Taiwan: Risk Assessment
Country Risk Rating
Business Climate Rating
- Robust external financial position
- Support for R&D through public expenditure
- Consensus on democratic achievements
- 4th largest electronics producer in the world
- Diversified FDI portfolio in Asia
- Exposure to demand from mainland China and the United States
- Stagnant wage growth and low labor productivity
- Lack of competitiveness of the services sector
- Infrastructure gap compared to other advanced Asian economies
- Isolation on the international diplomatic scene
Sustained and strong growth with the pandemic under control
Growth is expected to accelerate in 2021 thanks to Taiwan’s early success in curbing the pandemic. Indeed, Taiwan is among the few countries that managed to control the pandemic with a quick response and a good centralized coordination. It activated the Central Epidemic Command Centre (CECC) in January 2020, which aims to coordinate ministries and governmental agencies, and manages testing, quarantine, and contact tracing. This eased concerns over the possibility of a second wave and, alongside fiscal stimulus packages (6% of GDP) in 2020, has spurred consumer confidence and will continue to support domestic consumption (48% of GDP) in 2021. Inflation will increase with the improvement of domestic demand. On the external front, exports (70% of GDP) are likely to remain robust thanks to high demand for hi-tech products and electronic components (semiconductors). U.S.-China frictions and the pandemic have spurred chip exports from Taiwan. Investment (22% of GDP) will remain strong and will be supported by reshoring of activities to Taiwan and a flourishing semiconductor industry. While trade tensions between the U.S. and China are unlikely to ease and have accelerated with the U.S. crackdown on Huawei Technologies and other Chinese manufacturers, Taiwanese companies - especially tech ones (Quanta, Innolux) - will probably continue to relocate their activities from China back to the homeland in order to avoid tariffs from the U.S. and higher labor costs. This move is encouraged by the Taiwanese authorities with investment incentives implemented in 2019.
Strong external accounts
The 2021 budget will increase by 4% to support social welfare policies and defense. Defense expenditures are set to increase by 10% under the 2021 budget, which is 3% of GDP, for national security purposes amid China’s combat drills drawing nearer Taiwan in September. The budget deficit is set to narrow but will remain above its pre-crisis level, due to improved tax collection following slower growth because of the pandemic. This led to an increase in government spending through a 5.5% of GDP worth fiscal package in order to support growth in 2020, along with the central bank’s preferential loans, extended into 2021 for businesses hit by the pandemic.
Regarding the external accounts, the current account will remain in surplus thanks to a large trade surplus. Exports of electronics, such as semiconductors, have soared on the back of high global demand for 5G technologies and work-from-home devices. Going forward, external demand will be further boosted by a rebound in global economic activity in 2021, which started by that of key trading partners such as China. That said, imports should grow faster due to a recovery in domestic demand, which may drag the current account surplus slightly. Taiwan is the fifth largest creditor economy, with a net external position of 200% of GDP and a stock of foreign net assets worth USD 2.3 trillion that generate solid income. Furthermore, the primary income posted a strong surplus in 2020 due to an increase in residents’ income from outward FDIs. This environment should strengthen on the back of the government’s “New Southbound Policy” adopted in 2016, which aims at strengthening ties with ASEAN members, South Asia, Australia and New Zealand. The level of external debt (30% of GDP, but entirely private-owed ) does not compromise the stability of the island’s external position.
Increasing tensions with China but global role model for pandemic management
Pro-independence candidate Tsai Ing-wen won a second term by a landslide victory during the Presidential Election in January 2020, following strong anti-Beijing sentiment after months of social unrest in Hong Kong. Relations with mainland China have soured since Tsai’s Democratic Progressive Party (DPP) came into power in 2016. Tsai’s DPP has remained firm in its conviction that it will not join the “1992 Consensus” that governs cross-strait relations, in opposition to the “One China” principle. As a result, China has resorted to economic measures and an intensification of military exercises to put pressure on Taiwan. Despite these pressures, the President is unlikely to call for a referendum on an official declaration of independence, preferring the status quo. On the international front, Taiwan is a global role model for managing the pandemic efficiently, without receiving any assistance from the World Health Organization, due to China’s insistence that Taiwan is under China’s jurisdiction. This may accelerate Taiwan’s recognition and visibility as a country on the international diplomatic stage – so far only 15 countries do so.