• Improving Taiwan’s Economic Performance
  

  The government is hoping to spur new industries, reduce export reliance, and foster freer cross-Strait trade. Economists also stress the need to build brands and end over-regulation. 

• Consumer Vouchers: Small but Real Impact

• Promising Signs for 2010
  
  

BY JANE RICKARDS

The global financial calamity last year triggered by the bankruptcy of Lehman Brothers sent shock waves all over the world. Among the major Asian economies, Taiwan has been the hardest hit. According to Global Insight, the economic research and consulting firm, Taiwan’s economic growth this year of minus 4.1% will constitute the steepest contraction in East Asia. In comparison, the South Korean economy is expected to contract by 1.9%, Singapore’s by 2.1%, and Hong Kong’s by 2.9%. The value of Taiwan’s all-important electronics exports plummeted by 28% in the first half of this year as Western consumers tightened their belts in the face of the deep recession.

Forecasts for next year are considerably brighter, with general expectations that Taiwan will outdo many of its neighbors and possibly experience a sharp V-shaped recovery next year. Global Insight foresees 4.3% GDP growth for Taiwan, as against 4% for Hong Kong, 3.9% for Singapore, and 1.6% for South Korea. But despite the rosier outlook for 2010, the financial crisis has profoundly challenged Taiwan’s economic identity. “We have to reposition ourselves,” says Chen Miao, the chief economic forecaster at the Taiwan Institute of Economic Research (TIER). “We have come to that stage where the conventional wisdom of the growth model will no longer work.”

Policy-makers and economists alike are questioning Taiwan’s extremely heavy reliance on exports, which makes for greatly increased vulnerability in times of international turmoil. They are also questioning whether Taiwan – one of the world’s top performers in Information/Communications Technology (ICT) – is too narrowly focused on electronics. And many are now pondering whether Taiwan remains too dependent, when indirect exports after processing in China are factored in, on the U.S. market.

“Taiwan’s economy has too much volatility,” says Wang Lee-rong, director of the Center for Economic Forecasting at the semi-official Chung-hwa Institution for Economic Research (CIER). “When there is a world recession, we are very small and open and hit badly compared to other countries.”

Generally, economists have been saying for years that Taiwan must further integrate its economy with China’s if it wants to promote more vibrant economic performance. “Taiwan has been clearly underperforming if you compare it to peers like Singapore, Hong Kong, and even Korea,” says Kim Eng Tan, a Singapore-based credit analyst with Standard and Poor’s. “The main reason is that it has shut itself off to a large extent from the main source of growth [in the region], and that’s China.”

Since regaining power last year, the Kuomintang-led government in Taiwan has been working to facilitate cross-Strait trade and investment. As a result of declining confidence in the ability of the U.S. economy to generate sufficient demand, there is a tendency now in Taiwan to view China less as a location for low-cost manufacturing and more as an important export market in its own right. The perception that the financial crisis has left the U.S. economy badly weakened is likely to intensify that trend. Despite the global economic woes, China is forecast by Global Insight to enjoy 8.1% GDP growth this year.

“In the near future, we can expect to see the driving force of world economic growth shifting from the West to the East, with tremendous business opportunities arising in the Asia Pacific markets,” said San Gee, Deputy Minister of the Taiwan government’s Council for Economic Planning and Development, at the 2009 Taiwan Business Alliance conference in October.

San noted that Taiwanese exports are overly concentrated in North America and Europe, which – if indirect exports are included – account for 67.2% of the total value of Taiwan’s overseas shipments. At the same time, those Western markets are losing momentum in their appetite for consumption. He cited Global Insight forecasts that OECD countries’ annual growth rate for imports will average 7.8% between 2011 and 2015, well below the 14.4% projected for Asia Pacific nations. He also cited a Goldman Sachs projection that China will have the world’s largest economy by 2030, and noted that the middle-class population in the Asia Pacific has expanded six-fold over the past two decades to reach 88 million people in 2008. CIER’s Wang predicts that if environmental problems continue to worsen and oil prices to rise, “intra-regional trade will replace global trading.”

Cheng Cheng-mount, an economist with Citigroup, points to another indicator that the economic thrust is shifting from West to East. He says that Taiwanese computer makers traditionally viewed the United States as one half of their export market, with Europe and emerging economies collectively making up the other half. “But now it is one-third for each market – the U.S., Europe, and Asia.”

Other analysts stress that, despite the necessity that Taiwan engage in greater market diversification, the United States will still be a crucial export destination for Taiwan for many years to come. Kevin Hsiao, director of Wealth Management Research at UBS, estimates that current American consumption power – even at a time of slow economic recovery and record unemployment – is around eight times that of China’s. “Even though the dynamics are shifting and American consumption is shrinking, China alone cannot pull up Taiwan’s exports,” he says.

Cross-Strait links

Looking beyond the export trade, economists say Taiwan should link itself more closely to China’s enormous and rapid growth in other ways. “There is a significant need to see [regulatory] barriers removed so that Taiwan may leverage the growth of mainland China,” Tan says. He says that Hong Kong – whose economy performed much better than Taiwan’s this year – is thriving because it utilizes its legal framework inherited from the British and a foreigner-friendly environment to develop financial and professional services needed by China. Taiwan has many advantages over Hong Kong, such as a Mandarin-speaking environment, but it “is obviously not benefiting from China as much as it could,” Tan says.

For decades the ban on direct transport severely hindered the development of cross-Strait economic ties, and even though the situation has been much improved since Ma Ying-jeou’s accession to the presidency, the number of flights – at 270 per week – is still insufficient, especially for major destinations such as Shanghai.

Legal restrictions on tech-sector investments in China are another problem, and have caused many companies to move some of their major business activity offshore, Tan adds. Tech giants like Quanta and Foxconn are strong, he says, “but if you want them to perform even better, you must give them more flexibility in investment.” Currently, Taiwanese companies are prohibited from investing more than 60% of their net worth in China, although the cap can now be waived for companies certified by the government as headquartered in Taiwan. 

Further easing the restrictions on investment into the mainland, economists suggest, would in fact enable Taiwan to attract more foreign and local investment to the island. Companies setting up operations in China might wish to maintain their regional headquarters here so as to tap the vast Chinese market while still enjoying Taiwan’s advantages of better Intellectual Property Rights (IPR) and other legal protections.

Analysts add that a proposed cross-Strait Economic Cooperation Framework Agreement (ECFA) would also help Taiwan take fuller advantage of China’s rapid growth. ECFA is designed to prevent Taiwan’s exports to China from losing competitiveness due to their 5-15% tariff levels as China enters into free trade agreements with the ASEAN countries next year. It is also seen as reducing the likelihood of Taiwan being marginalized in the region due to exclusion from the emerging trade blocs.

Taipei and Beijing are expected to discuss ECFA in bilateral talks scheduled for December, Mainland Affairs Council officials say, in hope that the framework for the pact – along with “early harvest” items earmarked for tariff relief – can be signed at another round of talks early next year. Economists say this could provide further encouragement for companies to locate headquarters or make new investments here. In an environment of a free flow of goods, services, and investment, Taiwan and China could each gain by concentrating on complementary business niches – with Taiwan, for example, specializing in such areas as R&D and international marketing while China contributes its labor supply and huge domestic market.

But the process of completing full negotiations on ECFA and resolving decades of mutual hostility is likely to be slow. Some economists suggest that the main benefit of ECFA, which will include a dispute resolution mechanism, will be simply to boost business confidence and thus make Taiwan more attractive to investors. “Political uncertainties are a very great threat to Taiwan’s economy, so at least if negotiations are going on – and ECFA will go on for more than 10 years – the two sides will have a platform to talk with each other,” Wang says. “As long as the two sides are talking, foreign investors will view it as a positive development.”

Citigroup’s Cheng says agreements like ECFA are mainly likely to boost Taiwan’s stagnant service sector and will bring limited benefits to high-tech industry. He points out, for example, that Taiwan’s life insurance sector, consumer banking, convenience store chains, and logistics operations are all more advanced than their Chinese counterparts, giving these service industries a good opportunity to make inroads in the China market. “With closer ties with China, Taiwan’s GDP growth rate could perhaps increase by 1%,” says Cheng. That could enable Taiwan’s average annual growth to continue at a 4-5% level over the next decade rather than slow to 3-4% as the economy matures. 

Other major economic problems confronting Taiwan include stagnating growth in personal income and weak consumption. Hsiao of UBS notes that between 2000 and 2008, per capita GDP shot up by a total of 21.3% in Hong Kong, 69% in Singapore, and a “stunning” 75% in Korea, while Taiwan’s rose by only 17%, “far below its peers.” According to a 2008 UBS report, in addition, private consumption in Taiwan increased by an average of 7.8% a year in the 1980s and 1990s, but since 2000 that has slowed to an average of 2.6%.

Migration of one million

These poor consumption conditions have been exacerbated by the migration to China of at least one million mostly middle-class Taiwanese who are no longer doing their major purchasing on the island. With further improvement in cross-Strait transportation and the removal of more business barriers, however, many of the Taiwanese on the mainland could opt to spend more time in Taiwan, even treating it as their base from which to do business with China.

The job market has also been a source of concern, with the unemployment rate in September setting a record high at 6.09%. That does not even tell the whole story, says Tan, pointing to such signs of under-employment as the queues of taxis lining the streets waiting for passengers. “There are a lot of people working on pay that can barely sustain their life,” Tan says. “All this does not contribute to a strong economy.”

Boosting the Taiwan economy by leveraging China’s growth of course brings up questions of political risk. Companies will make the decision to substantially expand capital and human resources in Taiwan only if they feel secure about engaging in long-term business planning. There is a risk that agreements such as ECFA could be stalled or undone in the future if a government unfriendly to China is elected. “The [political] risk is not very high, but neither is it small enough for people to disregard it,” says Singapore-based Tan.

Despite corruption scandals surrounding former pro-independence Democratic Progressive Party (DPP) president Chen Shui-bian, 42% of Taiwan’s voters still voted in the 2008 presidential election for the DPP, which opposes Ma’s version of ECFA. But at least some analysts interviewed for this report doubt that a DPP comeback would make a significant difference in economic policy. The opposition party, which supports economic links with China as long as Taiwan’s sovereignty is not compromised, will realize it cannot afford to ignore China economically, they say.

Looking at the China side of the equation, CIER’s Wang believes Beijing will seek to continue with ECFA even if the DPP returns to power. She notes that President Hu Jintao wishes to leave a legacy of peaceful cross-Strait relations before he steps down in 2012, and that China also has economic benefits to derive from ECFA. High-level Chinese officials “think it is a good thing to cooperate with Taiwanese companies, especially the high-tech ones, as they need to upgrade [their industries] quickly” to prevent a significant slowdown in China’s growth in five to six years’ time, Wang says. 

For its part, Taiwan also needs to make its economy more balanced. ICT products currently account for 53.2% of Taiwan’s exports, says CEPD’s San, a level that leaves the island highly vulnerable at times of global recession. Citigroup’s Cheng suggests that Taiwan focus more on exporting services, rather than goods, to the enormous China market. “Upgrading Taiwan’s service sector is definitely one of the priorities for the current government,” he says.

The government is also providing funding and other support to spur the development of six emerging industries in an effort to lessen the dependence on ICT exports. The six sectors are green energy, including solar cells and LED lighting; cultural and creative industries; health care (especially to improve treatment in rural and remote areas, and to develop capabilities in medical tourism); international and domestic tourism; high-end agriculture; and biotech, for which the government in March announced a US$1.8 billion venture capital fund to support cutting-edge biotech research.

These programs are still in their infancy. “The government wants to lead the private sector to invest, but it will take time,” Wang says. But reaction to the projects from economists has been mixed. Cheng considers that it is a good direction but sees little likelihood of significantly lessening Taiwan’s tech dependency for the next five to ten years. TIER’s Chen also expresses skepticism that the initiatives can resolve fundamental problems with Taiwan’s economy. He cites the lack of needed “vertical” elements, such as “the upstream to design ideas and the downstream outlets,” and concludes that “this is just a new song with the same lyrics.”

In the face of stiff competition from Asian rivals, Taiwan in recent years has also been looking for ways for assist its companies in upgrading from their traditional roles as original equipment manufacturers for top Western tech firms, instead turning to branding and innovation. Hsiao of UBS says Taiwanese companies cannot continue with OEM outsourcing over the long term. “If you look at the notebook industry, in the very beginning the notebook makers enjoyed double-digit margins,” he says. “Currently they are below 5%. How sustainable will profitability be if the margin erosion continues? I think it will be a dead end sooner or later.” 

Most economists expect the Taiwan economy to remain firmly rooted in the ICT field, but stress the importance of both brand development and enhancing competitiveness. Tan compares Taiwan with Korea, whose larger domestic economy has made it easier for its major companies to develop strong brands. “In Taiwan, you have very strong companies, but they are not branded, and this is a disadvantage for the Taiwanese,” he says.

Taiwan is making some strides in branding, says Hsiao. As an example, he cites Asus, the first company in the world to make netbooks – small, light, and inexpensive laptop computers suited for general computing and accessing web-based applications. When Asus launched its Eee PC in 2007, it created a new market segment.

Leading brands

In mid-October, the Taiwan External Trade Development Council (TAITRA) announced the leading Taiwanese global brands for 2009, with computer-maker Acer topping the list with an estimated brand value of US$1.24 billion. Trend Micro, the anti-virus software company, came in second at US$1.24 billion and Asus was third with US$1.23 billion.

But these figures pale in comparison to the value of U.S., Japanese, and Korean brands. The 2009 survey of the world’s top 100 brands, published by BusinessWeek based on data from Interbrand using similar methodology as the Taiwanese study, contained no Taiwanese companies. Coca-Cola topped the list with a brand value of US$68.7 billion, Japan’s Toyota came in at No. 8, and Korea’s Samsung was No. 19. No. 99 on the list, Polo Ralph Lauren, was worth US$3 billion, almost triple Acer’s brand value, showing that Taiwanese companies have some way to go.

Hsiao also suggests that the major Taiwanese tech companies may get a boost in building global brands by operating in the immense China market. CIER’s Wang points to a government plan launched last year, under which eventually Chinese goods would be shipped to Taiwan for higher-level processing before being re-exported to foreign countries as “made in Taiwan” products. Discussions have begun about such cross-Strait cooperation in such fields as solar cells, Chinese medicine, and auto-electronics, with the aim of launching actual operations within three years.

TIER’s Chen also emphasizes the need to shed over-reliance on other countries’ technology and instead to build Taiwan’s own capacity for innovation and design. “By using second-hand and borrowed technologies, we have basically limited our growth to the lifecycle of what happens to be manufactured at the time,” he says. But progress is being made, as seen by the fact that Taiwan ranks fourth in the world in the number of U.S. utility patents granted each year. Its expenditures on R&D in 2007 amounted to 2.58% of GDP, not far below the 2.62% of the United States. Citigroup’s Cheng notes, however, that R&D in the United States is sponsored both by the private sector and the government, while in Taiwan the private sector is largely absent from R&D activity.

Another problem in Taiwan, Chen says, is that there are not enough incentives or rewards for good ideas. The venture-capital industry is comparatively small, capital markets are not well enough developed, and relatively few people are willing to “invest in the future with foresight,” he says. “If Jerry Yang of Yahoo! were in Taiwan, how far would he be able to get?” Chen asks. “Would he be able to sell his options to the stock market in Taiwan and make billions? Maybe – but the odds are smaller here.”

Ultimately, analysts say, Taiwan cannot create an atmosphere conducive to business and investment without vastly improving its regulatory environment. The government needs to “reduce the paper work and rubber stamps and get rid of antique laws and legislation,” Chen says. “You might think of these as trivial, but they are not. They can be the difference between whether or not you would consider investing more here.” AmCham’s 2009 Taiwan White Paper notes that top-level officials seem well-aware of this problem, but states that this consciousness has not spread to the middle- and lower-level officials who interpret regulations on a daily basis.

CEPD’s San points to strides in deregulation since the Ma administration took office, as a result of which Taiwan moved up 15 places this year in the World Bank’s report on the ease of doing business and up five places in the World Economic Forum’s global competitiveness report.

In discussing competitiveness, Tan particularly emphasizes the need to consolidate the fragmented banking sector, noting the inevitable impact that banking has on all the other aspects of the economy. “Taiwanese banks are less profitable than their peers elsewhere,” he says. “This limits their ability to strengthen their capital base to stand up to financial shocks and competition overseas.”

Over-regulation – including the restrictions on commerce with China, which has discouraged investment into Taiwan – is also seen as retarding competitiveness. “This is very important,” says CIER’s Wang. “Our investment ratio – that is, investment as a proportion of GDP – is so low. From 1996 until now, it has only been around 20%, while the equivalent figure for China is 47%.” Tan adds that more investment from China could help the economy. In June this year, Taiwan opened 64 categories of manufacturing, 117 categories of services, and 11 categories of public investment to Chinese investment, but few projects have materialized as yet.

The government also is encouraging Taiwanese-invested companies overseas to list in Taiwan. So far 10 such companies have applied to the Taiwan Stock Exchange for secondary listings, with the Tingyi Group saying in early November it plans to raise about US$440 million in a share offering in December. TIER’s Chen also suggests that Taiwan set up a national investment office, similar to the Government of Singapore Investment Corp., enabling the government to utilize Taiwan’s foreign reserves to make long-term investments on behalf of the country. The earnings could be used to provide funding for the financially strapped National Health Insurance program and for infrastructure improvements, he notes.

When asked to name a country that Taiwan could model its economy on, Chen points to the Netherlands. Manufacturing there is still profitable, he points out, with Philips doing well in electronics and Anglo-Dutch Unilever producing home, personal care, and food products. “It is small relative to its bigger neighbors, but it has managed to create a market structure allowing business activities to branch out of the Netherlands to the rest of the world,” he says. 

“There is no excuse for losing out to China,” Chen concludes. “We just need to be more efficient.”

Consumer Vouchers: Small but Real Impact

During Taiwan’s gloomiest economic moment – the trough that took place in the beginning of 2009 when GDP growth for the first quarter set a record low of  minus 10.13% – the government sought to cheer up the public ahead of the Chinese New Year. With the aim of creating a short-term economic fix by boosting consumer spending, the government distributed consumption vouchers worth a total of NT$85.7 billion (US$2.6 billion), with each citizen receiving NT$3,600 (a little over US$100) in vouchers. The first wave of coupons was distributed at post offices and other government offices around the island starting January 18, and 92% of eligible recipients picked them up. By the end of September, the deadline, 99.42% had been cashed.

However, the unprecedented program was not as successful as the government had hoped, says Chung-Hua Institution for Economic Research chief forecaster Wang Lee-rong. The semi-official CIER and the government had originally calculated that multiplier effects would enable the program to add around 0.66 percentage points to Taiwan’s real GDP growth rate.

But this never happened. The reason? Sixty percent of thrifty voucher users, nervous about grim economic conditions, used them for things they planned to buy anyway, causing a “substitution effect.”

“We over-estimated,” Wang says, adding that CIER had expected a substitution rate of only around 30% to 40%. But the actual results were similar to those of a Japanese program in 1999, where only 30% of the spending went for non-substitution purposes.

“If the government is seriously looking at turning around the weak consumption sector, they should look into structural problems instead of a one-time stimulus package,” says Kevin Hsiao, director of Wealth Management Research at UBS. Kim Eng Tan, a credit analyst with Standard and Poor’s, suggests the program might have been more successful if it had been directed more at low-income households.

Despite the large substitution effect, the voucher program is still regarded as having had a positive impact. Citigroup economist Cheng Cheng-mount says that without the voucher program, first quarter growth might have been dragged down to -11% or -12%. Chen Miao, chief economic forecaster at the Taiwan Institute of Economic Research, adds that “it definitely helped boost confidence at the time – people definitely went out and spent more.” He notes that even if the substitution rate were as high as 90%, that still means an extra NT$8.5 billion was being injected into the economy, helping spur business activity.

— By Jane Rickards

Promising Signs for 2010

Unexpectedly, Taiwan is showing itself to be one of the fast-recovering economies in Asia from the worldwide downturn. “It is becoming a V-shaped recovery,” says Cheng Cheng-mount, an economist with Citigroup.

Exports – which as the equivalent of 74% of GDP are the main drivers of the tech-strong island’s economy – are gradually clawing their way to pre-crisis levels. Some economists think that export value may even show positive year-on-year growth next month.

From January’s record drop of 44.1% from the same month last year, exports have slowly climbed back – from negative 24.6% year-on-year growth for August to minus 12.76% in September, before showing just a 4.7% decline growth for October.

Export orders, a sign of shipments to come in the next one to three months, are showing a similar trend, according to figures from the Ministry of Economic Affairs (MOEA). The minus 3% growth year-on-year in September (the most recent number to be released) was the smallest drop this year.

In October, China (including Hong Kong) was the most prominent buyer of Taiwanese goods, accounting for 41.7% of the island’s exports and registering healthy year-on-year growth of 10.6% in imports from Taiwan. In contrast, exports to the United States, Japan, many Southeast Asian countries, and Europe showed negative growth. On the other side of the trade ledger, total imports for October, amounting to US$16.58 billion, were down by 6.7% from the same month of last year. The trade balance was a favorable US$3.23 billion, the Ministry of Finance reported.

Further improvements in the trade picture are likely to continue to be gradual, as American consumers – the main buyers of Taiwan’s electronics and computers – reel from their deepest recession in almost 80 years. “Until real estate prices stumbled in 2007, U.S. growth was driven by unsustainable lending,” says Kim Eng Tan, a Singapore-based credit analyst with Standard and Poor’s. “This situation won’t be repeated. Growth in the U.S. won’t be as vibrant and this will drag on the international economy.”

Cheng of Citigroup says new demand from China is currently boosting Taiwan’s exports. He sees this as enabling exports to reach their pre-crisis levels in the second half of 2010, even though American demand will not have fully recovered by then.

“People have the idea that the ordinary Chinese consumer probably cannot afford very expensive items,” but that is not necessarily so, Cheng says. For example, 37” and 42” large-screen televisions currently are very popular in China, he notes, with many average consumers able to find the money to upgrade from their existing small TV set.

Kevin Hsiao, director of Wealth Management Research for UBS in Taipei, notes that around half of Taiwan’s exports to China are re-exported to the United States after processing and assembly. The overall export outlook therefore cannot improve substantially without a pick-up in U.S. demand. Nevertheless, Hsiao predicts export growth in the high single digits for the first half of 2010, before Taiwan returns to double-digit export growth in the second half.

Tan of Standard and Poor’s forecasts that the economy will shrink by 4% this year, before rebounding to positive 3.25% growth in 2010. Citigroup’s Cheng is predicting -3.9% GDP growth this year and 3.7% next year, while the semi-official Chung-Hua Institution for Economic Research is predicting -3.72% GDP growth this year and 4.46% for 2010.

In another sign of gradual recovery, September was the first month this year in which industrial production, which strongly correlates to profit margins in the manufacturing sector, showed an increase in value, albeit a modest 1.01% growth, according to the MOEA. 

Private investment declined sharply this year, reflecting the collapse in export demand and tighter credit conditions. CIER anticipates a -24.77% drop in private investment this year and 2.97% growth in 2010. Unemployment, seasonally adjusted, stood at 6.09% in September, the highest level since the government started keeping records three decades ago, the Directorate General of Budget, Accounting and Statistics (DGBAS) reported. The true unemployment figure could be even higher, since some companies urged workers to take unpaid leave. But economists note that employment is a lagging indicator in a nascent economic recovery. “The job market is already stabilizing and the worst is over” says Citibank’s Cheng. CIER, for example, predicts average unemployment of 5.88% for this year, followed by a slightly better 5.76% next year.

Private consumption, which accounts for over half of Taiwan’s economic activity, is still in a poor state. Around one million Taiwanese have moved to China, depriving the market here of their purchasing power, and high levels of household debt, equaling about 65% of GDP, is causing many people to scale back their shopping. Although debt levels started easing once the 2006 credit card crisis had passed, “households are under more pressure as debt obligation remains the same while income growth slows,” wrote UBS economist Duncan Wooldridge in an October report.

Deadly Typhoon Morakot also cut into private consumption this year. Besides the direct impact of the property losses on victims of the typhoon, many members of the public made substantial charitable donations that reduced their regular consumption activities, notes CIER chief forecaster Wang Lee-rong. The effect of the disaster contributed to the CIER’s decision to downgrade its GDP forecasts for this year from July’s -3.56% to -3.72%, Wang says. Her institute forecasts consumption growth of 0.46% this year and 1.91% next year, while the Taiwan Institute of Economic Research, another local think tank, forecasts 0.37% for 2009, followed by 1.89% in 2010. With the arrival of Chinese tourists numbering in the few thousands each day, their spending so far is having very little impact on the overall economy, economists said.

On the monetary front, the government is keeping borrowing costs low to help fuel recovery. In late September the Central Bank decided to leave the discount rate unchanged at 1.25%, the third time since February that it did so at its quarterly board meeting. The government wants to keep the value of the New Taiwan dollar relatively low to boost exports, and the Central Bank is highly unlikely to be one of the first in Asia to raise rates. Some analysts said rates are likely to be raised in tandem with action by the U.S. Federal Reserve, perhaps in mid-2010 or later. Citibank’s Cheng, for example, predicts a rise in interest rates in June 2010 by 25 basis points (0.25%). Meanwhile, the DGBAS says, inflation is likely to remain low and stable, with the Consumer Price Index (CPI) forecast to increase 0.68% this year and 0.87% in 2010.

With regard to exchange rates, the Taiwan dollar’s appreciation against a weakening greenback is causing investors to bet that it may appreciate further, much to the Central Bank’s irritation. The bank warned in late September that it would “step in to maintain an orderly market” if irregular flows of “hot money” caused the New Taiwan dollar exchange rate to be excessively volatile. On October 3, the currency reached NT$31.995 against the dollar, the strongest level since the same date a year before. Media reports later quoted Central Bank Governor Perng Fai-nan as saying that foreign investors have some NT$500 billion (about US$15.4 billion) sitting in Taiwan-dollar accounts, five times more than he considers acceptable.

In November, Taiwan imposed capital controls banning foreign funds from investing in time deposits. “The [Central Bank] will not go against the wind, but it will definitely slow down the volatility,” says CIER’s Wang. “The biggest consideration is that we can not appreciate more than our competitors: Korea, Singapore, maybe Japan, and other regional countries.” Economists say the currency is likely to appreciate next year fueled by improved economic fundamentals, warmer cross-Strait relations, and inflows of Taiwanese and foreign capital into portfolio investments. CIER is predicting that the average exchange level against the dollar will rise from the NT$33 of 2009 to NT$31.83 for 2010.

Economists say that government stimulus packages, including the 12 i-Taiwan infrastructure projects announced in 2008 as involving US$80 billion in public spending over seven years and the US$2.9 billion Typhoon Morakot reconstruction budget, were not having a significant impact on GDP growth or employment. Although government spending has expanded – CIER predicts it will grow 21.5% this year before shrinking by 3.73% next year – it still represents a small part of the economy. Overall, says Hsiao of UBS, economic revival will depend on consumption and exports.