Taiwan Business Forecast Report

All Eyes On The Recovery Although it will not be plain sailing from here, we now believe that the trade-dependent Taiwanese economy could stage a more brisk recovery than previously anticipated. Reconstruction efforts following the devastating Typhoon Morakot will help bolster economic output over the coming quarters, as will the government's broader stimulus package. Continued vigorous activity in China, no doubt bolstered by the mainland's own gargantuan pump priming, has also cushioned Taiwanese exports. In light of improved data and the island's high sensitivity to cyclical swings, we could see it outperform on the upside, just as it fell more dramatically on the downside. Although our 2009 growth forecast remains static at -4.5%, we have revised our 2010 forecast up to 3.5%, from 1.2% previously.

Public anger at the slow response to Typhoon Morakot has delivered a blow to the ruling Kuomintang (KMT) government, forcing the cabinet to resign en masse. While the economic damage should be manageable and nowhere near the havoc wreaked by the 1999 earthquake, the impact on public sentiment could affect the KMT's prospects in important local elections scheduled for the end of the year. Meanwhile, we expect cross-Strait rhetoric to remain cordial, although Beijing did express its dissatisfaction with Taipei's decision to allow the exiled Tibetan spiritual leader Dalai Lama to visit the island to console the victims of Typhoon Morakot in late August. A central question is whether or not President Ma Ying-jeou's loss of political capital will jeopardise trade talks scheduled for late 2009, which the opposition Democratic Progressive Party (DPP) remains strongly opposed to.

The economy is emerging from the worst recession on record, with second quarter GDP data confirming expectations that Q109 marked the trough in the present downturn. The strong rebound in sentiment, illustrated perhaps most vividly by the brisk rally in the stock market, has been fuelled by benign leading indicators and the backdrop of improving economic ties with the mainland. Expectations of a memorandum of understanding regarding cross-Strait investment in the financial services sector are high as we go to print, and, if realised as we expect, present an exciting prospect for the crowded Taiwanese banking sector. Although the central bank has been unwilling to let the Taiwan dollar appreciate too fast, we believe it will scale down its interventions once it becomes more confident in the durability of the recovery.

Taiwan maintains a robust 27th place (of 167 countries) in our business environment ratings, aided by strong scores in the market orientation and infrastructure sub-categories. Looking forward, the thawing relations between the island and the mainland - as reflected in improved transport links and eased restrictions on cross-border investment in some sectors - will likely boost the appeal of the island to foreign investors. Moreover, the KMT government's tax reforms could see a significant return of money from the wealthy Taiwanese diaspora and improve the island's desired status as a regional capital-raising hub. Indeed, a string of fresh public offerings on the Taiwan Stock Exchange is testament to these changing dynamics.