Taiwan: Risk Assessment
Country Risk Rating
Business Climate Rating
- Resilient external financial position
- Support for R&D by public expenditure
- Consensus on democratic gains
- 4th largest electronics producer in the world
- Foreign trade very vulnerable to the economic situation in mainland China and the United States
- Massive relocations undermining industrial employment
- Lack of competitiveness of the service sector
- Behind in terms of infrastructure compared to other advanced Asian economies
- Increasing isolation on the international diplomatic scene
Growth Restricted by the Chinese Slowdown
Economic activity will remain restricted by the weakening of demand in the main Taiwanese export markets (mainland China and Hong Kong). Nevertheless, exports will continue to contribute to growth in 2018, thanks to positive growth in advanced economies. Profits will be concentrated in electronics (accounting for 40% of exports), machinery and the chemical industry. Moreover, although the break in official relations since June 2016 has not prevented the People’s Republic of China from maintaining its rank as Taiwan’s main trading partner, it has been detrimental to the service industries in view of the ban on touristic travels organized for those hailing from mainland China. In addition, while public investment will increase slightly, the deterioration of the Chinese economic situation and the breakdown of relations will weigh on private investment, both domestic and foreign, because of the lower performance of exporting companies and decreased confidence. On the other hand, although stimulated by the depreciation of the New Taiwan dollar against the US dollar, inflation will be limited by modest growth in household consumption in 2018. In fact, despite the low levels of unemployment, the virtual stagnation of wages could undermine consumer confidence and lead to reduced spending. Although the probable raising of the minimum wage and the construction of social housing may help upgrade the purchasing power of the lower economic classes, given the concentration of disposable income growth in the affluent classes, demand will be particularly strong for the luxury sectors (fashion, cosmetics, and electronics).
Its Financial Situation Will Remain Strong
The implementation of the national infrastructure development plan (centered on the modernization of the railway network, water distribution, the development of renewable energies, urban areas and innovation), started in 2017 and with expected completion in 2025, will slightly inflate public spending. On the other hand, the government will increase business and dividend taxes and lower the income threshold from which the maximum tax rate applies. Despite these measures, the public deficit, albeit small, is expected to widen slightly. However, the public debt will remain at a moderate level, especially since it is almost entirely denominated in New Taiwan dollar and held by domestic investors. Moreover, the high level of private foreign debt (around 30% of GDP), which contracted notably in the context of financing trade, does not compromise the stability of the island’s external position, because with a net external position representing 180% of its GDP, it is one of the world’s leading creditors. In addition, it has substantial foreign exchange reserves (which are expected to represent more than 21 months of imports in 2018). The current account surplus is expected to decline due to the deterioration of the trade terms and weak Chinese demand, but it will remain at a high level. This is mainly thanks to a strong trade surplus but also a positive balance of services.
The Challenge of Broken Dialogue With Mainland China
The 2016 parliamentary and presidential elections brought the opposition party, the Progressive Democratic Party (DPP), and President Tsai Ing-wen to power. While the Kuomintang and the previous president favored a policy focused on rapprochement with mainland China, the DPP has a harder position and refuses to adhere to the “1992 consensus” that drove relations between the two sides of the Taiwan Strait in addition to recognizing the “one China” principle. This policy will remain unchanged, and official relations broken. In fact, most Taiwanese remain against any plans for reunification with the Beijing regime and are increasingly suspicious of the existence of a relationship of economic dependence. In this context, and despite the pressure exerted by Beijing to isolate Taipei diplomatically, the president seeks to boost diplomatic relations with countries that still recognize Taiwan as a sovereign country. It also intends to integrate the island into regional and global trade beyond the free trade agreements concluded in 2013 with Singapore and New Zealand, including discussions to integrate the Trans-Pacific Partnership. Moreover, the president, whose popularity has waned due to disappointing economic performances, is nevertheless preparing for the 2020 electoral campaign: she pushed for the resignation of her prime minister at the end of 2017, hoping that a new government could revive popular consent.