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Taiwan Country Risk Report Q2 2016

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

Core Views

Taiwan's 2015 real GDP growth came in at 0.9%, slightly belowour forecast of 1.0%. Ongoing weakness in the Chinese economycoupled with continued uncertainty in the domestic political situationwill continue to weigh on Taiwan's economic growth. However, weexpect business sentiment to improve gradually in H216 as the politicalsituation stabilises, leading to a slight improvement in growth figures.As such, we forecast 2016 real GDP forecast to come in at 1.5%.Taiwan's opposition Democratic Progressive Party (DPP) won alandslide victory in both the presidential and parliamentary electionsheld on January 16. With the pro-independence DPP having yetto fully articulate its cross-Strait policy, we expect political risks toremain high, undermining investor confidence.

President-elect andDPP leader Tsai Ing-wen also faces an uphill task in boosting theisland's ailing economy.We maintain our forecast for two interest rate cuts by the CBC in2016 following the surprise 12.5 basis points (bps) cut on December16, which took the discount rate to 1.625%. Continued exportheadwinds and low inflation will prompt the CBC to cut rates in abid to support growth and keep the Taiwan dollar competitive, andwe expect the central bank to take its benchmark rate to 1.375% bythe end of 2016.Taiwan's modest stimulus package aimed at supporting growththrough boosting domestic spending will have a limited effect on thecountry's growth, which will continue to be hampered by stiff exportheadwinds as well as domestic political instability.

The size of thepackage is also unlikely to have a significant impact on the 2016fiscal deficit, which we forecast to come in at 1.6% of GDP.Despite its strong fundamentals, the TWD is facing downside pressurefrom the ongoing weakness in the Chinese economy as wellas domestic uncertainty. As such, we see continued weakness inthe near term, with the currency ending 2016 at TWD34.30/USD.Over the long-term, an undervalued real effective exchange rate anda large current account surplus will lend support to the currency,limiting weakness and providing stability.Major Forecast ChangesWith external headwinds and domestic political uncertainty likely topersist, we have downgraded our 2016 and 2017 real GDP forecaststo 1.5% and 2.3%, respectively (from 1.9% and 3.5% previously),to reflect these challenges.We are downgrading our 2016 end-year currency forecast toTWD34.30/USD from TWD32.00/USD to reflect the likelihood thatthe central bank will weaken the currency to support exports.

Table Of Contents

Taiwan Country Risk Report Q2 2016
Executive Summary 5
Core Views5
Major Forecast Changes5
Key Risks5
Chapter 1: Economic Outlook 7
SWOT Analysis 7
BMI Economic Risk Index 7
Economic Growth Outlook 8
Political Uncertainties Will Constrain Growth In H1168
Taiwan's 2015 real GDP growth came in at 09%, slightly below our forecast of 10% Ongoing weakness in the Chinese economy
coupled with continued uncertainty in the domestic political situation will continue to weigh on Taiwan's economic growth
GDP By Expenditure Outlook 10
TABLE: GDP GROWTH FORECASTS10
TABLE: PRIVATE CONSUMPTION FORECASTS10
TABLE: GOVERNMENT CONSUMPTION FORECASTS 10
TABLE: FIXED INVESTMENT FORECASTS10
Fiscal Policy And Public Debt Outlook 11
Modest Stimulus Will Have Little Impact On Growth, Fiscal Position11
Taiwan's modest stimulus package aimed at supporting growth through boosting domestic spending will have a limited effect on the
country's growth, which will continue to be hampered by stiff export headwinds as well as domestic political instability As such, we
maintain our real GDP forecast for 2016 to come in at 15%
TABLE: NET EXPORTS FORECASTS 11
Structural Fiscal Position 12
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES12
Monetary Policy 13
Easing Cycle To Intensify13
We maintain our forecast for two interest rate cuts by the CBC in 2016 following the surprise 125bps rate cut on December 16, which
took the discount rate to 1625% Continued export headwinds and low inflation will prompt the CBC to cut rates in a bid to support
growth and keep the Taiwan dollar competitive, and we expect the central bank to take its benchmark rate to 1375% by the end of
Monetary Policy Framework 14
Currency Forecast 15
TWD: Continued Weakness Amid Political Uncertainty15
Despite its strong fundamentals, the TWD is facing downside pressure from the ongoing weakness in the Chinese economy as well as
domestic uncertainty As such, we see continued weakness in the near term, with the currency ending 2016 at TWD3430/USD
TABLE: BMI CURRENCY FORECAST16
Outlook On External Position 17
TABLE: MAIN IMPORTS AND EXPORTS17
TABLE: MAIN IMPORT AND EXPORT PARTNERS17
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE17
Chapter 2: 10-Year Forecast 19
The Taiwan Economy To 2025 19
Multiple Headwinds Against Structural Growth19
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 expect real GDP growth to average 33% between 2016 and 2025
TABLE: LONG-TERM MACROECONOMIC FORECASTS19
Chapter 3: Political Outlook 23
SWOT Analysis 23
BMI Political Risk Index 23
Short-Term Political Outlook 24
DPP Wins, Will Face Many Challenges24
Taiwan's opposition DPP won a landslide victory in both the presidential and parliamentary elections held on January 16 With the
pro-independence DPP having yet to fully articulate its cross-Strait policy, we expect political risks to remain high, undermining investor
confidence President-elect and DPP leader Tsai Ing-wen also faces an uphill task in boosting the island's ailing economy
TABLE: POLITICAL OVERVIEW 24
Long-Term Political Outlook 27
Legal Status Quo To Prevail In 2010s27
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
Chapter 4: Operational Risk 31
SWOT Analysis 31
Operational Risk Index 31
Operational Risk 32
TABLE: OPERATIONAL RISK32
Trade Procedures And Governance 33
TABLE: IMPORT AND EXPORT DOCUMENTS33
TABLE: TRADE PROCEDURES BREAKDOWN33
TABLE: ASIA - TRADE PROCEDURES AND GOVERNANCE RISK34
Vulnerability To Crime 35
Chapter 5: BMI Global Macro Outlook 39
Global Macro Outlook 39
Downside Risks Gather Momentum39
TABLE: GLOBAL ASSUMPTIONS39
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %40
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, % 40
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %41
TABLE: MACROECONOMIC DATA AND FORECASTS43

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