Books on Taiwan
Update No: 056 - (29/09/08)
Hard times ahead
By any yardstick, Taiwan continues to do reasonably well in a global environment
that is becoming increasingly harsh and uncertain. Yet that is not how the
public of Taiwan see it. Ma Ying-jeou was elected to the presidency in May on
the promise of better things to come. Ma campaigned on the basis of a
"6-3-3" economic policy. This referred to his promise of an annual
economic growth rate of six percent, an annual per capita income of US$30,000
and an unemployment rate of less than 3 percent per year. Barely four months
after being returned to office, that promise is now looking extremely hollow.
The signs of an economic slowdown are evident to all and, as a result, Cabinet
is showing signs of going into panic mode.
Inflation is on the increase. The Consumer Price Index (CPI) rose by 4.78
percent year-on-year in July bringing the average CPI increase for the year to
4.25 percent. This figure is well above the government's prediction of 3.74
percent for the year as a whole. The Wholesale Price Index has risen by 9.57
percent from a year ago which suggests that Taiwan's manufacturers and retailers
continue to be caught in a price squeeze.
As a result incomes are being eroded and unemployment is rising. Real wages
posted negative (annualized) growth in May of -2.01 percent; in June of 2.36
percent and in July of -2.72 percent. The gap is widening and unemployment is
increasing. The unemployment rate (July figures) stood at 4.14 percent, the
highest in the past three years. Those with a tertiary education appear to be
hardest hit: Unemployment among those with college degrees has risen to 5.26
percent. "Headline wages" stood at NT$37,043 (US$1,153) in August.
It is little comfort to know that most of the inflation is imported; chiefly
fuel, raw materials and food. Consumer confidence appears to be weakening and
may be at historic lows according to some reports.
Exports too may be faltering in the face of the global economic slowdown. While
during August, shipments rose year-on-year by 18.4 percent, reversing the
downturn of the previous month, imports rose by some 40 percent resulting in a
trade deficit of US$30 million. Exports remain a major contributor to Taiwan's
economic growth and even before the US financial meltdown many feared that the
slowdown of the US economy would have major repercussions for Taiwan. Now that
concern has been amplified considerably as economists ponder the prospects of a
Foreign direct investment was already showing signs of a slowdown. According to
the most recent UNCTAD World Investment Report, released this past month,
foreign direct investment (FDI) inflows to Taiwan amounted to a new high of
US$8.16 billion last year, an increase of nearly 10 percent over 2006. That
amount made Taiwan the seventh-largest FDI recipient in Asia behind China, Hong
Kong, Singapore, India, Thailand and Malaysia.
However, with the global economy slowing, foreign investors have shown less
interest in Taiwan this year. According to Taiwan's Investment Commission, the
total number of FDI applications approved by the government dropped 6.63 percent
to 1,323 during the first eight months from a year earlier.
Government-approved foreign direct investment (FDI) totalled US$4.98 billion in
the first eight months of the year. In dollar terms this was down 46.58 percent
from the same time last year.
The stock market has shed more than 32 percent since President Ma took office in
May. In an effort to restore confidence, Premier Liu Chao-shuan introduced, on
September 11-a few days ahead of the US financial freefall-a NT$180.9 billion
(US$5.63 billion) economic stimulus package aimed at boosting economic growth
that had been flagging in recent months. The economic package covers 41 measures
and incentives designed to promote exports, increase consumption spending, boost
employment as well as providing an underpinning for the real estate, public
infrastructure and private investment markets, loans to small and medium
enterprises and care for the disadvantaged in society.
The KMT has also activated an economic task force designed to come up with
further recommendations for improving the economy. Vice President Vincent Siew
has been put in charge of the task force which will meet bimonthly as a
consultative body able to make recommendations to Cabinet.
These measures preceded, of course, the events of September 17 and the sharp
decline in the US stock market. In the wake of the tumultuous events on Wall
Street, the TAIEX, the main indicator of the Taiwan Stock Exchange, immediately
fell by 4.2 percent and, despite some momentary gains, continues to fall. As a
result Cabinet has activated the National Stablilization Fund, which has NT$500
billion in capital available to it, to prop up Taiwan's stock markets and
restore confidence especially among Taiwan's large "mom-and-pop"
Taiwan started the month with concern at the adverse effects a slowing U.S.
economy was having on local confidence and in the ability of the new government
to deliver on its campaign promises of restored economic health. By month's end
that concern had turned to panic in certain quarters with many doubting that the
measures taken so far would be sufficient to allay a concerted economic
downturn. A global slowdown will reduce demand for Taiwan's export products, a
weaker export sector will slow economic growth even further; and a further
slowing of economic growth will add to consumer concerns.
Will Taiwan weather the storm by itself or will it lead to a further reliance on
China? China has offered an Economic Partnership Arrangement (EPA) with Taiwan
which amounts to a free-trade pact that would further boost Taiwan's ability to
sell to China. Straits Exchange Foundation (SEF) Chairman Chiang Pin-kung cited
the EPA between China and Hong Kong as a model that could be used as a starting
point in negotiations. The goal, Chiang said, would be to promote and protect
Taiwanese businesses in China. Hong Kong signed an EPA with China in June 2003,
the goal of which was to boost trade and introduce measures such as allowing
Hong Kong companies to sell products tariff-free in China. The following year,
Macau also signed similar agreement so as to receive the same trade benefits.
But as local commentators have pointed out, what Chiang failed to mention is
that these pacts were modelled not as an agreement between two countries, but as
one between a country and its territories. This is unlikely to sit well with
The answer of course is to diversify further Taiwan's overseas investment
strategy. While inwards FDI may be faltering, outward FDI from Taiwan last year
rose by 50 percent over 2006 to US$11.11 billion, putting the country in sixth
place in the region behind Hong Kong, China, South Korea, India and Singapore.
Taiwan ranked 111th worldwide last year in terms of the Inward FDI Performance
Index, up from 122nd in 2006 and marking the highest ranking scored by Taiwan in
the past five years. However, if Taiwan is to gain most from overseas earnings,
diversification away from over-reliance on China is the obvious answer.
Still, while Taiwan is facing a serious problem in its efforts to restructure
its economy towards a new world order, it is still doing better than many.
According to a new report by Morgan Stanley, released in early September. Taiwan
has jumped from No. 2 spot to take the most favoured market position among Asian
emerging markets, followed by Russia and Malaysia.
Taiwan has also been ranked the second-best investment destination in Asia and
the fifth-best in the world, behind only Switzerland, Singapore, the Netherlands
and Norway, according to the latest report compiled by US-based Business
Environment Risk Intelligence (BERI) which gave Taiwan a "1B" rating
among the 50 countries surveyed, classifying Taiwan as a favourable investment
environment with a reduced military threat from China as a result of the return
to government by the KMT. Taiwan tied with Japan as the second-best in Asia and
fifth-best in the world, following Singapore but far ahead of China (ranking
14th in the world), Malaysia (18th), South Korea (22nd), Thailand (29th), India
(32nd), the Philippines (38th) and Vietnam (40th).
Moody's Investor Services has also reported favourably on Taiwan which has
maintained its "Aa3" government bond ratings for Taiwan, with a stable
"The government's ratings are supported by Taiwan's strong external
payments position, the absence of foreign currency borrowing to finance budget
deficits, a moderately high income level, and a maturing democratic and
constitutional system, while cross-strait geopolitics constrain the country
ceiling," said Aninda Mitra, a vice president and senior analyst in Moody's
sovereign risk unit.
While retaining its strong ratings on Taiwan, the Moody's Report underlined the
need for the nation to quickly adapt to changes to strengthen its
With inflationary pressures working through the economy now showing signs of
easing, government attention must now turn to maximize economic growth. It will
be no easy task, but Taiwan is in a better position than many other markets to
ride out the storm.