Taiwan: 7 likely outcomes in 2017

Transcription

1 Taiwan: likely outcomes in 1 1 November 1 Economics Taiwan: likely outcomes in 1 DBS Group Research 1 November 1 The economy will grow by about % in 1, faster than in 1 but still below potential The labour market will recover but not significantly Inflation will remain stable and low at about 1% The central bank will keep interest rates low, notwithstanding higher USD rates and a stronger US dollar Local property prices will remain high Outward portfolio and direct investments will be large Government policies may focus on structural issues Thus far, 1 has been a mediocre year for Taiwan. Economic growth averaged but.% (YoY) over the first three quarters. In spite of this, the central bank cut rates only modestly (bps in 1H1). The government maintained a neutral stance on fiscal policy, balancing the needs of growth with that of lowering public debt. Looking ahead to 1, growth should improve but only modestly. There should be less pressure on the central bank / government to pursue short-term stimulus. Policies are likely to focus more on long-term structural issues. 1) GDP growth will rise to about % in 1 Thanks to its small and open economy, growth follows the global cycle closely (correlation:. in -1, Chart 1). Growth has fallen significantly since 1 and turned especially weak in 1/1, in line with global patterns. According to Chart 1: GDP growth: Taiwan vs. Global 1 Taiwan 1 Global - IMF forecast DBSf F 1F Chart : Taiwan's electronics exports 1 9 iphone S iphone iphone G iphone iphone Jan- Jan-9 Jan-11 Jan-1 Jan-1 iphone Ma Tieying () - matieying@dbs.com Refer to important disclosures at the end of this report. 1

2 Taiwan: likely outcomes in 1 1 November 1 Chart : Taiwan's exports to China 9 Total Electronics Non-electronics 1 Jan- Jan- Jan-1 Jan-1 Jan-1 Chart : Unemployment rate % sa Jan- Jan-9 Jan-11 Jan-1 Jan-1 the IMF s latest World Economic Outlook, global growth will rise to.% in 1, a modest uptick from.1% in 1, and on par with the average growth seen in 1-1. If history is any guide, Taiwan s growth should also pick up next year. We expect.1% growth in 1, close to the 1-1 average of.%. Electronics exports are critical for Taiwan. The pattern here is heavily influenced by the product cycle in the global smartphone market. The launch of the new iphone models boosted Taiwan s electronics exports almost every year in - 11 (Chart ). But this so-called Apple effect weakened somewhat after 1, probably because technology started to mature and competition intensified in the global smartphone sector. In recent years, only the iphone (1) and the iphone (1) had a large impact on electronics exports. In 1, many expect Apple to push through with a major product redesign, a three-year lag following the last major redesign the iphone in 1. This will coincide with iphone s 1th anniversary. If so, this bodes well for Taiwan s electronics sector. For now, the US-based IT research firm Gartner projects global semiconductor capital spending to grow by.% in 1, a notable rebound compared to -.% in 1. Taiwan s Industrial Economics & Knowledge Center also forecasts that the output in Taiwan s semiconductor sector will grow a healthy.% next year. Export demand from China is also important. Taiwan s exports to China have been stagnant since 1, when China s GDP growth dropped to % and global commodity prices started to languish (Chart ). Exports to China contracted in 1, as China s growth dropped further to % and commodity prices fell more sharply. This year, demand from China has stabilized and rebounded since Q1. But the rebound has been mainly driven by electronics, which could reflect demand in the iphone supply chains (also Chart ). For the coming year, consensus is looking for a further slowdown in the Chinese economy (IMF:.% in 1 versus.% in 1, Bloomberg:.% versus.%). Growth deceleration and economic rebalancing on the mainland could continue to present headwinds for Taiwanese exporters. A possible rise in trade protectionism from the developed countries, as a result of Brexit and the anti-trade stance of the US president-elect, is an additional risk. Tariff/currency disputes between the US and China could hurt Taiwan s exports indirectly. Note that Taiwan also has close trade ties with the US and Europe directly (1%, 9% of its total exports respectively). Like China, it is also on the US Treasury s watch list for unfair FX practices.

3 Taiwan: likely outcomes in 1 1 November 1 Chart : Wage growth 1 Minimum wages Average regular wages Chart : Food, energy and CPI inflation Headline CPI - Food Energy - - Jan-11 Jan-1 Jan-1 Jan-1 Jan-1 Jan-1 ) The labour market will recover, but not significantly Modestly better GDP growth should benefit the labour market. The unemployment rate, which has been crawling up this year, will likely come off the peak in 1 (Chart ). That said, the expected rise in growth, which is largely driven by electronics exports, may not benefit the labor market significantly. The electronics sector accounts for 1% of Taiwan s GDP, but only % of its total employment, reflecting the relatively high productivity in this sector. Companies in the non-electronics manufacturing and services industries would remain cautious about their manpower plans, absent a substantial improvement in their earnings outlooks. ) Inflation will remain stable at about 1% Absent a strong labour market recovery, faster wage-push inflation is unlikely in 1. It is true that a % minimum wage hike is scheduled for next January. This, however, will only affect about 1.mn workers whose monthly pay is below TWD 1,9 (less than 1% of the total employment). Note that minimum wages have been raised almost every year since 11, but the passthrough on base wages has been negligible. The growth in average regular wages has remained low at about 1% (YoY, Chart ). Energy price inflation may increase in 1. The US Energy Information Administration projects Brent oil prices to rise to US$ 1/barrel in 1 from US$ in 1. Every 1% rise in crude oil prices is estimated to boost Taiwan s CPI by.%. Note that energy inflation has been deeply negative since H1 (Chart ). The swing from negative to positive would push up CPI inflation notably in 1 versus 1, by about 1ppt (oil prices assumption: US$ ). Food price inflation may offset energy prices to a large extent. Food inflation this year has been the highest in eight years (% on average in Jan-Oct1). Vegetable prices shot up in 1Q1 due to cold weather, and again in Q1 due to typhoons (also Chart ). Considering the high base, there is a good chance that food price inflation falls in 1. If fresh food prices stay at current levels, CPI inflation would be lowered by a full percentage point in 1 versus 1. This would likely offset any rise in energy price inflation. ) The central bank will keep rates low A modest economic recovery will reduce the need for Taiwan s central bank (CBC) to cut rates but would not be sufficient to prompt hikes. The output gap will remain negative in 1 as GDP growth is expected to stay below the potential rate of about.% [1]. Note that the CBC kept monetary policy accommodative after

4 Taiwan: likely outcomes in 1 1 November 1 Chart : Policy rate vs. output gap Chart : CBC's policy rate vs. FFTR % pa.. Output gap (RHS) Policy discount rate % of GDP % pa... CBC discount rate FFTR Mar- Mar- Mar- Mar-11 Mar-1 -. Jan- Jan- Jan- Jan-11 Jan-1 the global financial crisis. The last time it started to hike rates, it waited until the output gap turned significantly positive in 1 and inflation risks started to surface (Chart ). Notwithstanding Fed rate hikes and a stronger USD, the CBC may not raise interest rates. An orderly depreciation of the TWD would be tolerated, thanks to Taiwan s low foreign debt burdens, low inflation and strong external asset position. Indeed the CBC has decoupled from the Fed over the last several years. It raised rates in 1-11 when the Fed pursued QE, and cut rates in 1-1 when the Fed began to withdraw stimulus (Chart ). There are reasons to expect that the CBC will continue to focus on domestic fundamentals and keep short-term rates low in 1 (benchmark discount rate: 1.%). Long-term TGB yields could feel the spillover effects from rising UST yields. But the CBC s accommodative policy stance will also impact the long end of the curve. The correlation between the 1Y TGB yield and the 1Y UST yield fell to. in 1-1 from.1 in -9, thanks to the CBC s policy divergence with the Fed. ) Property prices will remain high Better GDP growth, stabilizing labour market and still-low interest rates should offer support to the property market. Banks home mortgage loans have rebounded moderately this year, and the pace of property price declines has slowed, mainly thanks to low interest rates (Chart 9-1). Chart 9: Banks' consumer loans: home purchases Jan- Jan-1 Jan-1 Jan-1 Jan-1 Chart 1: Property price indices Mar=1 Sinyi index Cathay index Mar- Mar- Mar- Mar-1 Mar-1 Mar-1 Mar-1

5 Taiwan: likely outcomes in 1 1 November 1 Chart 11: BOP: outward investment Chart 1: BOP: current vs. financial account Direct investment Portfolio investment Current account Financial account From a longer-term perspective, Taiwan s property market remains on a correction path. After rising for 1 years, home prices peaked in 1 and started to head south from 1 (also Chart 1). That said, a hard landing doesn t seem likely in 1, given the absence of income/interest rate shocks on the horizon. Demographics is a long-term negative for Taiwan s property market. The size of population aged -, an indicator for the combination of first-time and upgrade home demand, will shrink by. (or, persons per year) during 1-. But this could be partially offset by other structural factors such as urbanization and nuclear family formation. Urban population currently accounts for 9.% of Taiwan s total population. This is lower than in Korea (%) and Japan (9%). If urbanization proceeds at the pace of the past decade, urban population would increase by about, persons per year in 1-, creating a new potential source of property demand. ) Outward investments will be large Low TWD interest rates, Fed hike expectations and a globally strong USD should encourage capital outflows by domestic residents. Outward portfolio investment was exceptionally large in the past three years (Chart 11). The Fed ended QE in 1 and started to raise rates from end-1. The CBC, on the other hand, embarked a modest easing cycle from late-1. The unfavourable TWD-USD yield spreads prompted Taiwanese insurance firms and other financial institutions to reallocate portfolios towards foreign bonds and other assets. This situation is likely to persist in 1 as the Fed is poised to raise rates while the CBC stands pat. Relatively weak domestic (versus global) growth could bring a rise in outward direct investment by Taiwanese companies. While Taiwan s ODI in China has cooled, investment in other emerging markets has high growth potential. The government is currently pushing for the New Southbound Policy to assist Taiwanese companies to invest in Southeast/South Asia. Domestic capital outflows shouldn t be looked at askance. Outward investment helps Taiwan to tap the relatively strong growth opportunities in overseas markets and to boost its national incomes. Notwithstanding the depreciation pressure on the TWD in the short-term, investment earnings will be repatriated home and reflected in the current account. Indeed, Taiwan has maintained a large current account surplus over the past decade (9% of GDP on average), which helped to counteract the financial account deficit and supported the currency (Chart 1). In 1, the current account is likely to remain in solid surplus territory thanks to a recovery in exports and only modestly higher oil prices (a rise in oil prices to US$ /bbl in 1 would reduce Taiwan s CA surplus by just about, or.% of GDP).

6 Taiwan: likely outcomes in 1 1 November 1 ) Government policies focus on the structural issues A modest economic recovery should reduce the need to pursue fiscal stimulus and make it easier to manage public finances. The central government s assumption of 1.% revenue growth in 1 is conservative, taking into account the lagging nature of tax collections. The plan for spending growth (1.1%) is conservative too. With the fiscal deficit expected to remain low next year and the average TGB yields expected to stay below nominal GDP growth (about %), public debt dynamics are positive. The central government s debt as a percentage of GDP, which peaked in 1 at %, is likely to continue its gradual downtrend in 1. A cyclical improvement in the macroeconomic environment would also allow the government to focus on the long-term structural issues and pave the way for reform. The key elements of President Tsai s reform plans are industrial innovation, trade diversification and economic/social fairness []. More initiatives surrounding the Five Innovative Industries Plan and the New Southbound Policy could be expected next year. These include but are not limited to: deregulating rules to encourage business start-ups in the innovative sectors, offering incentives to attract advanced FDI and high-end foreign talent, and increasing the information and financial supports to help Taiwanese firms to access the Southeast/South Asian markets []. Pension reform, elderly care, youth employment and social housing could also be priorities for government in 1. Sources: All data are sourced from CEIC, Bloomberg, National Development Council (Taiwan), Ministry of the Interior (Taiwan), and the World Bank. Forecasts and transformations are DBS Group Research. Notes: [1] Taiwan: things you need to know about the aging population, August 1 [] Taiwan: after the election, January 1 [] Taiwan: diversifying into Southeast Asia, October 1

7 Taiwan: likely outcomes in 1 1 November 1 Recent Research Global: revenge of the demographic dividend 1 Nov 1 US: structural interest rate compression Nov 1 FX: Mid-quarter update 1 Nov 1 SG: down but not out 1 Nov 1 Rates: Global rates roundup 1 Oct 1 TW: diversifying into Southeast Asia 1 Oct 1 CN: cyclical bottom 19 Oct 1 IN: assessing current account 1 Oct 1 improvement PHgov bonds: expensive (still) 11 Oct 1 SGD: sticking to neutral Oct 1 EZ: not taper time yet Oct 1 CN: avoiding the Minsky moment Oct 1 IN: monetary policy committee lowers rates Oct 1 Qtrly: Economics-Markets-Strategy Q1 1 Sep 1 CNH: SDR inclusion - right time, right place Sep 1 IN: savings rate in need of a boost Sep 1 IDR: towards further resilience 1 Sep 1 SGS: on Fed watch Aug 1 Global growth: redefining strength Aug 1 TW: things you need to know about the 1 Aug 1 aging population SG: risks beneath the GDP figures 1 Aug 1 CN: the risk of keeping status quo 1 Aug 1 CN: why falling private investment growth 1 Aug 1 is a worry ID: tax revenues slipping 11 Aug 1 SG: labour market pain 1 Aug 1 IN: monetary policy in transition Aug 1 FX: DM vs EM - a more balanced story 1 Aug 1 Rates: Global rates roundup / chart-pack 1 Aug 1 IN: Hopes high for GST Jul 1 JP: will the helicopters fly? Jul 1 ID rates: steepening risk 1 Jul 1 IN: more consumption-led growth 1 Jul 1 FX: revisions to GBP & JPY Jul 1 TW & KR: how low can rates go? Jul 1 US: a risky mantra Jul 1 PH: Duterte s game plan Jul 1 EZ: dealing with post-brexit blues Jun 1 SG: Brexit impact limited for now Jun 1 Britain s Great Leap Backward Jun 1 Brexit first impact Jun 1 IN: maturing FCNR (B) deposits a molehill, 1 Jun1 not a mountain Qtrly: Economics-Markets-Strategy Q1 9 Jun 1 HK: cautious outlook May 1 IN: monitoring external fault lines May 1 TH: manufacturing gone cold May 1 SGS: bracing for the Fed May 1 Global: Where lies north? 1 May 1 Disclaimer: The information herein is published by DBS Bank Ltd (the Company ). It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Sources for all charts and tables are CEIC and Bloomberg unless otherwise specified. DBS Bank Ltd., 1 Marina Blvd, Marina Bay Financial Center Tower, Singapore 19. Tel: --. Company Registration No. 19E.