Growth drivers broadening

Taiwan’s economy continues to benefit from strong global demand in the goods market during the pandemic because of its heavy export-oriented structure and important position in the worldwide electronics value chain. Merchandise exports (54% of 2019 GDP) rose by 30% in January-October 2021 from a year earlier, making exports of goods and services contribute 57% to the 6.7% GDP growth rate. The export boom, especially in technology (ICT, electronics products), led to more significant domestic investment in manufacturing capacity, expansion, replacement, and productivity. Gross capital investment rose by 20% in the first three quarters of 2021.

We expect Taiwan to maintain a strong pace of export growth in 2022, albeit slower than in 2021, which will continue to support investment. However, the extent to which Taiwan’s technology exports can increase may be constrained by a protracted tightness in supply conditions. Increasing supply capacity, particularly in semiconductor production, requires time amid strong and sustained demand.

Private consumption (52% of 2019 GDP) remained subdued in 2021 but should see some improvement in 2022 on improved employment conditions and the quintuple stimulus vouchers (worth USD 5.8 billion). When at least 70-80% of the population is fully vaccinated, further economic reopening and an easing of border controls should help revive the tourism industry (4.4% of 2019 GDP). By early January 2022, just over 70% of the population had received two doses. Overall, the Taiwanese economy is expected to see growth momentum moderate in 2022 as gains from a low base effect fade. Meanwhile, inflation, which had risen in 2021 owing to higher energy and food prices, should moderate slightly in 2022.

Narrower budget deficit

The 2022 general government budget of TWD 3.4 trillion (USD 123 billion) is lower by 6.3% compared with 2021, with the central government budget focusing heavily on social welfare funding (25.9% of total spending), education, science, and culture (19.8%), and defense (16.3%). The 2022 defense allocation (TWD 471.7 billion) is increasing by 4% from 2021 and is split three ways, including a particular budget of TWD 40.1 billion to purchase F-16 fighter jets amid escalating tensions with China. Revenue growth will continue, with general government collection estimated to rise by 7% to TWD 3.1 trillion (15.7% of GDP) in 2022. A gradual reduction of pandemic-related spending should entail a narrowing budget deficit. The lower amount of financing needed, coupled with using previous years’ fiscal surpluses to pay for part of the planned expenditures, is expected to decrease the outstanding public debt load.

The current account balance will remain a substantial surplus, supported by a large trade surplus. Exports of technology-related goods, including semiconductors, will remain robust due to sustained global demand amid a broader move toward digitalization. Continued export growth in transport services would also help support the current account. Concomitantly, imports should increase faster in 2022 as further vaccination progress would pave the way for domestic demand to move closer to normality. Taiwan remained the fifth largest net creditor in the world during 2020, with total external assets growing by 10.5% to USD 2.5 trillion, generating solid income. Its net external position is 205% of GDP, and the level of external debt (30% of GDP, but entirely private-owed) does not compromise the stability of the island’s external position.

Heightened cross-straits tensions

Geopolitical tensions and potential military miscalculations remain significant risks to Taiwan’s outlook. The landslide victory of President Tsai Ing-wen and her Democratic Progressive Party (DPP) in the 2020 elections strengthened their position to oppose the “One China, Two Systems” framework (the so-called 1992 Consensus). Consequently, China has intensified military measures to pressure Taiwan, mounting record numbers of aircraft incursions in 2021. Despite pressure from hard-line pro-independence politicians, Tsai is unlikely to push hard for formal independence through constitutional reforms, which would be a formidable task. Amending the constitution requires a high threshold (75%) of legislators to be present and to pass the vote, followed by six months of public consultation before passing a referendum, with at least 50% of votes cast in the previous presidential election. This means the ruling DPP would need many opposition Kuomintang (KMT) lawmakers’ support (over 20) to push the proposed reforms through the Legislative Yuan.