Country Report Taiwan June 2008

Outlook for 2008-09

• Ma Ying-jeou of the Kuomintang (KMT) won the presidential election that took place on March 22nd. He took office on May 20th. His convincing victory provides him with a strong mandate to govern.
• Mainland China has long-favoured a KMT government over one controlled by the opposition Democratic Progressive Party (DPP). This will help the two sides to agree on policies that will improve economic ties.
• Real GDP growth is forecast to average 4.4% a year in 2008-09. This respectable rate of economic growth will help to limit the budget deficit to around 2% of GDP over the two-year period.
• Economic policy implementation will improve from the second half of 2008. The focus of the new government will be largely on improving economic ties with China. It will also seek to boost growth through public investment.
• The Economist Intelligence Unit expects public spending to rise sharply in 2008, as the KMT's control of both parliament and the presidency will allow it to pass spending bills. Interest rates will trend upwards during 2008-09.
• The government announced in late May that it would allow the island's main oil refiner to raise the retail petrol prices. Partly in response to this, we have increased our forecast for consumer price inflation in 2008 to 3.1% (from 2.6%).

Monthly review

• In May the main opposition Democratic Progressive Party elected Tsai Ing-wen as its new leader. Ms Tsai is the first woman to be elected to the position.
• The domestic political scene has been dominated by cross-Strait relations, with a warming of ties between China's government and the KMT evident. This rapprochement could, however, irritate the US.
• Much of the cross-Strait rapprochement relates to closer economic ties. In June the two sides agreed to expand the number of direct flights allowed, while also allowing more tourists to visit Taiwan from the mainland.
• The government has revealed a number of economic objectives, including raising GDP per head and reducing unemployment.
• The economy recorded strong growth in the first quarter, driven largely by exports of goods and services. Other Asian counties are an increasingly strong source of demand for Taiwan's products.
• Consumer prices rose by 3.7% year on year in May, driven largely by food prices. High prices have undermined consumer confidence.
• Merchandise exports recorded strong growth in May, owing to robust external demand for machinery and electrical equipment.

Source: Country Report