Taiwan Business Forecast Report Q2 2008

Publication Date	April 2008
Publisher	Business Monitor
Product Type	Report
Pages	55
ISBN Number	1745-073X
Product Code	BMI01529

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Summary

New Era For Taiwan

We are expecting a sharp slowdown of GDP growth from 5.7% in 2007 to .1% this year as global demand for consumer electronics, the mainstay of Taiwanese exports, falters. The victory of Ma Ying-jeou and the Kuomintang Party in the Q108 presidential and parliamentary elections will be a boost to investor sentiment and likely herald an improved business environment, particularly with regard to cross-Strait business. The main effects of these reforms are, however, likely to be felt towards the end of our five-year forecast period. Ma will also seek to put Taiwan on a new footing with Beijing and Washington after years of strained relations under outgoing President Chen Shui-bian.

With political power now firmly in the hands of President-elect Ma Ying-jeou and the pro-Beijing Kuomintang (KMT) Party, we are expecting a considerable improvement in cross-Strait relations.

We believe Ma will focus on reducing economic restrictions and improving transport links in his first year before testing the water for a possible peace agreement. However, continued apprehension about Beijing's growing economic and military might will impede a rapid improvement of political relations, with Ma's approach likely to be gradual, in particular if the opposition Democratic Progressive Party revives under a new leadership.

Economic growth surprised on the upside in H207, lifting full-year growth to an impressive 5.7%, mainly due to strong exports. The outlook for 2008 is more worrying as we foresee a sharp downturn in the global demand for laptop computers and other consumer electronics. Sluggish demand from the US has so far been offset by strong exports to the mainland and East Asia. However, we believe many of these shipments are ultimately re-exported to the US and are therefore likely to be negatively affected over the year. We have therefore lowered our GDP growth forecast for 2008 from .7% to .1%.

Ma Ying-jeou was elected president on March 22 on the back of an ambitious political agenda aimed at lifting annual real GDP growth to 6%. His reform programme includes a pledge to cut the corporate tax rate from 25% to 20% and granting tax breaks for low-income households, which should boost domestic demand. Moreover, direct flights to the mainland and lifted restrictions on investing there will encourage corporate investment on Taiwan going forward. However, we see considerable risk to fiscal stability from Ma's pledge to spend TWD2.65trn (US$85bn) on public investment projects in the coming eight years.

Content

Executive Summary
- New Era For Taiwan
Chapter 1: Political Outlook
- SWOT analysis
- BMI Political Risk Ratings
- Domestic Policy
- Can Ma Deliver?
- Expectations are now high for President-elect Ma Ying-jeou to deliver a boost to Taiwan's sagging economy and
- a major improvement in cross-Strait relations.
- Foreign Policy
- Cross-Strait improvement To Be Gradual
- We believe an improvement in cross-Strait relations will be gradual as President-elect Ma Ying-jeou will be
- careful not to appear too receptive to proposals from Beijing.
Chapter 2: Economic Outlook
- SWOT analysis
- BMI Economic Risk Ratings
- Economic activity
- BMI's 2008 GDP Forecast Cut To 4.1%
- We have lowered our 2008 GDP growth forecast from 4.7% to 4.1% as a bleaker outlook for Taiwan's export sector
- will impact consumer confidence and domestic demand.
- Economic Policy
- Economic Reform To Be Front-Loaded
- We see newly elected President Ma Ying-jeou as bringing a significant improvement for economic policy in Taiwan.
- Monetary Policy
- CBRC To Let Currency Do The work
- We believe the 12.5bps rate hike to 3.500% on March 27 will be the last in the central bank's monetary tightening
- cycle, despite assertions that it will maintain its policy of 'modest interest-rate increases'.
- Exchange Rate Policy
- Greater TwD/CnY Convertibility On The Cards
- The prospects for the establishment of a Taiwan dollar-Chinese yuan currency exchange mechanism have been
- boosted by recent comments from the heads of the Taiwanese and Chinese central banks.
Chapter 3: Special Reports
- Looking Beyond 2008
- US: The Rebalancing act
- Unwinding The imbalances
- We believe that a substantial, multi-year shift in the US external accounts is under way.
- China: what if we're all wrong?
- Our Core Scenario For China
- We are retaining our positive headline growth projections for China across the forecast period to 2012, with
- our expectations of the continued success of the urbanisation process and export-driven growth model
- underpinning our assumptions.
- Japan: immigration Key To Long-Term Growth
- Demographic woes Portend Long-Term Decline
- Immigration remains the only realistic way that Japan can overcome its long-term economic challenges.
Chapter 4: Business Environment
- SWOT analysis
- BMI Business Environment Risk Ratings
- Business Environment Outlook
- Institutions
- Infrastructure
- Market Orientation
- Operational Risk
Chapter 5: Key Sectors
- Autos
Executive Summary
- After a 5% drop in sales in 2008, BMI expects average annual sales growth for the autos sector
- in the region of 4% for the remainder of the forecast period.
- Oil & Gas
List of Tables
- Table: Economic Activity
- Table: Monetary Policy
- Table: BMI Business and Operational Risk Ratings
- Table: BMI Legal Framework Ratings
- Table: Taiwan Annual FDI Inflows
- Table: BMI Trade Ratings
- Table: Taiwan autos Sector - Historical Data & Forecasts (CBUs unless otherwise stated)
- Table: Taiwan Oil & Gas - Historical Data & Forecasts