Economic studies
Taiwan

Taiwan

Population 23.6 million
GDP per capita 25,008 US$
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Synthesis

MAJOR MACRO ECONOMIC INDICATORS

  2017 2018 2019 (e) 2020 (f)
GDP growth (%) 3.3 2.8 2.5 2.2
Inflation (yearly average, %) 1.1 1.5 0.8 1.1
Budget balance * (% GDP) -0.1 0.8 -0.7 -0.9
Current account balance (% GDP) 14.5 12.2 11.5 10.7
Public debt (% GDP) 35.5 35.1 33.6 32.3

(e): Estimate. (f): Forecast. *Fiscal year from October 2018 to September 2019 (Budget including grants).

STRENGTHS

  • Robust external financial position
  • Support for R&D through public expenditure
  • Consensus on democratic achievements
  • 4th largest electronics producer in the world
  • Diversified FDI portfolio in Asia

WEAKNESSES

  • Exposure to demand from mainland China and the United States
  • Stagnant wage growth and low labour productivity
  • Lack of competitiveness of the service sector
  • Infrastructure gap compared to other advanced Asian economies
  • Growing isolation on the international diplomatic scene

RISK ASSESSMENT

Growth slows but is expected to remain robust

Growth is expected to moderate slightly in 2020, due to lower external demand amid trade tensions between the United States (US) and China. Taiwan’s share of exports to the US has increased. However, overall exports contracted by an average of -2.6% YOY in the first nine months of 2019 and should remain weak despite the partial trade deal between the United States and China in December 2019, as existing tariffs would continue to pressure global demand. Taiwan is integrated into the Chinese value chain, as its exports are mainly composed of intermediate products. Inflation will continue to remain subdued in 2020, due to weaker prices for key imports such as commodities and semiconductors. This will help to boost private consumption, which shall nonetheless remain muted. The 5% increase in the minimum wage, implemented at the beginning of 2018, has helped to boost consumption, but base effects together with more uncertainty surrounding weaker external demand will keep any upside in check. Moreover, China suspended independent tourist travel to Taiwan amid worsening cross-strait relations, a trend which is set to continue in 2020 because of the presidential election.

 

Government spending increased ahead of the January 11 presidential election. This will fall due to base effects and budgetary delays following the election in 2020. Infrastructure spending will help to cushion this downside, as this spending has already been approved by the legislature under Phase-II of the National Infrastructure Development Plan (2017/2025). In addition, private investment is set to increase, as Taiwanese firms divert production away from China and towards Taiwan, owing to disruptions surrounding the trade war and higher labour costs.

 

Strength of internal and external accounts

Infrastructure investments, which focus on the modernization of the rail network and water distribution, as well as the development of renewable energy, should be completed by 2025. Defence spending increased by 8.3% in 2019, which is 3% of GDP, and this will accelerate further in 2020. This is a pre-emptive move ahead of Presidential elections in the US (a Democratic Administration could halt military sales to Taiwan). The slight budget deficit is not worrying as 2018 tax reforms should help to buffer revenues, while the remaining extra expenditure will be partially financed through the issuance of sovereign bonds. Public debt, almost entirely denominated in New Taiwanese dollars and held by domestic investors, will remain at a moderate level.

 

On the external accounts side, the current account might deteriorate slightly but will remain in surplus due to a large trade surplus. Exports have slowed due to a more challenging external environment, but import growth will remain subdued on weak commodity prices (oil is and semiconductors). Taiwan is the fifth largest creditor economy, with a net external position of 200% of GDP and a stock of foreign net assets worth USD 1.3 trillion . This environment could strengthen on the back of the government’s “New Policy for the South”, which aims to extend Taiwan’s economic integration with Southeast Asian economies. The level of external debt (33% of GDP) does not compromise the stability of the island’s external position.

 

Tense relations with China, but more favourable international image

Relations with mainland China have soured since President Tsai Ing-wen and her Democratic Progressive Party (DPP) came into power in 2016. This is because DPP has adopted a tougher stance and refuses to join the 1992 consensus that governs relations between the two sides of the Formosa Strait and recognizes the principle of “one China”. Despite losing 15/22 cities and counties during local elections in 2019, embattled President Tsai Ing-wen’s popularity rose sharply in the months ahead of the January 11, 2020 Presidential elections, in response to developments in neighbouring Hong Kong. Her opponent, Kuomintang’s Han Kuo-Yu is pro-Beijing, and Taiwanese voters may have felt antagonized by this. Despite pressure, the President is unlikely to call for a referendum on an official declaration of independence, preferring the status quo.

 

Kiribati and Solomon Islands ceased to recognize Taiwan as a sovereign country in favour of mainland China in September 2019, meaning Taiwan only has full diplomatic relations with 16 countries (nine of which are in Latin America). Despite growing isolation on the international diplomatic scene, perceptions about Taiwan have improved, with the number of foreigners seeking residence permits increasing sharply (30% YOY increase from Hong Kong alone). Taiwan was also the first country in Asia to legalize same-sex marriage in 2019, and Taipei ranked as the No. 1 city in the world for expats according to a 2019 poll by InterNations.

 

 

Last update: February 2020

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