Taiwan: Risk Assessment
Country Rating1
Rating: A1
Business Climate Rating1
Rating: A2
Risk Assessment2
Strong rebound in 2010 and resumption of normal growth in 2011
GDP growth rebounded sharply in 2010 thanks to the recovery of domestic demand, underpinned by expansionary monetary and fiscal policy, and the strong growth of international trade. Private consumption, which benefited from subsidies to needy households and improvement in the job picture, spurred the retail trade. Investment, especially in the construction sector, increased thanks to vast infrastructure projects and loans to first-time home buyers. Capital goods and electronics exports - which represent over 50% of sales abroad - have surged thanks to the economic upturns in China and the United States. Particularly laptop computers and LCD monitors, products where Taiwan is the leader, outperformed. The services sector, especially tourism, wholesaling and financial services, also rebounded.
The pace of growth will likely return to normal in 2011 as the base effect wanes. Consumption will remain the principal economic engine and support retail trade. The services sector will moreover show strong growth due especially to the development of tourism from continental China. However, investment could suffer from the contraction of margins in a few sectors hobbled by overcapacity and from uncertainty over the growth outlook in the United States: Many of the island's export industries remain dependent on the US economy, the country's main trading partner, with 70% of Taiwanese exports to continental China then re-exported to the American market.
Solid financial position
The fiscal deficit narrowed in 2010 as a result of the gradual tightening of fiscal policy and the gradual recovery of the economy. And it is expected to narrow further in 2011 with the public sector debt remaining at sustainable levels.
The current account surplus declined in 2010 with imports, fuelled by domestic demand, recovering faster than exports. It remains substantial, however, and will stay that way in 2011 albeit shrinking slightly.
Meanwhile, the aftermath of the crisis has been marked by massive inflows of capital, three quarters of which are speculative in nature according to the Central Bank, betting on the appreciation of the new Taiwanese dollar. In this context, the Financial Oversight Commission decided to bar non-residents from making time deposits from November 2009 on. This capital control was maintained in 2010. In 2011, despite the concerns of Taiwanese exporters over the appreciation of the new Taiwanese dollar, the capital controls are not expected to be strengthened with the proponents of taxation of short-term capital flows remaining a minority.
Besides, foreign exchange reserves have remained very high in 2011, protecting the island from a foreign exchange liquidity crisis.
Greater economic and financial cooperation with continental China
The political situation is expected to remain stable with the Kuomintang maintaining control of the presidency and a substantial majority in Parliament since 2008. With Ma Ying-Jeou as president, the tensions with Beijing have gradually eased and economic and financial relations have grown stronger as attested by the conclusion in June 2010 of an Economic Cooperation Framework Agreement between Beijing and Taipei, the restoration of air, sea, and postal links between the island and continental China, the opening of the Taiwan Stock Exchange to investors from mainland China, and the possibility for banks on either side to establish subsidiaries in the other territory. This trend is expected to continue in 2011.
Strengths
- Solid external financial position
- Support for R&D via public spending
- Established democratic principles and practices
- World’s fourth largest electronics producer
- Improvement in relations with continental China since the Kuomintang came into power
Weaknesses
- Excessive concentration of foreign trade on Continental China and the United States
- Industrial employment undermined by massive relocations of facilities
- Lack of competitiveness in services
- Infrastructure development lagging compared to the other advanced Asian economies