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Taiwan Country Risk Report Q1 2017

  • November 2016
  • -
  • Business Monitor International
  • -
  • 43 pages

Core Views

We are upgrading our forecast for Taiwan's 2016 real GDP to grow by 1.1% from 0.7% previously following revisions to H116 data and stronger than expected Q316 growth. With external conditions showing signs of stabilising following a gradual pick up in the tech cycle and the effects of domestic policy appearing to be gaining traction, we maintain our 2017 real GDP forecast at 2.0%. The ICAO's refusal to let Taiwan participate in the meeting held from September 27 to October 7 shows the extent to which cool cross- Strait ties are limiting Taiwan's ability to participate in international events, and we expect this to remain the case for the foreseeable future. Exclusion from the ICAO will also have a negative impact on Taiwan's aviation industry and could weigh on the island's economic growth. The CBC held its discount rate at 1.38% during its monetary policy meeting on September 29.

Given that various leading indicators suggest that growth has stabilised while inflation remains manageable, we have pared back our expectations for an additional rate cut and now expect the CBC to remain on hold throughout 2016 and 2017. Taiwan's modest budget will likely hit its deficit target in 2017 due to the conservative stance adopted by the government. We therefore forecast the deficit to come in at 0.9% of GDP in line with the government's projected 0.9%. We expect the New Taiwan Dollar (TWD) to remain within its current trend channel over the coming months, averaging TWD31.50/USD in 2017 amid a positive technical picture. Over the long-term, we expect gradual strength as an undervalued real effective exchange rate, a strong net international investment position (NIIP), and low inflation lend support to the TWD.

Major Forecast Changes We have pared back our expectations for an additional rate cut and now expect the CBC to remain on hold throughout 2016 and 2017 amid signs of stable growth and inflation. We have upgraded our forecast for Taiwan's 2016 real GDP to grow by 1.1% from 0.7% previously following revisions to H116 data and stronger than expected Q316 growth.

Table Of Contents

Taiwan Country Risk Report Q1 2017
Executive Summary 5
Core Views 5
Major Forecast Changes 5
Key Risks5
Chapter 1: Economic Outlook7
SWOT Analysis 7
BMI Economic Risk Index 7
Economic Growth Outlook 8
Growth To Pick Up Amid Stabilisation In Exports 8
We are upgrading our forecast for Taiwan's 2016 real GDP to grow by 1 1% from 0 7% previously following revisions to H116 data and
stronger than expected Q316 growth With external conditions showing signs of stabilising following a gradual pick up in the tech cycle
and the effects of domestic policy appearing to be gaining traction, we maintain our 2017 real GDP forecast at 2 0%
GDP By Expenditure Outlook 9
TABLE: GDP GROWTH FORECASTS 10
TABLE: PRIVATE CONSUMPTION FORECASTS 10
TABLE: GOVERNMENT CONSUMPTION FORECASTS10
TABLE: FIXED INVESTMENT FORECASTS 10
TABLE: NET EXPORTS FORECASTS 10
Fiscal Policy And Public Debt Outlook11
Cautious Budget Likely To Meet Targets 11
Taiwan's modest budget will likely hit its deficit target in 2017 due to the conservative stance adopted by the government We therefore
forecast the deficit to come in at 0 9% of GDP in line with the government's projected 0 9%
Structural Fiscal Position 12
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES12
TABLE: FISCAL AND PUBLIC DEBT FORECASTS 12
Monetary Policy 13
Rate Target Hit, Long Hold Ahead 13
The CBC held its discount rate at 1 38% during its monetary policy meeting on September 29 Given that various leading indicators
suggest that growth has stabilised while inflation remains manageable, we have pared back our expectations for an additional rate cut
and now expect the CBC to remain on hold throughout 2016 and 2017
Monetary Policy Framework 15
TABLE: MONETARY POLICY FORECASTS 15
Currency Forecast 15
Taiwan Dollar Likely To Remain Within Appreciatory Trend15
We expect the Taiwan dollar to remain within its current trend channel over the coming months, averaging TWD31 50/USD in 2017 amid
a positive technical picture Over the long term, we expect gradual strength as an undervalued real effective exchange rate, a strong net
international investment position (NIIP), and low inflation lend support to the Taiwan dollar
TABLE: BMI CURRENCY FORECAST 15
Outlook On External Position 18
TABLE: MAIN IMPORTS AND EXPORTS 17
TABLE: MAIN IMPORT AND EXPORT PARTNERS 17
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE 17
TABLE: CURRENT ACCOUNT BALANCE FORECASTS18
Contents
Chapter 2: 10-Year Forecast 19
The Taiwan Economy To 2025 19
Multiple Headwinds Against Structural Growth 19
A strong recovery from the global financial crisis by no means suggests that Taiwan's economy will maintain a robust growth trajectory
going forward We believe the lingering presence of the government within the banking sector, an increasingly uncompetitive tech
sector, an overly tech-focused economy, and the reluctance to speed up Chinese investment, will impede Taiwan's structural growth
prospects Moreover, a rigid labour market, coupled with fast deteriorating demographics will serve to erode the attractiveness of
Taiwan's business environment Lastly, we expect the structural shift in China's economy to carry wide-ranging ramifications for Taiwan
We expect real GDP growth to average 3 1 % between 2016 and 2025
TABLE: LONG-TERM MACROECONOMIC FORECASTS 19
Chapter 3: Political Outlook 23
SWOT Analysis 23
BMI Political Risk Index23
Domestic Politics24
ICAO Exclusion First Of Many Amid Rocky Cross-Strait Ties 24
The ICAO's refusal to let Taiwan participate in the meeting held from September 27 to October 7 shows the extent to which cool cross-
Strait ties are limiting Taiwan's ability to participate in international events, and we expect this to remain the case for the foreseeable
future Exclusion from the ICAO will also have a negative impact on Taiwan's aviation industry, and could weigh on the island's
economic growth
TABLE: POLITICAL OVERVIEW 24
Long-Term Political Outlook 25
Legal Status Quo To Prevail Into 2020s 25
Taiwan's long-term political prospects are inseparable from its relations with China, and while cross-Strait relations have thawed in
recent years, we believe the status quo will largely prevail While further economic integration is likely between the two Chinas, we
exclude meaningful political convergence Meanwhile, Taiwan is extremely unlikely to regain internationally recognised independence
As a result, we believe Taiwan will remain in a political no-man's land - with this being the least worst path for political stability
Chapter 4: Operational Risk 29
Operational Risk 29
TABLE: OPERATIONAL RISK 29
Business Crime 30
TABLE: BUSINESS RESPONSE TO RISK 33
Government Intervention 34
TABLE: BUSINESS TAXES 35
TABLE: PERSONAL INCOME TAX 35
Chapter 5: BMI Global Macro Outlook39
Global Macro Outlook 39
Austerity Has Peaked, But Populism Is Not Yet Policy 39
TABLE: GLOBAL ASSUMPTIONS 39
TABLE: DEVELOPED STATES, REAL GDP GROWTH, % 40
TABLE: EMERGING MARKETS, REAL GDP GROWTH, % 41
TAIWAN - MACROECONOMIC DATA and FORECASTS 43

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