RaboResearch - Economic Research

Country Report Taiwan

Country Report


Due to a weak external environment, Taiwan’s economy has been performing weakly, but a slight growth acceleration is expected. Political infighting in the ruling KMT party has weakened the president’s position and will hamper policy implementation.

Strenghts (+) and weaknesses (-)

(+) Highly competitive export sector

Taiwan’s has a good business environment, efficient markets, sound economic infrastructure and sophisticated education system, which benefits its export sector.

(+) Very strong external position

Taiwan’s has persistent current account surpluses, a vast amount of FX reserves (roughly 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. Economic growth remains below average, inflation expected to rise slightly

Real GDP growth was weak at 1.3% in 2012. The main cause was weak external demand, which negatively affected Taiwan’s export performance. Given the importance of the export sector to the country’s overall economy – it accounts for 74% of GDP - investment and consumption growth have, in turn, also been adversely affected. In May this year, the government implemented a stimulus plan meant to boost consumption and investment in the next 5 years. The plan includes allowing Taiwan’s life insurers to invest in public construction projects and a speeding up the approval of investment plans. As a result of the stimulus and an improved external economic environment – especially in China, Taiwan’s main trade partner - export growth picked up again and investment growth rebounded from negative growth rates in 2011 and 2012. Overall, real GDP growth is estimated to accelerate to roughly 2.3% this year. However, this will still be below the average of 4.5% a year in 2002-2011. Partially due to the weakening of China’s economic figures in September, Taiwan’s exports contracted in September. As a result, the risk that economic growth in 2013 will undershoot current estimates has increased.

This risk was one of the reasons that Taiwan’s Central Bank kept its benchmark interest rate – the discount rate – unchanged at 1.875% in its most recent meeting in late September. Moreover, inflation remained low at a mere 0.9% year-on-year in the period January – August 2013, as a result of relatively weak economic momentum and the presence of overcapacity in the economy. Inflation is expected to increase slightly looking forward, as the government has raised electricity prices as part of its effort to gradually liberalize the economy and economic growth is picking up (see below). As a result, inflation is forecast at about 2.2% in 2014. Although Taiwan’s Central Bank usually tends to favor a gradual strengthening of the Taiwanese currency (TWD), which reduces imported inflation, it has recently been managing the TWD on a slight depreciatory path given concerns about export competitiveness vis-à-vis Japan, as very loose monetary policies, which has led to a deprecation of its currency, have boosted Japan’s exports. The Central Bank, however, has not allowed the TWD to slide too much. Amid the height of fears for a cut back of quantitative easing in the US, which put downward pressure on Taiwan’s currency, the Central Bank did not allow the TWD to fall below 30.2 TWD per USD. In the coming years, real GDP growth is expected to pick up again, to roughly 3.3% in 2014 and some 4% in 2015, as the country’s main growth driver – net exports – will be supported by a more benign external environment. Exports of goods will be increasingly directed at emerging markets, mostly in the Asia region, where domestic demand growth is forecast to be strong. Better economic performance in the advanced economies would boost demand for Taiwan’s IT products. Meanwhile, tourism from mainland China is expected to increase, which will boost Taiwan’s services exports. 

Figure 1: Growth performance
Figure1: Growth performanceSource: EIU
Figure 2: Inflation and interest rate
Figure 2: Inflation and interest rateSource: Reuters Ecowin

2. Domestic political upheaval weakens the president's position

Relatively weak economic growth, poor communication on policies and a number of political scandals have contributed to President Ma Ying-jeou’s approval ratings remaining below 20% from shortly after his election in 2012 onwards. A number of scandals have led to infighting in his KMT party this year. In June, the resignation of defense minister Kao - following the death of a young military recruit – prompted a second cabinet re-shuffle in 2013. In early September, Ma’s justice minister Tseng resigned, after he was accused of power abuse by a special investigations unit. The scandal led to a dispute between Ma and the KMT speaker of parliament, Wang, resulting in Wang being expelled from the KMT a few days later. However, Wang has gotten a court injunction against his removal from the party. His attempt to oust Wang have weakened President’s Ma position, as it was seen as a political purge, while Ma had allegedly used information obtained via illegal wire taps. President Ma now finds himself in a worsening political scandal. As a result of the infighting and the president’s weakened position, passing legislation through parliament has become more difficult, which will hurt policy implementation. The next elections are scheduled for 2016 (presidential and parliamentary). If the Democratic Progressive Party (DPP) - the main opposition party - continues to ease its stance towards China while upholding its criticism of the KMT party on economic and social/welfare policies, it is likely to further improve its position.

3. Cross-Strait relations

In recent years, relations with mainland China have improved. An economic cooperation framework agreement was signed in 2010. Last year, the Taiwanese branch of the Bank of China was allowed to act as a clearing house for RMB-denominated transactions in Taiwan, paving the way for Taiwan to become an offshore center for RMB transactions, and a Cross-Strait services trade pact was signed in June this year, although Taiwan’s parliament still has to approve it. Mainland China’s president Xi Jinping – installed in March – has maintained his predecessor’s ‘economics first’ stance toward Taiwan. However, Xi also seems more inclined to also start political talks, which Taiwan remains reluctant to engage in.

Factsheet of Taiwan
National factsheet of TaiwanSource: EIU, CIA World Factbook, UN, World Economic Forum, 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 business environment is good. 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 as well.

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 considers Taiwan as one of its provinces. Although tensions have eased in recent years, China will still consider any unilateral proclamation of independence by Taiwan an act of war. 

Economic indicators of Taiwan
Economic indicators of TaiwanSource: EIU

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