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Taiwan, Republic of China
SEB MERCHANT BANKIN G – COUNT RY RISK AN ALYSIS
February 11, 2016
Analyst: Rolf Danielsen. Tel : +46 8 763 83 92. E-mail : [email protected]
Following a disappointing economic performance in 2015 in part due to the slowdown in China, hopes
are pinned on a moderate recovery in the current year on the back of stronger domestic demand.
Renewed political calm after landslide elections for the opposition should bolster sentiment as the
new President has declared to maintain status quo vis-vis its big neighbor.
Summary and conclusion
OMNS=ëÜçìäÇ=ëÉÉ=~å=ÉåÇ=íç=ìåÉñéÉÅíÉÇ=ëäçïÇçïå=Ä~êêáåÖ=ëáããÉêáåÖ=êáëâë:
The steep deceleration of economic growth in 2015 to less than 1% is now
hopefully a thing of the past as the unambiguous results of recent elections help
clear the air and strengthen sentiment among consumers and investors.
However, the threat from adverse external shocks may not fade anyway soon
portending significant impacts on Taiwan’s open economy. Such shocks are not
only related to China and what is now being mused as the potential for a crash
landing of that country. Other risks could emerge including new turbulence in
Europe – perhaps triggered by a Brexit, uncertainty surrounding a new
president in the US and the possible failure of Abenomics in Japan, another large
economy and trading partner in Taiwan’s neighborhood.
oçÄìëí=ÉÅçåçãó: However, against such challenges and outright threats
Taiwan represents a bulwark of sound economic and financial policies.
Government deficits have been brought down to less than 1%/GDP and its debtratio is moderate at 42%. Last year, the current account balance produced a
structural surplus of 15%/GDP helping maintain reserves at more than $400bn -enough to cover 18 months of imports or twice the size of external debt. The
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economy is the 14 most competitive in the world and investors praise the
country for good governance and sound business environment. Banks appear
strong but could prove liable to highly leveraged households.
råÇÉêäóáåÖ=ëÉÅìêáíó=êáëâëW That said, Taiwan also finds itself in a regional
security environment where the potential for abrupt changes could be on the
rise. The President elect, Ms. Tsai, a university professor in law, has asserted
that she will continue status quo policies although with greater transparency
than her predecessor despite being elected by an increasingly China sceptic
population. Last month she won a landslide victory while also securing two
thirds parliamentary support.
bñíÉêå~ä=ëçîÉêÉáÖå=ê~íáåÖë have remained unchanged over the recent 12 months
period. Weighing in inherent economic strengths against potential medium
term headwinds country risks should also stay put barring an unlikely –
although disastrous -- tail risk of regional security breakdown.
important
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SEB Merchant Banking Country Risk Analysis February 2016
Recent economic developments
.
dêçïíÜ=íìêåë=ëçìíÜW==Against all expectations, 2015 turned out as a great
disappointment in terms of economic growth. As late as halfway through the
year, most observers had expected continued growth at more than 3% in line
with the year before. The final number is now estimated well below 1%. Many
observers blame this on faltering exports, including to China. While this explains
much, almost flat imports cushioned the effect on weaker net trade in real terms.
By contrast, softer domestic demand, in particular private consumption also
exerted a drag on the economy in the second half of last year notwithstanding
strengthening households’ purchasing power in real terms. Continued fiscal
austerity and less buoyant investment demand explained the rest of Taiwan’s
poor economic performance in 2015.
OMNS=ëÜçìäÇ=éêçîÉ=ÄÉííÉê=ÇÉëéáíÉ=ÖêçïáåÖ=ÇçïåëáÇÉ=êáëâë. The general
sentiment is still for a modest recovery in 2016 to more than 2% growth, but that
comes with warnings of serious downside risks depending on what will happen
in the rest of the region and the global economy at large.
fåÑä~íáçå=~åÇ=ìåÉãéäçóãÉåí=ÇÉÅäáåÉ: As expected against the background of a
softer economic environment the rate of consumer price inflation decelerated to
a negative 0,3% year-on-year (yoy) in 2015. Unemployment, by contrast,
continued declining as well to levels last seen at the dawn of the Great Financial
Crisis (GFC) in 2008. Going forward this could still prove a lagged response
from employers to what must have been a softer labor market despite an
underlying adverse demographic trend.
`ìêêÉåí=~ÅÅçìåí=ëìêéäìë=êáëÉë=íç=NRB=çÑ=dam: Despite weakening exports of
which electronics dominate a third, the external balances still managed to beat
all previous records since the late 1980s. In our estimation the current account
balance ended 2015 at $80bn. -- more than 15% of GDP -- based on a 25% surge
in the three first quarter of the year compared with the same period of 2014.
Despite weaker export earnings that raised the surplus 3 percentage points (pp)
up on the preceding year as the import bill plummeted sharply following a
rapid fall in raw material prices and above all energy prices.
dêçïáåÖ=áåîÉëíãÉåí=çìíÑäçïë=Äìí=êÉëÉêîÉë=êÉã~áå=ëí~ÄäÉ. As in previous years
a part of this surplus was used to finance investments abroad including
acquisitions in regional countries. As a result of some very large year-end
transactions, net FDI (foreign direct investments) recorded a large deficit in 2015
of almost $19bn. -- double the result of the preceding year. Net of other capital
transactions -- including $164bn of loan repayments -- amounted to an outflow
of $58bn. offsetting most of the current account surplus. As such, the small rise
in reserves of $13bn. probably reflected mainly valuation effects because the
CBoC is not known to have intervened much in the local foreign exchange
market. That amount is enough to cover more than 18 months of imports or to
repay outstanding amount of total foreign debt twice. By the same token
Taiwan’s net international investment position (NIIP) is estimated at 180% of
GDP and remains extraordinarily strong for a non-oil-producing country.
Policies
pìÅÅÉëëÑìä=ÑáëÅ~ä=ÅçåëçäáÇ~íáçå: Since the GFC disrupted the fiscal balance in
2009 the government has been busy reining in the subsequent deficit. Last year
the budget shortfall remained stable within 1% of GDP, actually 0,5%/GDP less
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SEB Merchant Banking Country Risk Analysis February 2016
than budgeted. That was not only due to prudent expenditure management but
also the full year effect of tax hikes on business introduced the year before with
the aim to strengthen fiscal revenues. At only 16%/GDP Taiwan’s tax take is
quite low, less than half of similarly rated peers. However, fiscal activism is
likely to remain moderate. The first reading of the budget for 2016, presented by
the outgoing government, shows revenues rising only by 3,8% following the
introduction of taxes on house and land transactions. Expenditures, by contrast,
are expected to grow less, by 3,3%, setting the stage for further budget
consolidation.
b~ëó=ÇÉÑáÅáí=Ñáå~åÅáåÖ: As in previous years the small budget shortfall of 2015
was easily covered by the sales of bills and bonds mainly to domestic banks and
insurance companies at rates well below 2%pa. For several years outstanding
government debt relative to GDP has continued shrinking to 42% of which nonresidents hold less than 1%. This is well within the 50%/GDP limit set by
Taiwan’s own Public Debt Act. However, observers note that these numbers do
not cover contingent liabilities including government issued guarantees for three
state owned enterprises to the tune of 37%/GDP.
jçåÉí~êó=éçäáÅó=É~ëáåÖ: within the framework of a monetary targeting regime
the Central Bank of China (CBoC) – central bank -- last year eased its policy rates
twice, last in October, by 12,5bsp to1,6% pa. This was the first easing in more
than four years in response to soft money demand and credit growth and
against a backdrop of negative inflation rates. That seems to have prompted
some market reactions in terms of a weakening exchange against the USD which
may not have been entirely undesirable from an overall policy standpoint. The
Taiwanese dollar is for all practical purposes a free-floating currency and as
noted above not subject to active policy management.
oçÄìëí=Ä~åâáåÖ=ëÉÅíçê=ïáíÜ=ãçÇÉê~íÉ=`Üáå~=ÉñéçëìêÉ: At 280%, the banking
system of Taiwan is large in terms of total assets to GDP It is also regarded as
overbanked and could benefit from mergers and other rationalization. However,
it is still well managed with sound funding. A loan to deposit ratio at only 76%.
Means strong liquidity. High capitalization at 12,5% is in part the result of very
low levels of non-performing loans (NPL) having declined to 0,26% of the total
despite growing leverage in particular among households. The latter is often
cited as a potential future problem not least in view of elevated property prices.
Another oft-cited concern is the close financial relationship of Taiwanese banks
with their Chinese counterparties. While such exposure has increased rapidly in
recent years it still represents only 8% of total assets which is moderate
compared with peers, including Singapore with 12% and Hong Kong with 32%.
píêìÅíìê~ä=Ó=íçç=ãìÅÜ=çéÉååÉëë\ In crude macro terms, Taiwan remains a very
open economy with exports and imports altogether accounting for 130% of GDP.
But such statistics come with an important qualification. The interconnected
industrial development of recent decades in East Asia means that the same
product will pass borders several times as an intermediate product before
ending up with the domestic or foreign end-consumer. This is believed to inflate
the volume of Taiwanese trade in particular with China and Hong Kong. Until
some years ago this bilateral trade was growing very rapidly to almost 40% of
the total Taiwanese exports but could in fact include much double counting
perhaps to the tune of almost one half.
qçç=ãìÅÜ=ã~åìÑ~ÅíìêáåÖ\ Another case often pointed out by observers is the
share of manufacturing in the economy which at 29% is quite high for an
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SEB Merchant Banking Country Risk Analysis February 2016
advanced economy. As these are related to cyclical industries such as IT and
hardware spare parts including displays, hard discs and semiconductors, the
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economy may have become more volatile than desired. In return, this is also
the result of the economy’s strong competitiveness ranking number 14 out of 144
countries worldwide according to the World Economic Forum’s Global
Competitiveness Index. -- In return, Taiwan scores among the highest rated
countries in terms of ease of doing business, rule of law and absence of corruption
according to international surveys.
Politics
amm=ïáåë=~=ä~åÇëäáÇÉ=îáÅíçêó: Last January the opposition politician., Dr. Tsai,
of the Democratic Progressive Party won a landslide victory in presidential
elections over the Kuomintang candidate Mr. Eric Chu who was supported by
the incumbent, President Ma. At the same time DPP won 68 of the 113 seats in
the Legislative Yuan (LY). This makes it the first time DPP controls also the
national assembly since democracy was introduced in 1992 a situation some
observers have seen as potentially ominous. Last time DPP held the presidency
(2000-2008) Kuomintang controlled LY and blunted several presidential
initiatives that might have provoked Beijing.
kÉï=mêÉëáÇÉåí=ìåäáâÉäó=íç=ÇáëíìêÄ=ëí~íìë=èìç. However, Ms. Tsai, a law
professor of the local university -- is not regarded as a firebrand. She did not win
on a ticket challenging status quo with Beijing but rather on greater diversity in
external trade and financial transactions after President Ma had used his two
terms in office to promote trade and finance with China in a manner
disapproved of by swaths of the electorate even within his own party -- It has
been noted that many of these new trade and investment agreement, in
particular the comprehensive Economic Cooperative Framework Agreement in 2010,
did not break much new ground in terms of trade and economic cooperation,
although cemented what had already been achieved. By contrast, the new
president has advocated joining the US led initiative: Trans-Pacific Partnership
which has yet to extend an invitation to China.
q~áï~å=Ó=`Üáå~=ëÉÅìêáíóW=áë=ëí~íìë=èìç=ëìëí~áå~ÄäÉ? Since the Consensus
agreement Taiwan-China-US was signed in 1992, China has repeated its
determination to take back Taiwan over which it claims sovereignty if necessary
with military means should Taipei declare independence. To back up its words
China has continued to install missiles and other weapons on its side of the
Taiwan Strait. Hopes still remain though, that growing trade and personal
contacts through rapidly growing mutual tourism would eventually lay the
grounds for a peaceful solution to the underlying conflict.
dêçïáåÖ=ëìëéáÅáçå: Under Pres. Ma, DPP, has been supported by a growing
constituency of people increasingly suspicious of China. This has raised
concerns that the new president could pursue a more strident tone. However,
the President elect (she will take office in May) has made it clear bot prior to and
after the polls that in principle she supports status quo based on the three No’s of
the 1992 Concensus: No independence declaration, No unification, No use of violence.
in line with her predecessors. However, where the last No may in the past have
been a reminder to both sides of the Strait, it now clearly applies to China only.
Despite occasional US deliveries of arms to Taiwan, the latter has slipped further
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In our statistical rating framework, CRIS, Taiwan scores at par with weaker countries in terms of
export and GDP volatility.
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SEB Merchant Banking Country Risk Analysis February 2016
and further behind of any capacity to defend itself from an attack across the
strait. It now entirely depends on the US coming to its rescue which again is a
function of the mutual military strength between China and the US. That
continues to develop in a direction which eventually may not prove favorable to
the latter. This does not mean any party is planning to disrupt status quo, but
the military build-up in East Asia – not only by China – could raise the risk of
policy mistakes and accidents. Nevertheless, most observers, including the
rating agencies, downplay the likelihood of any military confrontation.
Outlook:
oÉÅçîÉêó=ëÜçìäÇ=ÄÉ=áå=íÜÉ=çÑÑáåÖ: After an unexpectedly weak performance in
2015, hopes are pinned on a moderate recovery in the current year. Households
are expected to take advantage of continued rise in purchasing power due to
tepid inflation while investors bounce back now when domestic political
uncertainty has calmed down. In this environment and barring any external
shocks the stage should be set for a gradual pick-up in economic activity to more
than 2% expansion in 2016 with further acceleration through the rest of the
decade.
However, such a scenario comes with growing voices of caution. The situation
for China has grown increasingly unclear since its financial turmoil began with
the stock market crash in June. Respected pundits with more than 60 years as
advisors to global markets are raising the specter of China rather crashing than
landing. While there will always be hyperboles there is no merit in closing ones
yeas to uncomfortable probabilities and as a close neighbor and important
trading partner China has a clear bearing on Taiwan and its credit risk. There
could also be other global risks, perhaps to be triggered by a sharper than
expected downturn in China. They include the potential for the euro-crisis to
flare up again or eventually that investors turn against Japan, should Abenomics
be seen as a failure. Uncertainty about a new US president could also play in.
Against this one should also factor in Taiwan’s very strong economic resilience
in terms of sturdy government finances and an extraordinary strong external
position with large reserves and a large structural current account surplus. As
long as there is no breakdown of regional security, Taiwan should be in s good
position to weather economic headwinds at least within a medium term horizon.
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SEB Merchant Banking Country Risk Analysis February 2016
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SEB Merchant Banking Country Risk Analysis February 2016
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