstances, in which it has lost both power and—in Lee Teng-hui, Taiwan’s president and chairman of the KMT from 1988 to 2000—a previously dominant leader. Initial indications suggest that the KMT is reacting to its humiliating defeat last March by repudiating Mr Lee’s Taiwan-centric political line. Such a shift could become more deeply engrained with the election of a new KMT party chairman, which is due to take place in March this year. Such a development has perhaps been made more likely by the return during the party’s recent re-registration drive of several high-profile figures forced out by Mr Lee’s “Taiwanisation” policies. (In March the party chairman will for the first time be elected through a ballot of all party members.)
Approval in March for the stronger pro-unification line recently adopted by the KMT could have far-reaching implications for politics in Taiwan. For one thing, it would probably lead to even closer co-operation between the KMT and the
EIU Country Report February 2001 © The Economist Intelligence Unit Limited 2001 8 Taiwan
other two opposition parties (both of which were formed as breakaway groups from the KMT during Mr Lee’s time in office and are more open to the idea of reunification). It could also produce a wider realignment of politics in Taiwan by forcing supporters of Mr Lee within the KMT to leave in search of a new political home. Such a scenario is not far-fetched. Some prominent KMT politicians refused to sign up during the party’s recent re-registration drive, complaining that the new leadership was betraying Mr Lee’s policies. Further, in December one of the former president’s closet allies, Liu Tai-ying, expressed the hope that a new political party could be formed to represent “mainstream opinion”—by which he would seem to be referring to the Taiwan-centric stance of the pro-Lee Teng-hui wing of the KMT, rather than the pro- unification line of the current opposition alliance.
Mr Chen, who, with his strong pro-Taiwan views, is viewed by many as a natural political heir to Mr Lee, would obviously hope to gain from such a development. In fact, with the DPP highly unlikely to win a legislative majority in the forthcoming election, a realignment of political parties is Mr Chen’s best hope for gaining the power to rule effectively during the remainder of his four-year term.
International relations Without such a strengthening of his domestic political standing, it seems unlikely that the current president will be able to secure a resumption of high- level cross-Strait contact. In recent months the verbal and tangible gestures of cross-Strait goodwill made by Mr Chen have been received only coolly by China’s government. It appears that the authorities in Beijing will only be satisfied by a clear statement from Mr Chen that “Taiwan is part of China”— the “One China” principle. The mainland government has good reasons for being obstinate. For one thing, it is clear that Taiwan will become more closely integrated with China even if the current impasse in cross-Strait negotiations continues: Mr Chen’s government has already loosened restrictions on cross- Strait economic ties, and business pressure in Taiwan for an opening of direct cross-Strait transport links is becoming irresistible. In addition, the authorities in Beijing know that, aside from a domestic political realignment, a break- through in cross-Strait relations is one of the few developments that could help Mr Chen consolidate his power in Taiwan. But China’s government has little interest in helping to strengthen the position of a leader who represents an openly pro-independence party.
Mr Chen will hope—and the leadership in China fear—that the recent change of government in the US will work to Taiwan’s advantage. The instincts of the new US president, George W Bush, certainly seem more supportive of Taiwan than were those of his predecessor, Bill Clinton. But any change in US policy is likely to be one of style than substance. Policymakers in Washington are expected to opt for restraint over Taiwan in order to wrest concessions from China on the many other issues that bedevil Sino-US relations.
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Economic policy outlook
Policy trends Economic policy during the forecast period will be dominated by three trends: the use of fiscal and monetary policy to boost slowing GDP growth; efforts to restructure Taiwan’s financial sector; and growing economic integration between Taiwan and mainland China. While the recent troubled passage through the Legislative Yuan of the 2001 budget (January-December) indicates that the conduct of fiscal policy is likely to be affected by infighting among Taiwan’s political parties, other developments suggest that reforms of the financial sector and measures aimed at strengthening cross-Strait economic ties could enjoy bipartisan support. In November, for example, legislation was passed to encourage the consolidation of Taiwan’s overcrowded banking sector. In addition, there is a growing recognition among all political parties in Taiwan that the establishment of direct cross-Strait links is now a matter of when rather than if.
Still, even in these two areas that enjoy bipartisan support, progress could be slow in 2001-02. The government has recently appeared keen to oversee a consolidation among state-linked banks, but enthusiasm for the redundancies that would follow such a restructuring may wane as GDP growth slows and the unemployment rate rises further. Merger costs, both financial and political, may also delay mergers among private-sector banks. Mr Chen has signalled that, as far as cross-Strait economic links are concerned, his government will mollify the “less haste, be patient” stance of his predecessor in favour of “proactive openness and effective management”, but nevertheless the opening of direct transport and communication links will progress slowly—the establishment of the so-called three links would after all only occur on the basis of cross-Strait negotiations.
Fiscal policy The government deficit is likely to remain large throughout the forecast period. The Legislative Yuan has already pushed through an expansionary budget for the 2001 fiscal year (January-December), and during 2001 the government is likely to seek support for measures to boost spending in order to support slowing GDP growth. At the same time ,the weakening economy and likely opposition in the Legislative Yuan will make officials reluctant throughout the next two years to push for changes to widen Taiwan’s dwindling tax base. The fiscal deficit, estimated to be 4.8% of GDP in 2000, is consequently likely to rise to 5.9% in 2001 before falling to 5.1% in 2002.
Monetary policy The government has embarked on a policy of monetary easing to stimulate the economy, which it fears may be slowing too quickly. The Central Bank of China (CBC, Taiwan’s central bank), which had been aggressively intervening in the foreign- exchange markets earlier in 2000 to support the Taiwan dollar, dramatically curtailed its involvement in mid-October. This suggests that the CBC is willing to let the currency weaken. The benchmark rediscount rate was cut in early January by 12.5 basis points to 4.63%, following a cut in interest rates by the Federal Reserve in the US. Further monetary easing is likely to occur in line with cuts in US interest rates,
EIU Country Forecast February 2001 © The Economist Intelligence Unit Limited 2001 10 Taiwan
although the CBC’s ability to reduce domestic rates will be restricted by a continued weakness of the Taiwan dollar.
Economic forecast
International assumptions The EIU expects GDP growth in the US (which accounts for around a quarter of the demand for Taiwan’s exports) to decelerate sharply from 5% in 2000 to 1.4% in 2001, although we have revised our forecast upwards to 2.9% for 2002. This downturn is also likely to impact on growth in the Association of South-East Asian Nations and Japan—other major export markets for Taiwan. Having risen sharply to an estimated average of US$28.37/barrel in 2000, oil prices (Brent) are likely to ease in 2001-02, although aggregate non-oil commodity prices will increase. The effect of weaker export growth will have major direct and indirect effects on the Taiwan economy in 2001 and a weak recovery is expected in 2002 in line with a recovery in world GDP and trade growth.
International assumptions summary (% unless otherwise indicated) 1999 2000 2001 2002 Real GDP growth World 3.5 4.9 3.3 4.0 OECD 3.0 4.0 2.0 2.7 US 4.2 5.0 1.4 2.9 Exchange rates (av) ¥:US$ 113.9 107.8 119.5 120.0 US$:¤ 1.07 0.92 1.00 1.09 SDR:US$ 0.731 0.758 0.755 0.731 Financial indicators ¥ 2-month private bill rate 0.27 0.24 0.50 0.50 US$ 3-month commercial paper rate 5.18 6.32 4.89 5.39 Commodity prices Oil (Brent; US$/b) 17.9 28.4 23.3 23.1 Gold (US$/troy oz) 278.8 283.2 265.4 270.0 Food, feedstuffs & beverages (% change in US$ terms) –18.6 –6.2 8.9 16.3 Industrial raw materials (% change in US$ terms) –4.2 14.6 0.3 13.4 Note. Regional aggregate GDP growth rates weighted using purchasing power parity exchange rates. Economic growth We estimate that real GDP grew by 6.5% in 2000 and forecasts annual average growth of just 3.9% a year in 2001-02. We have lowered our forecast because of declining consumer and investor sentiment, which have resulted from domestic political instability, and because of the increasing likelihood of a sharper than expected downturn in global demand for Taiwan’s exports, especially electronics.
The uncertain political environment has already affected consumer spending in Taiwan. Private consumption growth has been affected by weak share prices, and despite a slight improvement in stock prices since mid-January—as the possibility of an agreement on restarting the construction of the fourth nuclear power plant increased—the stockmarket remains depressed. This has depressed
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spending, as a large proportion of Taiwan households invest in the local stockmarket. Sentiment is likely to be undermined further by a slowing economy and a subsequent rise in unemployment. Private consumption is expected to grow by an average of just 3.5% year on year in 2001, before strengthening slightly to 5% in 2002.
Forecast summary (% unless otherwise indicated) 1999a 2000b 2001c 2002c Real GDP growth 5.7 6.5 3.2 4.6 Industrial production growth 7.7 8.0 7.5 7.3 Gross fixed investment growth 2.2 9.5 2.8 7.7 Unemployment rate (av) 2.9 3.0 3.2 3.1 Consumer price inflation Average 0.2 1.3 1.6 1.8 Year-end 0.1 1.7 2.0 2.0 Short-term interbank rate 7.7 7.9 7.7 7.9 Government balance (% of GDP) –5.9 –4.8 –5.9 –5.1 Exports of goods fob (US$ bn) 121.1 148.1 152.7 167.0 Imports of goods fob (US$ bn) 106.1 134.1 141.1 158.2 Current-account balance (US$ bn)d 8.4 9.6 10.0 6.5 % of GDP 2.9 3.0 3.1 1.8 External debt (year-end; US$ bn) 31.5b 40.0 43.8 49.8 Exchange rates NT$:US$ (av) 32.26 31.14 32.75 31.46 NT$:¥100 (av) 28.32 28.89 27.40 26.22 NT$:¤ (av) 34.37 28.77 32.58 34.29 NT$:SDR (av) 44.12 41.07 43.36 43.02
a Actual. b EIU estimates. c EIU forecasts. d Quarterly data may not add to annual totals owing to revisions.
Weak share prices reduce the scope for companies to raise equity finance. This will create pressures for weaker companies, which may find that banks are restricting access to credit because of rising levels of non-performing loans. Given the depressed outlook for technology exports in 2001, hi-tech firms are expected to defer plans to increase capacity and to upgrade their production facilities (in order to supply higher-specification products) until 2002. Forecasters in the semi-conductor industry have revised downwards sales growth in 2001 to around 10%, substantially below the 37% registered in 2000. This weak outlook in one of Taiwan’s main drivers of investment, coupled with the political uncertainty currently afflicting Taiwan, is still likely to affect investor confidence adversely. (In addition, investment will be further undermined by the longer-term trend of a diversion of production facilities onto mainland China.) These factors will outweigh the effects of the government’s stimulus package and, as a result, investment growth will fall to 2.8% in 2001, before accelerating to 7.7% a year in 2002 on the assumption that growth in world GDP and demand for electronics recover.
The likelihood of weaker domestic demand and a sharp deterioration in export growth will dampen the growth in imports of goods and services in 2001-02, as
EIU Country Forecast February 2001 © The Economist Intelligence Unit Limited 2001 12 Taiwan
a large proportion of import growth is generated by demand for materials used in export products and by demand for capital goods. These factors are expected to outweigh the impact of market-opening measures that will be implemented when Taiwan joins the World Trade Organisation, probably in 2001.
Gross domestic product by expenditure (NT$ bn at constant 1991 prices; % change year on year in brackets unless otherwise indicated) 1999a 2000b 2001c 2002c Private consumption 5,484 5,802 6,005 6,305 (5.7) (5.8) (3.5) (5.0) Public consumption 1,134 1,152 1,193 1,234 (–6.3) (1.6) (3.5) (3.5) Gross fixed investment 2,111 2,310 2,375 2,558 (2.2) (9.5) (2.8) (7.7) Final domestic demand 8,729 9,265 9,572 10,097 (–3.2) (–5.4) (–3.3) (–5.3) Stockbuilding 134.8 75.0 75.0 65.0 (0.1)d (–0.7)d (0.0)d (–0.1)d Total domestic demand 8,864 9,340 9,647 10,162 (3.2) (5.4) (3.3) (5.3) Exports of goods & services 4,456 5,250 5,402 5,717 (9.6) (17.8) (2.9) (5.8) Imports of goods & services –4,269 –4,947 –5,096 –5,463 (4.4) (15.9) (3.0) (7.2) Foreign balance 187 303 307 254 (0.3)d (–2.1)d (–3.1)d (–3.1)d GDP 9,051 9,642 9,954 10,417 (5.7) (6.5) (3.2) (4.6)
a Actual. b EIU estimates. c EIU forecasts. d Contribution to real GDP growth.
Inflation There are indications that consumer prices at the end of 2000 were on a rising trend, with year-on-year prices in December rising by 1.7% compared with around 1% in the first half of the year; the average increase for the whole year is estimated at 1.3%. However, the rise in the latter part of 2000 largely reflects seasonal factors and despite a year-on-year increase of 2.4% in January 2001, the EIU expects prices to rise by an average of just 1.6% in 2001 and by 1.8% in 2002. Domestic demand is expected to be weak in 2001-02. Consumer price inflation will also be restrained during the forecast period by official attempts to enhance the efficiency of the domestic economy, the liberalisation of various sectors and by lower oil prices.
Exchange rates The NT$:US$ exchange rate began depreciating in late July, and the pace accelerated in mid-October when the CBC appeared to pull back from active intervention in support of the currency. Despite a strengthening of the currency following a doubling, from 5% to 10%, of the reserve ratio on foreign currency deposits at the beginning of 2001 (in an effort to reduce the attractiveness of holding US dollars), this is likely to prove a temporary respite. If, as now seems likely, the CBC favours a weaker currency as a stimulus to export growth, the Taiwan dollar is likely to continue falling in value. As a result, we are forecasting an average exchange rate of NT$32.75:US$1 in 2001.
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The Taiwan dollar has also been dragged down by capital outflows triggered by domestic political instability. A further cut in local interest rates would also weigh on the local currency, although we expect the interest rate differential with the US to narrow, as Taiwan is not expected to reduce interest rates as aggressively as the US Federal Reserve. We would expect the Taiwan dollar to strengthen in line with faster GDP growth in 2002, and as the local political environment stabilises after legislative elections in late 2001. In addition, we assume that the deterioration in the local stock and money markets is a result of overshooting, and that markets will eventually move in line with fundamentals.
External sector The current-account surplus is estimated to have risen from US$8.4bn (2.9% of GDP) in 1999 to US$9.6bn (3% of GDP) in 2000; it was higher than expected largely because of a lower import bill. Growth in the volume of merchandise exports is expected to decline sharply in 2001 as growth slows in Taiwan’s major export markets. (Export earnings, however, will rise more strongly, as prices are expected to continue increasing, albeit at a slower pace than in 2000.) However, given an expected decline in investment, in private consumption and in raw materials demand, our downgrade for growth in imports of goods (in both volume and value terms) is more severe during the same period. As a result, despite the continued implementation of market- opening measures associated with Taiwan’s likely membership of the World Trade Organisation, the merchandise trade surplus will narrow more slowly than previously forecast. As the world and domestic economies begin to recover in 2002, import growth will return to its trend of growing considerably faster than export growth. The income surplus will expand throughout the outlook period, partly because firms will continue to move lower-end manufacturing offshore in an attempt to avoid rising domestic costs of production. Nevertheless, largely as a result of the falling trade component surplus, the current-account surplus will fall to around 1.8% of GDP by 2002.
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The political scene
Tensions have eased on the A resolution to the crisis created by the decision on October 27th 2000 of the nuclear issue Executive Yuan (cabinet), which is led by the Democratic Progressive Party (DPP), to terminate construction of Taiwan’s fourth nuclear plant, was found in mid-February. The resolution was a victory for the opposition Kuomintang (KMT). But while support for construction of the fourth nuclear plant among Taiwan’s three opposition parties (the former ruling KMT, the People First Party (PFP) and the New Party) had not waned, they did appear willing to give some ground to the administration’s strongly anti-nuclear stance. On January 31st a resolution was approved by the opposition-dominated Legislative Yuan which, while reaffirming support for construction of the fourth nuclear plant, also stated that the building of a nuclear-free Taiwan was an ultimate goal. The Legislative Yuan compromised by agreeing to discuss the early decommission- ing of the island’s three existing nuclear plants under an energy bill, or by legislating to institutionalise the use of referendums in Taiwan; but resuming construction is seen as a defeat for the executive and agreements on further discussion on the future of nuclear power usage are just a face-saving exercise.
The court has ruled on the These events followed a ruling issued by Taiwan’s highest court, the Council of nuclear plant issue Grand Justices, on the legality of the government’s October decision. The opposition parties had claimed that, as the budget for the nuclear plant had been approved by the legislature in 1994, the Executive Yuan was obliged to follow through with the project; the October decision was therefore illegal, and had to be reversed. Officials, on the other hand, argued that the administration has the right to decide whether or not to spend budgets approved by the Legislative Yuan.
Although keenly awaited, the court’s ruling on January 15th, which had been requested by the Executive Yuan, was initially greeted with some disappoint- ment, as the intervention of the court hardly seemed decisive. While arguing that the administration’s decision was procedurally flawed, the judges did not rule that it was unconstitutional; for good measure, they said that the Legis- lative Yuan, by refusing to allow the prime minister, Chang Chun-hsiung, to issue a report explaining his cabinet’s October decision, had also been in the wrong. The court ruled that the Legislative Yuan should first listen to Mr Chang, and only then decide on whether to continue construction of the plant. If after hearing from the prime minister the Legislative Yuan still op- posed the administration’s plans—as seemed inevitable—the issue should then be resolved through negotiations between the two branches of government.
The opposition and cabinet At first, given that the two sides had strong, predetermined and opposing views may compromise on the issue, it seemed unlikely the court’s ruling offered an immediate way out of the impasse. The Legislative Yuan’s resolution on January 31st did indeed seem to produce an atmosphere in which both sides were willing to compromise over the issue. Having said this, the agreement between the Legislative and Executive Yuans may not be sufficient to end the controversy
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surrounding construction of the fourth nuclear plant. The decision by the government to restart construction has disappointed many in the DPP: opposition to nuclear power is enshrined in the party’s founding platform. Cancelling the fourth nuclear plant was one of the campaign pledges of Taiwan’s current DPP president, Chen Shui-bian, and many DPP politicians have openly objected to resuming construction. Mr Chen has hopes that he can convince DPP members that a solution to this dispute will now allow the cabinet to concentrate on other issues and that the possibility of greater stability will help the party ahead of a parliamentary election (due at the end of the year). Whatever the outcome of the current crisis, the future of the plant would again become a major national political issue in the unlikely event that the DPP was to win a majority of legislative seats in the forthcoming election.
Corruption reduction Although the construction of the fourth nuclear plant has disappointed many, efforts have continued Mr Chen can offer DPP supporters some consolation in that in other areas his government does seem to be achieving progress, most notably in fulfilling his campaign pledge to strive to stamp out corruption. As opposed to the debate over nuclear power, the opposition parties have little power to frustrate the DPP’s ambitions in this area, as the government’s anti-corruption drive is less reliant on the creation of new laws than on the stricter enforcement of existing statutes. In recent months such enforcement has resulted in a string of prominent politicians being detained on corruption charges. For example, the commissioner of Nantou County, Peng Pai-hsien, was charged in January with misappropriating more than NT$13m (US$400,000) in relief money related to the devastating earthquake that struck Taiwan in September 1999 (Mr Peng was formerly a member of the DPP, but left the party to contest the Nantou County commissioner election as an independent). In December 156 people associated with the KMT were charged with receiving or giving bribes during the March 2000 presidential election. On December 29th a former KMT legislator, Shih Tai-sheng, was sentenced to ten years in jail for accepting money in exchange for granting favours during his time in office (Mr Shih immediately announced he would appeal this conviction); and the DPP mayor of Tainan, George Chang, has been indicted for allegedly covering up the corrupt practices of subordinates.
Charges against James In another prominent case, a court decided in January not to charge the Soong have been dropped current PFP chairman, James Soong, on embezzlement charges. Mr Soong was previously a senior KMT official, but in the late 1990s fell out with the former KMT chairman, Lee Teng-hui. After deciding to stand as an independent in last year’s presidential election, Mr Soong was expelled from the KMT, and subsequently accused by his former colleagues of embezzling up to NT$360m during his time as secretary-general of the party. In January it was ruled that although Mr Soong had indeed deposited large amounts of KMT money in his personal accounts, the funds were appropriated to fund KMT projects, and so he had not betrayed the party’s trust nor engaged in illegal actions. This decision no doubt disappointed many in the DPP (and those close to Mr Lee in the KMT). Mr Soong, after all, ran Mr Chen a very close second in the presidential election, and remains both one of the island’s most popular politicians and an important rival of Mr Chen.
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Accusations of an affair Shortly after the controversy over the fourth nuclear plant arose, allegations have been retracted were made that the married Mr Chen was having an affair with one of his aides. These allegations were vigorously denied, and a subsequent investigation by a well-known weekly magazine, The Journalist, found that they were indeed without basis. The magazine did not kill the controversy, though. Instead, it claimed that the affair rumours were started by none other than Mr Chen’s vice-president, Annette Lu. Ms Lu rejected these claims, and subsequently decided to sue The Journalist for defamation.
The vice-president is suing Although the trial is being held behind closed doors, the first hearing on January 12th was accompanied by frenzied media interest. The Journalist claimed that Ms Lu had made the affair allegations in a telephone conversation with its editor-in-chief, Lee Ming-chun. When records of Ms Lu’s telephone calls suggested no such conversation had been held, Mr Lee claimed that the records has been tampered with; Mr Lee also disputed Ms Lu’s assertion that they did not know each other, saying that they had been students at the US’s Harvard University at the same time. Following this first hearing, the judge postponed proceedings until February, after the Chinese New Year holiday.
The KMT is reorganising The KMT has been undergoing a period of adjustment in recent months. This is partly a natural reaction to the victory of Mr Chen and the DPP in the election last March. However, it is not just related to the loss of the presidency per se, which assigned the KMT to opposition for the first time since it fled to Taiwan in 1949. It is also linked to the humiliating nature of the March 2000 defeat: the KMT candidate in the poll (who subsequently became party chair- man), Lien Chan, slumped to third place, winning just 23.1% of the vote. The comprehensiveness of this defeat led many loyalists to promote a radical restructuring of the party. Some reforms were pushed through at an extra- ordinary conference in June last year (August 2000, pages 15-16), and on September 1st the KMT began a drive to re-register party members. The re- registration period was initially scheduled to last until December 31st, but faced with a disappointing response the finishing date was put back by a month. By the new January 31st deadline, the party officially had a member- ship of more than 900,000 people. Although small compared with the 2.5m members previously claimed by the party, KMT officials expressed satisfaction, saying that 100,000 new members had been gained during the re-registration process.
The result of this re-registration process will have an important effect on the future development of the party. This is because the March 2001 choice of party chairman will be based on a ballot of all these people, whereas previously the party chairman was chosen by just 2,000 party officials. This leads to the second reason for the KMT’s recent period of readjustment: a reaction to the end of the leadership of Mr Lee. Mr Lien’s predecessor was a towering personality in the KMT, and during his 21-year reign as chairman oversaw a “Taiwanisation” of the previously mainlander-dominated party. This involved a promotion of officials born in Taiwan: Mr Lee himself was the first native- born chairman of the KMT. Mr Lee also reoriented the KMT to a strongly “Taiwan first” policy stance. The KMT’s official desire for unification with the
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mainland became less and less frequently espoused, and appeared more or less abandoned by the time Mr Lee announced his controversial “state-to-state” definition of cross-Strait relations in June 1999. The result of these changes was that considerable numbers of mainlanders left the KMT, some to establish new political groups such as the New Party and PFP, leaving the then ruling party apparently dominated by a Taiwan-centric group of Lee Teng-hui supporters.
Reunification has re- Events since Mr Lee was forced from the chairmanship in March last year have entered the KMT agenda suggested that the changes he instituted were not as far-reaching as they once seemed (Mr Lee was forced to resign to take responsibility for the KMT’s appalling performance in the election). During Taiwan’s recent political wrangling, Mr Lien—at least publicly—worked closely with Mr Lee’s former adversaries in the New Party and PFP. Open support for unification by KMT members is also no longer frowned on: on January 4th Mr Lien launched a book promoting the establishment of a cross-Strait confederation, while during the KMT’s recent re-registration drive several high-profile politicians who had left the party because of Mr Lee’s “Taiwanisation” policies returned to the fold. Most notable was the re-registration of a former president of the Control Yuan, Chen Li-an, who strongly supports unification with China and who was expelled from the KMT when he ran against Mr Lee in the 1996 presidential election. At the same time, some prominent former KMT members—such as a legislator, Huang Chao-shun, a former minister of the interior, Huang Chu- wen, and a former party spokesman, Huang Hui-chen—failed to re-register. Huang Chu-wen was quoted as complaining that “the party is betraying Lee Teng-hui's line”.
If the rejection of Mr Lee’s mainland stance that has seemed to be occurring at senior levels is reflected in the views of the ordinary party members who have- registered, it is possible that a strongly pro-unification KMT leadership will be elected in March. Such a development could have important consequences for politics in Taiwan. For one thing, it would open up the possibility of even closer co-operation between the KMT, the PFP and the New Party. But it may also prompt a larger exodus of Mr Lee’s supporters from the KMT in search of a more suitable political home. That such a realignment is possible was suggested by recent comments made by a close ally of Mr Lee, the former head of the KMT’s huge business empire, Liu Tai-ying. In December Mr Liu said that he hoped a new political party could form in Taiwan that could command a majority in the Legislative Yuan, and represent “mainstream opinion”—by which he would seem to be referring to the Taiwan-centric stance of the DPP and pro-Lee Teng-hui wing of the KMT, rather than the pro-unification line of the current opposition alliance.
Mr Chen may benefit from As the most prominent Taiwan-centric leader, such a realignment would his Taiwan credentials benefit Mr Chen. Indeed, such a shift in domestic politics, by strengthening Mr Chen’s domestic authority, would seem one of the few ways in which he is going to be able to secure an improvement in Taiwan’s official relationship with mainland China. Having won just 39.3% of the vote in the presidential election and with his party controlling only a minority of seats in the Legislative Yuan, Mr Chen’s authority was always going to be limited. But since
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taking office his position has been weakened further by the controversy over the fourth nuclear plant and a sharp slowing of domestic economic growth. Announcing a breakthrough in relations with China would boost Mr Chen’s popularity and produce an improvement in consumer and investor confidence.
The opposition has In an effort to strengthen his bargaining position with China, after his election boycotted a new task force Mr Chen organised a task-force on cross-Strait relations. The government intended the group to include representatives of all the island’s main political parties, so that its recommendations would reflect a consensus of opinion within Taiwan. But the task-force, headed by the respected head of Academia Sinica, Lee Yuan-tseh, was boycotted by the KMT and PFP, who said that such a body was not needed as a National Unification Council already existed (the New Party withdrew from Mr Lee’s group in November, claiming disappointment with the lack of progress). Nevertheless, the group went ahead with its deliberations, and on November 26th suggested that the constitution of the Republic of China (ROC, Taiwan’s official name) offered a way out of the impasse in cross-Strait relations. The constitution is based on ROC having sovereignty over all mainland China and Taiwan. By basing any negotiating stance on this constitution, therefore, the group suggested that the government could abide by China’s cherished “One China” principle without having to actively express support for it.
Mr Chen continues to seek Mr Chen welcomed this recommendation. However, in his New Year’s Eve co-operation with China address the president went even further to accommodate China’s desire for unification, talking of the possibility of future “political integration” between the two sides of the Taiwan Strait. In addition, his government has in recent months implemented several measures aimed at improving cross-Strait relations in a more tangible way. In November officials said that they would permit mainland journalists easier access to Taiwan. In early December the Legislative Yuan eased restrictions on mainland Chinese citizens visiting Taiwan; officials have indicated that such tourist trips could be permitted from as early as June 2001. Most significant of all, from January 1st the government started to allow direct passage between Taiwan’s two offshore islands of Kinmen and Matsu and mainland China—relaxing for the first time in 50 years the official ban on direct cross-Strait communication. The government has also given permission to several businessmen, resident on Taiwan proper, to travel to the mainland directly—under the mini-links formula only residents of the two outlying islands were given permission—and it has recently hinted that direct links could be established ahead of World Trade Organisation entry (on the condition that these were done on an equal basis). Consultations have also been held with regard to the previous administration’s “no haste, go slow” policy, which bans Taiwanese companies from investing in strategic sectors or investing above US$50m dollars on the mainland. As a result, there are hints that these rules will be eased.
China has accepted mini- China’s leaders have only begrudgingly accepted these efforts to strengthen links as a right step economic links across the Taiwan Strait; and they have been less receptive to Mr Chen’s efforts to restart contacts between the two governments. This reluctance actively to promote official links is partly because of the tangible
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measures the Taiwan government has already implemented: China can be confident that cross-Strait economic integration will continue apace even in the absence of an improvement in political ties. It is also because of the very importance to Mr Chen of securing an improvement in cross-Strait relations. China’s government has little interest in helping to strengthen the position of a leader who represents an openly pro-independence party.
The authorities in Beijing are doing what they can to weaken Mr Chen’s domestic standing even further. They have been helped in this by the willingness of Taiwan’s opposition parties to visit the mainland. Now out of power, the KMT has been most enthusiastic in this regard. In November a KMT vice-chairman, Wu Po-hsiung, became the most senior KMT official to visit the mainland since the ending of the Chinese civil war in 1949. During his visit Mr Wu held talks with China’s influential vice-premier, Qian Qichen. In early January the KMT sent another delegation to China, this time accompanied by members of the New Party. Despite this lukewarm reaction, the first Chinese ship arrived on the island of Quemoy at the beginning of February and Mr Qian said that China would welcome links if they were considered an internal matter, a condition unacceptable to most members of the DPP.
Economic policy
The budget was delayed The government’s 2001 (January-December) budget clearly suffered as a result of the hostility that has characterised Taiwan’s political scene since a Democratic Progressive Party (DPP) president, Chen Shui-bian, took power in May last year. For one thing, approval of the budget was a long time in coming. The legislature, still dominated by the former ruling party, the Kuomintang (KMT), took some time even to agree to consider the budget when it was first presented by the government of the then prime minister, Tang Fei, back in September. Mr Tang resigned in early October and was replaced by Chang Chun-hsiung, who withdrew his predecessor’s spending plans from the legislature in order to revise them. Mr Chang’s cabinet approved a new budget on October 13th, but, largely as a result of the furore created by the government’s decision in late October to terminate construction of the fourth nuclear plant (November 2000, pages 16-17), the legislature did not approve the budget until January 4th, four days after the new fiscal year had begun.
The late approval of the budget did not result in a government shutdown: unlike in the US, in the absence of legislative backing for new spending plans, Taiwan’s government can claim the same budget approved for the previous year. The approval process did, however, result in important changes being made to the administration’s spending plans. In particular, the KMT-led opposition alliance (which, in addition to the former ruling KMT, includes representatives of the People First Party (PFP) and the New Party) reduced total government spending from NT$1.61trn (US$50bn) to NT$1.58trn, a reduction of just over 2%, the largest cut inflicted on an administration’s budget since 1996. Budgeted revenue was reduced by an even steeper 5.4%, from NT$1.46trn to NT$1.38trn. The changes will thus result in a larger central
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government fiscal deficit than originally budgeted: NT$195bn, rather than the NT$150bn proposed by Mr Chang’s cabinet.
The working week has The recent highly partisan political atmosphere has also resulted in wrangling been reduced over the length of Taiwan’s working week. One of Mr Chen’s election pledges was to cut the maximum length of Taiwan’s standard working week from the current 48 hours to 40 hours by 2002. In a first step towards achieving this aim, Mr Tang’s government proposed in June last year to cut the working hours to 44 a week. The KMT-dominated Legislative Yuan rejected this proposal, and instead cut maximum working hours to 84 hours every two weeks. This legislation represented a significant change of heart on the part of the KMT: as the ruling party it had never made much effort to instigate such a cut (August 2000, page 22). With Taiwan’s economy weakening and the unemployment rate rising, in November the government again proposed the introduction of a 44-hour working week, but this proposal was again rejected. Some attempts were made to reach a compromise agreement, whereby for a transitional period employers could maintain a maximum 44-hour working week with their employees’ consent. But even this proposal failed to win bi-partisan support, with the DPP and the opposition parties failing to agree on how long any transitional period should be.
Support for financial sector Fortunately for Taiwan, however, even in this hostile political environment consolidation some economic policy initiatives have managed to gain bipartisan support. In particular, in recent months legislators have signalled support for a series of government proposals aimed at encouraging consolidation within Taiwan’s financial sector. In October the Legislative Yuan approved a government proposal raising the maximum stake any one institution or individual could hold in a bank from 5% and 15% of equity respectively to 25% (and above this if the acquisition was done via a financial holding company). On November 24th the Legislative Yuan passed a law giving tax benefits, such as exemption from deed and contract tax and reduced income tax, to banks that acquire other financial institutions, or new institutions that arise as a result of mergers.
Increasing concern over the health of Taiwan’s banking sector finally seemed to persuade legislators of the real need for this legislation (recent articles in several well-known international publications—such as a sister company of the EIU, The Economist—highlighting weaknesses in Taiwan’s banking sector have gained much attention in Taiwan). But the passage of the law also seems to be related to the new government’s eagerness to push forward structural reforms of the banking sector. In a meeting in December, the finance minister, Yen Ching-chang, was reported to have urged 12 state-linked banks to “seriously consider” merging their operations. (In late January Mr Yen said that mergers among state-owned institutions would result in the creation of “one or two” large banks, with a market share of 15-20%.) Also in December the Ministry of Finance sent to the Legislative Yuan a law on financial sector holding companies, aimed at clearing the way for one financial institution to offer a much wider range of services, from banking and securities to insurance services (the law will also allow one firm, if it is a holding company, to exceed the ceiling restricting ownership of a bank to 25% of equity).
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Foreign investment is The government seems keen for foreign firms to be involved in this process of encouraged consolidation. One important obstacle to the participation of overseas firms was removed in January, when the government lifted the ceiling on foreign investment in the stockmarket from 75% of the equity of any one company to 100%. In addition, under the terms of the draft legislation sent by the finance ministry to the Legislative Yuan in December, foreign companies will be allowed to directly acquire up to 25% in financial institutions in Taiwan without first establishing a holding company on the island. In December Taiwan’s finance ministry was quoted as saying: “We welcome foreign banks, through holding companies [above this 25% level], to merge with local banks.”
Consolidation has begun Early indications suggested that this drive to promote consolidation could be successful. In December Mr Chang announced that the state-owned Taiwan Co-operative Bank (TCB) and the private-sector Chinfon Bank were to merge. The two institutions seem quite well matched. Chinfon has some strengths— notably a well-developed credit card issuing business—but is also small. As a result TCB, by buying the smaller bank, will strengthen its consumer banking business while not having to institute too radical a restructuring following the merger. In January Taiwan’s Far Eastern International Bank announced that it was discussing a merger with five foreign institutions (the bank said that it had also been approached by local institutions). In early 2001 rumours of several other possible mergers appeared in Taiwan’s media.
Mergers may reduce By encouraging such mergers the government hopes to alleviate the problem overbanking of overbanking in Taiwan. In 2000 the island had 46 banks. With none having a market share of more than 10%, their ability to benefit from economies of scale is limited. Moreover, the presence of so many banks has resulted in intense competition. Consequently, profit margins have fallen, weakening the financial health of the banking sector as a whole. But mergers such as the one between Chinfon and TCB may not resolve this underlying weakness. After all, Taiwan’s problem of excess competition is unlikely to lessen significantly until mergers occur between institutions active in similar areas of the industry. With unemployment rising, the government is unlikely to be keen to push through such mergers, which will inevitably result in redundancies. Indeed, the government has already suspended a planned merger between three state- owned institutions, Bank of Taiwan, Land Bank of Taiwan and Central Trust of China. The finance minister claimed that this merger, announced by the former KMT government, had not been properly thought through; his officials said that the three banks were too similar to merge. The issue of unemployment could also slow consolidation among private-sector banks. Such institutions may prefer to avoid the redundancy payments and adverse publicity that would be associated with any merger-related lay-offs. Even if shareholders are willing to bear these merger costs, other factors, in particular family ownership of banks, may continue to hold up consolidation among private-sector institutions.
NPL problems are In addition to encouraging consolidation within the banking sector, the new recognised government has also tried to mollify concerns over the health of Taiwan’s banks. Many observers have long believed that Taiwan’s non-performing loan
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(NPL) ratio underestimates the extent of problem assets in the banking sector. Such fears seemed to be confirmed by a deputy governor of the Central Bank of China (CBC, the central bank), Chen Shih-meng, who said on November 16th that the true NPL ratio could be “close to 10%" (official figures for the end of September suggested the NPL ratio in the banking sector was just 5.4%).
Responding to these concerns, officials from the finance ministry and CBC in a joint meeting on December 5th decided to revise the presentation of Taiwan’s NPL ratio. While arguing that the criteria on which Taiwan’s NPL ratio was calculated already exceeded international standards, the officials agreed that this figure would in the future be supplemented by information on loans under surveillance (which includes loans overdue for three months but less than six months; loans where the principal is either not overdue or has been overdue for less than three months, but with interest payments past due for between three and six months; and loans that reached NPL standards but were exempted from the existing ratio with regulatory approval). On this basis, total problem loans in the banking sector at the end of October were equal to 8.39% of assets, with an NPL ratio of 5.49%, and loans under surveillance accounting for a further 2.9% of assets (some observers believe even this higher figure is still too low).
Asset management Whatever the true NPL ratio, the government realises it must be reduced. In an companies have been set up important step towards achieving this aim, the November merger law, as well as including measures to encourage consolidation within the banking sector, provided a legal framework for the establishment of asset management companies (AMCs). Media reports have since suggested that 25 banks have plans to establish such AMCs, which will take on non-performing assets from the financial sector. The formation of two such AMCs has already been announced, joint ventures between Taiwan’s Chinatrust Commercial Bank and the global investment bank, Goldman Sachs, and between the local China Development Industrial Bank and another global financial institution, Morgan Stanley Dean Witter. The participation of international financial institutions is important if this kind of asset management industry—which has previously not existed in Taiwan—is to develop successfully. Also helpful is the decision of the island’s Bankers’ Association to set up a financial services company to facilitate the establishment and operation of the AMCs.
Officials are also planning to establish a government-owned AMC, presumably to take on those assets that are so severely impaired that they cannot be sold to the private sector. Any such public-sector AMC is likely to have most involvement with Taiwan’s grassroots financial institutions, namely the credit units of farmers' and fishermen's associations. A far-reaching restructuring of this sector is long overdue. The NPL ratio of this sector was 15.6% at the end of October, but the health of some individual institutions was far worse: at the same time 82 of Taiwan’s 287 credit unions had NPL ratios greater than 20% and 17 had a negative net worth. According to media reports, consolidation of this sector has already begun, with five local-level credit co-operatives in southern Taiwan planning to merge to form a new commercial bank. Further restructuring may follow. On November 26th officials announced that a special fund would be established to clean up these credit units, while the November
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merger law granted the finance ministry the controversial power to force banks to take control of credit unions.
The CBC has a cautious Despite the deteriorating state of the domestic economy, the CBC had until interest rate policy recently loosened its monetary stance only cautiously. Officials did cut benchmark interest rates on December 28th, but only by a symbolic 12.5 basis points. The authorities’ caution was clearly related to concern for the value of the New Taiwan dollar, which weakened from NT$31.35:US$1 at the beginning of 2000 to NT$33.08:US$1 at the start of 2001. An important factor behind this depreciation was the wide spread of US interest rates over Taiwan rates. Even before the CBC cut Taiwan rates in December, comparable US rates were 175 basis points higher, giving local investors a powerful incentive to buy overseas assets. Steep cuts in Taiwan rates, by widening the differential with US rates, would have encouraged this outflow of capital, further undermining the value of the New Taiwan dollar.
Consistent with its usual style of monetary management, the CBC for a time resorted to an interventionist approach to try and support the value of the currency. In particular, on December 8th 2000 the bank introduced a 5% reserve requirement on foreign-currency deposits in Taiwan; just three weeks later, when cutting its benchmark rediscount rate, the bank doubled this requirement to 10% of deposits. Officials hoped that banks would pass the costs related to this reserve requirement on to customers in the form of lower interest rates on foreign-currency deposits, thereby stemming the capital outflow.
On February 1st the CBC loosened monetary policy in Taiwan more aggressively, cutting its rediscount rate by 25 basis points. But the apparent abandonment by the bank of its former caution with regard to lower interest rates was less a reflection of the success of the reserve requirements policy than a response to falling interest rates in the US. Concerned by rapidly slowing GDP growth, the US Federal Reserve began in early January to cut sharply US interest rates. On two occasions in recent months the Federal Reserve has cut its benchmark rate by 50 basis points, first on January 3rd and then again on January 31st. By reducing the spread over Taiwan rates, these moves allowed the CBC to loosen its own monetary stance. With more cuts in US rates expected in 2001, the CBC’s rediscount rate—already at a record low—is likely to fall even further.
The domestic economy
Output and demand
Growth was strong in the After expanding by 5.4% year on year in the second quarter of 2000, Taiwan’s third quarter economy grew by a robust 6.6% year on year in July-September. This pick-up had been forecast by the EIU (November 2000, page 24), but so had the cause: unusually slow growth in the third quarter of 1999 leading to a low base of comparison, rather than an improvement in the underlying health of the economy. (Because of a devastating earthquake that hit Taiwan on September
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21st 1999 the island’s economy, which had grown by 6.4% year on year in the second quarter of 1999 and went on to grow by 6.4% in the fourth quarter, expanded by just 4.7% year on year in the third quarter.)
Growth in gross domestic product by expenditure (% change, year on year; 1996 prices) 1999 2000 1997 1998 1999 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr Domestic demand 8.7 6.5 1.9 -0.4 2.6 3.1 2.2 7.1 4.7 5.4 Consumption Private consumption 7.3 6.5 5.4 4.4 6.6 5.6 5.1 7.7 5.6 5.0 Government consumption 5.9 4.1 –6.5 –0.9 –4.2 –5.2 –15.3 –6.2 –9.5 13.3 Gross fixed capital formation 10.7 8.0 1.8 –0.5 2.5 –1.0 5.1 9.7 6.2 14.4 Private 18.6 11.8 –0.7 –3.0 –4.0 –3.9 5.9 18.4 27.1 17. Public –4.3 4.4 13.3 0.5 22.0 24.3 7.8 –4.0 –26.2 –1.0 External sector Exports of goods & services 9.1 2.4 11.9 10.4 12.3 7.1 17.6 13.0 18.9 23.5 Imports of goods & services 13.7 6.3 4.4 0.4 4.4 3.8 8.6 11.6 18.4 21.8 GDP 6.7 4.6 5.4 4.2 6.4 4.7 6.4 7.9 5.4 6.6
Source: Taiwan government statistics.
Private consumption Even this strong base effect could not mask underlying weaknesses in some growth is weak parts of Taiwan’s economy in the third quarter of the year. For example, consumer spending growth, which had begun to weaken in the second quarter of 2000, slowed further in the third quarter: after growing by 7.7% year on year in the first quarter of the year and by 5.6% in the second quarter, private consumption expanded by just 5% year on year in the July-September period of 2000. (This slowdown occurred even though consumer spending had clearly been affected by the September 1999 earthquake: after growing by 6.6% year on year in the second quarter of 1999, private consumption grew by just 5.6% in the third quarter.) Consumer spending growth has slowed as a result of slumping share prices, rising unemployment and the unprecedented instability that has characterised Taiwan’s domestic political scene in recent months. These factors will take time to resolve and so private consumption growth, which is likely to have slowed even further in the fourth quarter of 2000, will remain weak in 2001.
Export growth has This weak private consumption growth will not be fully offset by stronger decelerated growth elsewhere in the economy. Growth in exports of goods and services, for example, will be much slower in 2001 as a result of weaker external demand, particularly in the US. The effect on Taiwan’s merchandise exports (which generally account for nearly 90% of Taiwan’s total exports of goods and services) of slowing US GDP growth was already evident in the third quarter of last year. In US dollar terms, merchandise exports grew by 36.2% year on year in July, but by just 19.1% in August. Export growth picked up in September as a result of comparison with the low base of 1999 (dragged down by the earthquake, merchandise exports grew by just 0.7% year on year in September 1999), but has since slowed consistently, with merchandise exports expanding by just 9.8% year on year in December. Growth in exports of goods and services is likely to remain in single digits throughout 2001.
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Fixed investment growth Gross fixed investment growth is also likely to weaken in 2001. Although slowing capital expenditure growth accelerated in the third quarter of 2000, it was clear that an underlying downturn had already begun. The pick-up in overall gross fixed investment was due to comparison with the earthquake-depressed third quarter of 1999 and a turnaround in public-sector capital expenditure: after contracting by over 26% year on year in the second quarter of 2000, public- sector gross fixed investment fell by just 1% year on year in the July-September period. But private-sector capital expenditure, which accounts for around two- thirds of total gross fixed investment, began to slow in the third quarter of 2000. After expanding by 18.4% year on year in the first quarter of 2000 and by 27.1% in the second quarter, private-sector gross fixed investment rose by a more moderate 17.5% in the July-September period.
Pessimism in the chip Private-sector capital spending growth is likely to have slowed since then and industry has increased will weaken further in 2001. The plans of Taiwan’s two largest listed firms, United Microelectronics (UMC) and Taiwan Semiconductor Manufacturing (TSMC), provide evidence for this trend (TSMC and UMC are both foundry producers of semiconductors). According to a financial report issued by the company in October 2000, TSMC’s capital expenditure would fall from an expected US$3.9bn in 2000 to US$3.8bn in 2001. UMC’s capital expenditure will fall from US$3.3bn last year to a more moderate US$2bn this year (which, in turn, is lower than the US$2.9bn the company had initially planned to invest in 2001).
This downturn in private-sector gross fixed investment growth is partly due to weakening demand, both in Taiwan and in overseas markets, which reduces the incentive to invest. Also, in recent years private-sector capital expenditure in Taiwan has been characterised by periodic booms and slumps. For example, after contracting year on year in four successive quarters beginning in September 1998, private-sector capital expenditure has since boomed. Comparison with the high growth rates recorded during much of 2000 will pull down private-sector gross fixed investment growth—and consequently overall GDP growth—in the next few quarters.
Employment, wages and prices
Inflation has risen Taiwan faced little real inflationary pressure last year. Prices, as measured by the Consumer Price Index (CPI), did rise more rapidly in 2000 than they had the previous year. But this was not surprising, and was in some ways welcome— prices had after all, risen by an anaemic 0.2% in 1999. Although the CPI was boosted by rising school tuition and medical costs, the higher overall rate of inflation was largely the result of external factors rather than domestic developments. The government estimated that Typhoon Xangsane, which struck the island in early November, caused NT$2bn (US$62.5bn) worth of damage to Taiwan’s agricultural sector (November 2000, page 30). The consequent contraction in supply led the vegetable subsector of the CPI to rise by almost 35% year on year in November, and the overall index to surge by 2.3% year on year. Last year’s sharp rise in world oil prices also affected Taiwan. The oil component of the CPI rose by an average of 14.4% in 2000,
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contributing to a 3.4% rise in the transportation and communications sub- sector of the index.
These external factors also affected wholesale prices in Taiwan in 2000. The damage caused by Typhoon Xangsane contributed to the farm products subsector of the Wholesale Price Index (WPI) rising by almost 10% in November, and the overall index rising by a relatively rapid 2.4% in the same month. As a result of higher world oil prices, the minerals sector of the WPI rose by an average of 24.3% in 2000. Consequently, wholesale prices rose by an average of 1.8% in 2000, the most rapid rate of increase since 1995.
Prices (% change, year on year) 2000 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Consumer 1.26 0.51 0.93 1.11 1.24 1.58 1.37 1.44 0.29 1.62 1.02 2.26 1.66 Wholesale prices 1.81 1.22 0.93 0.87 1.2 2.14 2.64 2.65 2.14 1.86 1.87 2.38 1.79 Import 4.62 5.17 4.85 3.95 3.36 5.57 7.43 6.64 6.14 2.76 3.8 3.92 2.21 Export prices –0.9 –3.54 –3.82 –3.98 –3.3 –1.65 –0.67 0.21 0.36 0.76 0.73 1.9 2.6 Source: National Statistics of Republic of China website.
Unemployment has Unemployment is rapidly becoming an important political issue in Taiwan. increased This is partly because the average annual unemployment rate, which has been on the rise in recent years, rose further in 2000 to reach 3%. Although still low compared with the jobless rates recorded in many other industrialised countries, this rate is high for Taiwan: as recently as 1995, the annual joblessness rate was below 2%. Just as worrying for Taiwan was that during 2000 the pattern of monthly unemployment changed from previous years. In recent years the unemployment rate has regularly risen above 3% in the middle of the year only to drop again as new school and college leavers find employment. But last year, rather than beginning to fall in September, the unemployment rate continued to rise, reaching 3.3% in December, the highest unemployment rate in the last month of the year since at least 1978.
Unemployment
1999 2000 Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2.92 2.74 2.91 2.83 2.73 2.78 2.89 3.06 3.16 3.1 3.19 3.23 3.27 Source: National Statistics of Republic of China website.
Structural unemployment Joblessness has become a particularly high-profile issue because the recent rise may be appearing in the unemployment rate would seem to be structural rather than merely cyclical. The number of factory closures rose by 25% in 2000 compared with 1999, while Taiwan investment in mainland China surged (although the increase in factory closures was from a low base in 1999). The confluence of these two factors suggested that last year local firms, particularly those with more labour-intensive operations, accelerated the process whereby capacity is relocated to the cheaper climes of mainland China. This relocation of lower- end manufacturing processes reduces job opportunities for less-skilled and older workers, a development that is already being reflected in Taiwan’s
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unemployment statistics. In 1995 college graduates as a group suffered from an average unemployment rate of 2.5%, the highest joblessness rate among all educational attainment groups in Taiwan. But in 2000 the college graduate unemployment rate, at 2.67%, was the lowest except for those workers with a primary school education and below (by contrast, the average unemployment rate in 2000 for those with junior-high and vocational-school education was over 3.8%).
Employment creation and The rising unemployment rate has clearly rattled the government. Concern for training announced jobs was one reason why the president, Chen Shui-bian, recently backed away from an election pledge to cut the length of the working week in Taiwan to 40 hours (see Economic policy). (There is debate on whether this will aid or hinder employment opportunities.) In December the Executive Yuan (cabinet) approved an employment plan put forward by the Council of Economic Planning and Development and the Council of Labour Affairs. Under the proposals, the government will spend NT$61.4bn (US$1.9bn) to accelerate the implementation of public infrastructure and other development projects, creating 44,800 new jobs. As part of the plan officials will also spend NT$1.8bn on occupational training schemes, and will strengthen employment services and provide subsidies to 23,000 job seekers. According to the deputy director of the government’s Directorate-General of Budget, Statistics and Accounting, Chen Jin-cherng, these measures will help to keep the unemployment rate at around 3% in 2001. This seems optimistic. Although the cabinet’s new plan may well help to restrain the unemployment rate, given the rapidly slowing economy, it is unlikely to prevent the overall joblessness rate from rising further next year.
Financial indicators
Narrow money supply According to the Central Bank of China (CBC, Taiwan’s central bank), growth growth was soft in narrow money has continued to ease in recent months. After growing by an average of 10.8% year on year in the first six months of 2000, M1a (which includes currency in circulation and current-account and passbook deposits) expanded by just 6.2% year on year in the third quarter of 2000 and by an average of just 3.4% year on year in October-November (latest available figures). M1b (which, in addition to the constituents of M1a, includes passbook savings deposits), which expanded at double-digit rates in the first six months of 2000, also slowed towards the end of 2000, growing by an average of just 3.1% year on year in October-November. By contrast, growth in the broadest measure of money supply, M2, after slowing in the middle of last year, picked up slightly towards the end of 2000. M2 grew by an average of 6.2% year on year in the third quarter of the year, but by 6.5% in October- November.
Money growth is linked to Growth in narrow money in Taiwan is closely related to the performance of the stockmarket activity stockmarket. When share prices are buoyant—as was the case in the first few months of 2000—investors, keen to have the ability to enter the stockmarket quickly, maintain a higher proportion of their assets in liquid form. But the
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converse obviously applies when stock prices are depressed. In recent months the benchmark Taipei Stock Exchange Capitalisation Weighted Index (Taiex) has on occasion fallen below 5,000—in stark contrast to the performance of the stockmarket in the first few months of 2000, when the Taiex rose to a high of 10,129. Given the depressed stockmarket, it is not surprising that growth in narrow money has slumped.
Money supply (daily averages; % change year on year) 1998 1999 2000 Year Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov M1 0.4 3.2 12.6 9.3 12.0 12.7 10.3 7.8 5.7 6.7 6.2 4.0 2.7 M1 2.6 10.0 19.2 19.1 19.9 18.7 14.5 10.7 7.3 7.9 5.8 2.9 3.2 M2 8.8 8.3 8.3 8.3 8.2 7.9 7.0 6.6 6.0 6.3 6.3 6.3 6.7 Source: Central Bank of China.
Political instability has The EIU last quarter (November 2000, pages 27-28) identified the causes of the affected sentiment slump in the stockmarket that began in April—an unprecedented degree of domestic political instability, government attempts to crack down on corruption, and sharp falls in the US’s technology-heavy NASDAQ stockmarket index, reflecting a deterioration in global investor sentiment towards high-tech stocks (the electronics subindex has close to a 60% weighting on the Taiex, so share prices in Taiwan tend to move in the same direction as those on the higher-profile NASDAQ).
There is pessimism All these factors remain relevant, but in recent months their relative regarding tech-sector sales importance has shifted. In particular, deteriorating investor sentiment towards high-tech companies has become of more fundamental importance. Previously, the lessening of investor confidence in high-tech companies was in some ways more psychological than real, based on a reassessment of appropriate price- earnings (PE) ratios for firms in this sector (PE ratios for some high-tech firms had reached very high levels). In recent months this concern has become more pressing as numerous global high-tech firms—such as Dell Computer and Microsoft—have announced that, with US GDP growth slowing sharply, profits will not reach previously forecast levels. These prominent firms do not only share markets with Taiwan’s high-tech sector; many of them are also customers for Taiwan’s large Original Equipment Manufacture (OEM) and Original Design Manufacture (ODM) industry. So share prices in Taiwan have not only been hit by a global reassessment of what constitutes reasonable value for a high-tech stock; they have also been undermined by the prospect that future revenue flows achieved by high-tech firms will be lower than previously expected.
The stockmarket rallied in After falling to a five-year low of just 4,615 on December 27th, the Taiex rallied January to reach 5,848 on January 18th. The rally was induced in part by the surprise decision of the US Federal Reserve in early January to cut US benchmark interest rates by 50 basis points. This relaxation of US monetary policy not only offered to support GDP growth in the US, which is by far Taiwan’s most important export market, by closing the differential between US and Taiwan rates, it also seemed to give the Central Bank room to cut domestic rates in
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order to boost GDP growth in Taiwan (the CBC did relax monetary policy at the end of December, but this move was largely symbolic, with the benchmark rediscount rate being cut by just 12.5 basis points). Taiwan stocks have also benefited from a large influx of foreign portfolio investment, suggesting that despite Taiwan’s current political and economic difficulties, some overseas investors believe that last year’s 46% fall in the Taiex was overdone. After withdrawing a net NT$2.5bn (US$77.5m) from the local stockmarket in the third quarter of 2000, qualified institutional investors purchased a net NT$39.5bn worth of Taiwan stocks in the last three months of the year, and a further NT$43.5bn worth in the first 18 days of January alone.
Banking statistics
1998 1999 2000 Year Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Deposits & loans (% change, year on year) Deposits 8.6 8.3 8.5 8.5 8.8 7.8 7.0 6.3 6.3 6.5 6.2 6.5 6.7 Loans 8.6 4.6 4.9 4.5 5.2 5.1 5.3 4.2 4.9 4.9 4.5 5.7 4.8 of which: claims on non- government entities 10.0 4.3 2.8 2.7 3.0 2.7 3.0 2.3 3.6 3.9 3.2 3.3 2.7 Interest rates (%) CBC rediscount rate 5.2 4.5 4.5 4.5 4.6 4.6 4.6 4.8 4.8 4.8 4.8 4.8 4.8 Prime lending rate 7.9 7.7 7.7 7.7 7.7 7.7 7.7 7.7 7.7 7.7 7.7 7.7 7.7 Overnight interbank rate 6.5 4.8 4.6 4.6 4.6 4.7 4.8 4.8 4.8 4.8 4.8 4.8 4.7 Source: Central Bank of China.
Foreign portfolio inflows According to CBC officials this inflow of foreign portfolio investment, together caused M2 to rise with larger trade income inflows and additional borrowing by the government, caused the pick-up in M2 growth recorded in the later months of 2000. M2 growth is hardly rapid though (as recognised by the CBC, which in December reduced its target range for M2 growth from 6-11% to 5-10%). M2 growth continues to be held back by slow loan growth. Total lending by major financial institutions in Taiwan rose by an average of just 4.9% year on year in the first 11 months of 2000. That this was slightly higher than the average 4.6% year on year loan growth achieved in the whole of 1999 is of little importance for the economy. Excluding lending to government entities, total lending rose by an average of just 3% year on year in the January-November period of 2000, lower than the 4.3% growth rate of lending to non- government entities recorded in 1999.
Sectoral trends
Manufacturing production Having expanded strongly during the first three quarters of 2000, manu- has slowed facturing production growth slowed sharply in the final three months of the year. In January-September manufacturing production grew by an average of 11.2% year on year, but in the final quarter expanded by just 1.8% year on year. According to preliminary figures from the Ministry of Economic Affairs, manufacturing output in December actually fell by 2.4% on the year-earlier period.
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The IT sector has suffered The performance of most industrial sectors deteriorated towards the end of the the most year, but output growth of the all-important information technology sector slowed particularly sharply. Output of electrical equipment and machinery, which has a 26% weighting on the overall manufacturing output index, grew by an average of almost 25% year on year in the first nine months of 2000, but expanded by a more moderate 17.5% year on year in October, and was just 5.47% higher in November 2000 than it had been in the same month a year earlier. According to press reports, output of desktop and notebook computers was 3% and 8%, respectively, lower in November 2000 than a year earlier.
Computer sales suggest a The deteriorating performance of the high-tech sector, which is closely related downturn to the sharp slowing of US GDP growth, has been reflected in the disappointing sales achieved by some of Taiwan’s major companies. The island’s largest computer company, Acer, reported that revenue in December 2000 was 42% lower than in the year-earlier period, and 17% below that achieved in November. Another local computer manufacturer, Compal Electronics, announced that although December revenue rose 69% year on year to NT$6.5bn (US$201.6m), this was 18.9% below revenue earned in November, and 23.6% below that of October. Acer responded to these deteriorating market conditions—and to its plummeting share price—by announcing in December a far-reaching corporate restructuring programme. Nevertheless, it has stated that its short-term outlook remains uncertain, with PC sales for January 2001 falling 37% year on year.
Chip revenue was strong The sales of some areas of Taiwan’s high-tech industry did not appear to be immediately affected by the downturn in US GDP growth at the end of last year. The revenue of Taiwan’s largest foundry producer of computer chips, Taiwan Semiconductor Manufacturing (TSMC), grew by 112.3% year on year in December, and by almost 130% in 2000 as a whole. Although capital expenditure of the semiconductor industry will not grow as rapidly in 2001 as it did in 2000 (see Output and demand), local chip-making companies still seem confident about their long-term prospects. In December TSMC’s main rival, United Microelectronics (UMC), announced that it was to build a US$3.6bn microchip fabrication plant in Singapore. The company claimed that this would be the most advanced 300mm wafer foundry in the world. A German chipmaker, Infineon Technologies, and the Singapore government, have both taken stakes in this plant.
Foreign trade and payments
Foreign trade grew The total value of Taiwan’s foreign trade grew strongly in 2000. Merchandise strongly in 2000 exports rose by 22% in 2000 year on year, from US$121.6bn to US$148.4bn. Merchandise imports rose even more rapidly, from US$100.7bn to US$140bn, or by 26.5%. As a result the merchandise trade surplus was squeezed, falling by almost 25% from US$10.9bn to US$8.4bn.
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A sharp slowdown These growth figures for the year as a whole do, however, mask an important occurred in the last quarter development: a marked deceleration of merchandise export and import growth last year. After growing by an average of 25.5% year on year in the first three quarters of 2000, the US dollar value of merchandise exports rose by just 13.1% in the final quarter of the year. After increasing by 34% year on year in the January-September period, the US dollar value of merchandise imports expanded by just 9.4% in the last three months of the year. Trade growth was particularly slow in December, when exports grew by just 9.8% year on year and imports by just 1%.
The US remains Taiwan’s This deceleration of Taiwan’s overall trade growth was clearly related to slowing largest export market US GDP growth (the US is the island’s most important overseas market, and Taiwan’s merchandise exports are heavily dependent on imports of compon- ents and machinery). In the first three quarters of 2000 exports to the US rose by almost 15% year on year. But demand growth in the US slowed rapidly in the fourth quarter of the year, and exports to the US rose by just 4.6% year on year in December. Nevertheless, with imports from the US increasing by 27.6% last year, from US$20bn to US$25.1bn, the US remained Taiwan’s largest trading partner in 2000.
Trade with Asia has grown Taiwan’s trade with other east-Asian countries increased rapidly in 2000 as the rapidly region continued to recover from the severe economic difficulties of 1998-99. The value of Taiwan’s trade with Japan rose by almost 30% in 2000, and trade with South Korea increased by 31.7%. Taiwan’s total trade with Thailand, Singapore, Malaysia, Indonesia and the Philippines rose even more rapidly, by over 35% in 2000, from US$26.7bn to US$36.1bn. Trade with mainland China also continued to grow strongly last year. According to Taiwan’s Board of Foreign Trade, the value of the island’s indirect trade with China, which is mostly routed via Hong Kong, rose by 27.2% year on year in the first 11 months of 2000 (latest available data). The value of Taiwan’s trade with Saudi Arabia also rose sharply last year, by over 70%, as increases in the world oil price pushed up the cost of fuel imports from the Middle East.
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Exports of prepared foodstuffs, chemicals, plastics, and iron and steel all rose by more than 20% in 2000. But despite these strong sectoral performances, Taiwan’s dependency on exports of high-tech goods increased further in 2000. Exports of machinery and electrical equipment rose by 28.7% last year, to account for 55.7% of all exports, up from 52.8% in 1999. The expansion of this dominant sector was an important factor behind the rapid growth in Taiwan’s overall exports recorded in recent years, but with US GDP growth slowing, the island’s dependency on exports of high-tech products is likely to cause difficulties in 2001. In an apparent reflection of the downturn in US demand growth, exports of machinery and electrical equipment increased by a more moderate 14.1% year on year in December. Growth in exports of information and communications products slowed particularly sharply: after expanding by 35% year on year in the first nine months of 2000, exports of information and communications products rose by just 1.8% year on year in December.
Imports were also strong As a result of the surge in the world oil price, the value of Taiwan’s mineral exports rose by over 50% last year, with imports of crude petroleum accounting for almost 6% of total imports. The value of chemicals imports also rose strongly, as did imports of metal products. As has been the case in recent years, imports of machinery and electrical equipment, and of precision instruments, once again grew rapidly in 2000 as Taiwan’s high-tech sector continued to source components and machinery from overseas markets. Imports of com- ponents increased by over 25% last year to account for 64.1% of all imports. The value of capital goods imports surged by almost 34% last year, to account for 28% of total imports, up from 26.4% in 1999. This was the sixth con- secutive year in which the share of capital goods in total imports had increased: in 1994 capital goods accounted for just 15.9% of total imports. Consumer goods imports increased by just 4.8%, and their share of total imports consequently slipped from 9.5% in 1999 to just 7.8% (as recently as 1997 imports of consumer goods accounted for 13.6% of total imports).
The trade surplus On a balance-of-payments basis, the merchandise trade surplus narrowed by narrowed 25% year on year in the first three quarters of 2000, from US$11.7bn to US$8.8bn (by late January 2001 the authorities had still to publish Taiwan’s current account for the fourth quarter of last year). During the same period the
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services, income and current transfers balances all improved. However, with Taiwan’s external trade still being dominated by exports and imports of goods, the narrowing of the trade surplus ensured that the overall current-account surplus worsened in the first nine months of 2000 year on year, with the surplus falling by almost 17%, from US$6.5bn to US$5.4bn.
The cyclical slowing of US GDP growth is undoubtedly the most important factor behind the recent slowing of Taiwan’s merchandise export growth. But structural factors—namely the continued relocation of lower-end manufacturing capacity to mainland China—would also seem to be playing a role. According to Taiwan’s Ministry of Economic Affairs, approved investment by Taiwan entities in mainland China increased by over 108% year on year in 2000, to US$2.6bn.
The capital-account The increase in direct investment abroad was more than offset during the third balance has deteriorated quarter by a rise in foreign direct investment in Taiwan. Nevertheless, and continuing a trend that began in the second quarter of the year, Taiwan’s capital-account balance deteriorated in the third quarter of 2000. This was largely because of a large net outflow of portfolio investment. Taiwan investors purchased almost US$2bn in overseas securities in the third quarter of 2000, more than three times the amount acquired during the same period of 2000. At the same time, foreign investors, who had purchased a net US$3.6bn worth of Taiwan securities in the third quarter of 2000, sold a net US$131m in the July- September period of 2000. These developments contributed to the balance on the financial and capital accounts swinging from a surplus of US$1.9bn in the third quarter of 2000 to a deficit of US$4.1bn in the same period of 2001. Taiwan’s overall balance of payments also moved into the red in the third quarter of 2001, recording a deficit of US$437m.
Foreign-exchange reserves As a result of this deficit, Taiwan’s stock of foreign-exchange reserves fell to dipped in 2000 US$11.7bn at the end of September. Reserves have slipped further since then, reaching US$106.7bn at the end of 2000. This was not due to further portfolio outflows, however. Instead, qualified foreign institutional investors (QFIIs), who had withdrawn a net NT$2.5bn (US$77.5m) from the local stockmarket in the third quarter of 2000, invested a net NT$39.5bn in the last three months of the year. Inflows have increased since then, with QFIIs buying a net NT$43.5bn worth of local stocks in the first 18 days of January alone.
Officials in Taiwan’s central bank, the Central Bank of China (CBC), attributed the fall in reserves to increased corporate and individual holdings of foreign currency deposits. This outflow has been encouraged by the large spread between Taiwan and US interest rates, and by Taiwan’s domestic political instability. This movement of money has put downwards pressure on the value of New Taiwan dollar and the CBC has responded by using foreign-exchange reserves to support the value of the local currency, and, more recently, by imposing more direct controls on foreign-currency accounts. The CBC has also lowered interest rates less aggressively than the US Federal Reserve, thereby reducing the interest rate differential.
EIU Country Forecast February 2001 © The Economist Intelligence Unit Limited 2001 34 Taiwan
Balance of payments (US$ m) 1997 1998 1999 1999 2000 Year Year Year 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr Goods: exports fob 121,725 110,178 121,119 27,641 29,503 30,086 33,889 32,704 37,544 39,087 Goods: imports fob –107,843 –99,862 –106,077 –24,023 –25,279 –26,246 –30,529 –30,211 –34,794 –35,566 Merchandise trade balance 13,882 10,316 15,042 3,618 4,224 3,840 3,360 2,493 2,750 3,521 Services: credit 17,144 16,768 17,259 4,191 4,227 4,648 4,193 4,499 5,170 5,911 Services: debit –24,888 –24,169 –24,405 –5,736 –5,885 –6,409 –6,375 –6,511 –6,759 –6,914 Services balance –7,744 –7,401 –7,146 –1,545 –1,658 –1,761 –2,182 –2,012 –1,589 –1,003 Income: credit 6,919 6,481 6,965 1,672 1,486 1,832 1,975 2,079 2,202 2,385 Income: debit –3,797 –4,432 –4,294 –840 –1,173 –1,407 –874 –997 –1,358 –1,436 Income balance 3,122 2,049 2,671 832 313 425 1,101 1,082 844 949 Current transfers: credit 2,898 2,943 3,126 732 719 729 946 834 781 800 Current transfers: debit –5,107 –4,470 –5,309 –1,135 –1,245 –1,607 –1,322 –1,279 –1,375 –1,401 Current transfers balance –2,209 –1,527 –2,183 –403 –526 –878 –376 –445 –594 –601 Current-account balance 7,051 3,437 8,384 2,502 2,353 1,626 1,903 1,118 1,411 2,866 Capital-account balance –314 –181 –173 –32 –39 –58 –44 –118 –82 –42 Financial account balance Direct investment –2,995 –3,614 –1,494 –368 –392 –252 –482 –451 –359 –229 Abroad –5,243 –3,836 –4,420 –784 –908 –1,116 –1,612 –1,597 –1,507 –1,701 In Taiwan 2,248 222 2,926 416 516 864 1,130 1,146 1,148 1,472 Portfolio investment –7,953 –2,412 9,079 854 2,691 2,892 2,642 2,431 –1,578 –2,065 Assets –6,749 –4,220 –4,835 –1,023 –1,053 –682 –2,077 –4,179 –1,948 –1,934 Liabilities –1,204 1,808 13,914 1,877 3,744 3,574 4,719 6,610 370 –131 Other investment 3,657 8,521 1,635 1,158 –119 –703 1,299 5,508 619 –1,775 Assets –1,291 3,494 2,334 5,233 –810 –2,608 519 1,601 –1,183 –3,282 Liabilities 4,948 5,027 –699 –4,075 691 1,905 780 3,907 1,802 1,507 Capital- & financial-account balance –7,605 2,314 9,047 1,612 2,141 1,879 3,415 7,370 –1,400 –4,111 Net errors & omissions –174 –924 1,162 768 971 –799 222 –464 1,000 808 Overall balance –728 4,827 18,593 4,882 5,465 2,706 5,540 8,024 1,011 –437 Change in reserves (– indicates increase) 728 –4,827 –18,593 –4,882 –5,465 –2,706 –5,540 –8,024 –1,011 437 Source: Ministry of Finance website.
EIU Country Report February 2001 © The Economist Intelligence Unit Limited 2001