Taiwan Business Forecast Report Q3 2009

Publication Date	July 2009
Publisher	Business Monitor
Product Type	Report
Pages	61
ISBN Number	1745-073X
Product Code	BMI03885

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Summary

Taiwan has been severely rocked by the slowdown in the global economy due to island's heavy reliance on external demand and cyclically sensitive sectors such as electronics. However, the overarching theme of warming relations with mainland China has provided a partial counterweight to the gloom, raising the prospect of significant investment flows and synergies down the line - which foreign investors will be keen not to miss out on. Nonetheless, in the near term the challenges facing the administration of President Ma Ying-jeou are stark, with unemployment in record high territory and many sectors in the economy still hunkering down. Indeed, while the worst of the inventory correction is behind and there are some glimmers of light on the horizon, a sharp 'v-shaped' recovery is not our core scenario, with the recession likely to drag on in Q309.

The opposition Democratic Progressive Party (DPP) is determined to stall further cross-Strait agreements, as reflected in a number of street protests in H109, but given their parliamentary powerlessness they will not have any material impact on policy. A number of important deals, relating to the financial services sector, increased cross-Strait flights and joint efforts to fight crime, were inked in April. The next major hurdle for Ma will be to push through a free-trade agreement with the mainland, a policy that the DPP wants to hold a referendum about. Meanwhile, we expect to see a cabinet reshuffle ahead of December's local elections as the ruling Kuomintang (KMT) party attempts to ensure that its electoral prospects are not weighed down by unpopular ministers and internal squabbling.

We believe that the first quarter of 2009 - when real output fell by a swingeing 10.26% y-o-y - marked the nadir in GDP contraction terms, with incipient signs that the island economy may be bottoming out. Improving cross-Strait ties continue to drive sentiment, but the eventual rebound may not be as brisk as the market appers to be anticipating. Nonetheless, we do acknowledge a few potential green shoots, such as a deceleration in the contraction in export orders and an attendant slightly less precipitous decline in industrial output. We expect inflation to remain subdued, although the rebound in the international price of oil is a source of concern. While further fiscal stimulus is in the pipeline, we now believe that monetary easing cycle is at or near the bottom with further interest rate cuts unlikely to make much of a difference.

Taiwan's business environment is on a healthy trajectory, in no small measure due to the benign cross-Strait dynamic but also the government's focus on bolstering the island's competitiveness amid fierce regional competition. Tax cuts and infrastructure upgrades should help Taiwan climb a few notches in our business environment rankings, from its current position of 27. Foreign investors are keeping a close eye on developments, as thawing tensions with the mainland could provide the island economy with an important thrust. A renewed appetite for Taiwanese assets is reflected in the stock market, with net foreign inflows turning positive in Q209. Audible interest has also been expressed by private equity groups and other investors, particularly in the tourism and retail sectors, which should benefit directly from a rise in cross-Strait travel and business activity.

Content

Executive Summary
Worst May Be over, but Challenges Remain
Chapter 1: Political Outlook
- SWOT Analysis
- Bmi Political Risk Ratings
- Domestic Politics
- Ma on A Path of Power-Consolidation
- The Opposition Is Determined to Make Noise, as Reflected in A Number of Street Protests in H109, but Given Their Parliamentary Powerlessness They Will Not Have Any Material Impact on Policy.
- Foreign Policy
- Beijing Granting Taiwan Greater Political Latitude?
- Beijing's Decision Not to Bar Taiwan from Participating in The United Nation's World Health Assembly Meeting in May Is One Likely Result of Thawing Tensions between The Two Long-Time Rivals under President Ma Ying-Jeou.
Chapter 2: Economic Outlook
- SWOT Analysis
- Bmi Economic Risk Ratings
- Economic Activity
- Q109 Gdp Data Confirm Bleak Outlook
- The First Quarter of 2009 Is Likely to Have Marked The Nadir in Gdp Contraction Terms, with Incipient Signs That The Island Economy May Be Bottoming out.
- Fiscal Policy
- Fiscal Shortfall Set to Widen as Recession Bites
- The Government's Stimulative Programmes Coupled with A Marked Fall in Revenues Will Seen The Fiscal Deficit Widen Fairly Significantly in 2009, but Not Nearly as Dramatically as in Many Western Economies.
- Balance of Payments
- External Balance Still Highly Comfortable
- in Line with Our View That The Worst of The Current Downturn May Have Passed, Monthly Trade Figures from Taiwan Showed That Outbound Shipments in May Contracted by A Smaller than Expected 31.4% Y-O-Y.
- Monetary Policy
- Deflationary Blues Have Not Dispersed, Yet
- The Cbc Appears to Be at or near The Bottom in The Easing Cycle, with Further Interest Rate Cuts Unlikely to Make Much of A Difference.
Chapter 3: 10-Year Forecast
- The Taiwanese Economy to 2018
- The Mainland Factor
- We Think The ODDS Are Good That Taiwan Will Be Able to Revive Growth over The Coming Years, A View Predicated on Improving Relations with The Mainland, The Island's Robust Endowment of Human Capital, and Entrepreneurial Zest.
Chapter 4: Special Report
- The Outlook for Global Banking
- Business Environment Rating Outlook
Chapter 5: Business Environment
- SWOT Analysis
- Bmi Business Environment Risk Ratings
- Business Environment Outlook
- Institutions
- Infrastructure
- Market Orientation
- Operational Risk
Chapter 6: Key Sectors
- Textiles & Clothing
- Executive Summary
- Taiwan Itself Has Developed A Strong Competitive Position in Man-Made Fibres and Going Forward, Bmi Sees The Industry Specialising in Functional Textiles and Other Niche Markets.
- Metals
- Executive Summary
- While The Taiwanese Steel Industry May Have Reached Its Bottom in Q109, IT Will Not See Much of An Improvement until 2010, When Bmi Forecasts Output Growth of 3.8%.
Chapter 7: BMI Global Assumptions
- Global Assumptions
List of Tables
- Table: Political Overview
- Table: Economic Activity
- Table: Fiscal Policy
- Table: Balance of Payments
- Table: Monetary Policy
- Table: Long-Term Macroeconomic Forecasts
- Table: Loan-to-Deposit Ratios, Selected States
- Table: Loan Growth (% Chg Y-O-Y), Selected States
- Table: Commercial Banking Business Environment Ratings, Selected States
- Table: Bmi Business & Operational Risk Ratings
- Table: Bmi Legal Framework Ratings
- Table: Asia - Fdi Annual Inflows
- Table: Bmi Trade Ratings
- Table: Top Export Destinations
- Table: Textiles and Cloth Ing International Trade, 2006-2013
- Table: Taiwan's Metals Industry , 2006-2013
- Table: Global Assumptions
- Table: Global & Regional Real Gdp Growth
- Table: Commodities