RaboResearch - Economic Research

Country Report Taiwan

Country Report


Taiwan flag

Economic growth in Taiwan has been slowing as a result of weak external demand. As inflation is running near the central bank’s inflation target, interest rates have been kept steady. Even without monetary easing, growth is expected to recover somewhat in the coming years. 

Strengths and weaknesses


Highly competitive export sector

Taiwan’s has a benign economic environment, efficient markets, sound economic infrastructure and sophisticated education system.

Strong external position

Taiwan’s has a vast amount of FX reserves (around USD 400bn in 2012) and an acceptable external debt burden.


Vulnerability to external demand shocks

Taiwan’s economy is very open and driven by the export sector.

Tense relationship with mainland China

Mainland China considers Taiwan as one of its provinces. In addition to tense relations with China, Taiwan has only limited access to multilateral institutions and international organizations as a result. 

Key developments

1. Mild recovery underway

In 2012, Taiwan’s economic growth slowed sharply to 1.5% from the 4.1% registered in 2011. Taiwan’s export sector performed poorly last year on the back of weak external demand, as export growth was nearly flat at only 0.1%. Due to the importance of the export sector to Taiwan’s economy, last year’s weak performance of the export sector adversely affected investment growth, which contracted by 4.4% last year, and private consumption growth (1.5%) as well. As a result, the overall Taiwanese economy grew by a mere 1.3% in real terms last year. For this year, export growth is expected to pick up again on the back of increased demand, mainly from China, but demand from advanced countries is also expected to rise again. This will be reflected in both stronger investment growth of around 5% and a pick-up of private consumption growth to 2.1% in 2013. This will translate into a modest recovery of economic growth in 2013 that will continue in 2014. Real GDP growth is estimated at around 3% in 2013 and 4% in 2014. Downside external risks exist; an intensification of the fiscal problems in the eurozone or the US or weaker than anticipated growth in China would undermine current estimates.

Figure 1: Growth is picking up
Figure 1: Growth is picking upSource: EIU
Figure 2: Interest rates kept steady in 2012
Figure 2: Interest rates kept steady in 2012 Source: Reuters EcoWin

2. Interest rates kept steady

In spite of slow growth last year, inflation was only slightly below the Central Bank of Taiwan’s (CBOT) target rate of 2% a year – on average consumer prices rose by 1.9%. As a result, interest rates were kept steady in 2012. In February this year, inflation increased to 3% on the back higher food and transportation prices, as a result of stronger demand from China due to the Chinese New Year, but this rise will likely be short-lived. Interest rate will most likely be kept steady in 2013 as well. The Central Bank will have to balance the risk of upward inflationary pressures on the back of an accelerating economy and a recent minimum wage increase against potential downward pressures stemming from weak global demand. Inflation is estimated to average 1.5% this year but could turn out higher than expected due to the minimum wage and power price increases.

3. Fiscal outlook improves

The 2008/2009 global economic downturn, which strongly decreased demand for the country’s exports, prompted the Taiwanese government to increase public spending in order to soften the domestic economic impact. As a result, Taiwan’s public debt increased from around 30% of GDP in the years before 2008 to 36% of GDP in 2012, while a further increase to nearly 40% of GDP is anticipated in 2014. In order to prevent a further erosion of the government’s financial position, a sustainable and prudent budget is imperative. In this sense, we welcome the recently announced budget for 2013, which targets a fiscal deficit of 1.9% of GDP. On the longer term, pension reforms will be required to keep government finances healthy. Taiwan’s Council of Labor affairs has reported that the insurance fund that underpins Taiwan’s public pension system would post deficits from 2017 onwards and could go bankrupt by 2027. To tackle this problem, President Ma has proposed tough reforms. Civil servants will have to contribute more to public sector pension plans and the age of eligibility will be raised. However, the president’s plans will face political opposition.

Figure 3: Budget deficit is expected to narrow
Figure 3: Budget deficit is expected to narrowSource: EIU
Figure 4: External liquidity remains strong
Figure 4: External liquidity remains strongSource: EIU, Rabobank

4. New Chinese president upholds warming trend in Cross-Strait relations

In February this year, the honorary chairman of Taiwan’s ruling Kuomintang KMT party, Lien Chan, met with Xi Jinping, China’s new general secretary of the Chinese Communist Party who was also appointed as China’s new president in March 2013. Afterwards, Xi Jinping pledged to continue his predecessor’s policy of reconciliation and stated he is determined to bring about a peaceful reunification as part of his “Chinese dream”. As many Taiwanese strongly oppose reunification, an intended public relations campaign to improve China’s image in Taiwan will be vital to prepare the ground for a reunification at some point in the longer-term future. Lien Chan expressed, a bit more carefully, the desire to take Cross-Strait relationships one step at a time. As Taiwan and China are becoming more and more tied economically, serious tensions have abated to a large extent. Even so, tensions still remain and the rapprochement path will have to be guided carefully. 

National facts of Taiwan
National facts of TaiwanSource: EIU, CIA World Factbook, UN, Heritage Foundation, Transparency International, Reporters Without Borders, World Bank.

Background information

Taiwan, officially named the Republic of China, is a country comprising of several islands, located to the east of the People’s Republic of China. The largest island, the island of Taiwan, makes up 99% of Taiwan’s total land area and houses the country’s capital, Taipei. The economy is structured around the services sector, which contributes 68% to GDP. The prosperity of this services-based, capitalist economy stems from its dynamic and entrepreneurial private sector, which employs over 90% of the working population. Taiwan’s economic environment is benign. The country scores very well on factors such as economic freedom and ease of doing business and is highly competitive internationally, particularly due to its efficient goods and labor markets and developed financial markets, as well as the country’s sophisticated education and healthcare systems and sound infrastructure. Taiwan is home to some of the world’s leading multinationals in the information technology (IT) sector and the country is an important supplier of intermediate IT goods worldwide. Taiwan’s high degree of openness, with total exports and imports of goods and services amounting to 140% of GDP (2012), is, however, also the economy’s main weakness. It makes the economy overly dependent on external demand, especially from its main trading partners China, Japan and the US. Roughly 10% of total exports are destined for the European Union (EU), rendering the country vulnerable to problems in the eurozone.

After the communist victory in mainland China in 1949, about 2 million Nationalists fled to Taiwan, established a government and incorporated the locals in the governing structure. Mainland China still considers Taiwan as one of its provinces. Although tensions have eased somewhat in recent years, China will still consider any proclamation of independence from the side of Taiwan an act of war. 

Economic indicators of Taiwan
Economic indicators of TaiwanSource: EIU

naar boven