ECONOMY REPORT - CHINESE TAIPEI

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1 ECONOMY REPORT - CHINESE TAIPEI (Extracted from 2001 Economic Outlook) REAL GROSS DOMESTIC PRODUCT The Chinese Taipei economy grew strongly during the first three quarters of 2000, thanks largely to robust foreign demand. However, as the global economic expansion moderated in the fourth quarter, foreign demand turned weak and the continued sliding of the domestic stock market and its negative effect on equity wealth discouraged domestic demand. Despite the slowdown in the fourth quarter, real gross domestic product (GDP) growth registered 6 percent for the whole year, with gross national product (GNP) and per capita GNP registering at US$314.4 billion and US$14,216 respectively. Private consumption, private investment, and foreign demand were the major forces driving the Chinese Taipei economy in 2000, contributing 3.4 percentage points, 2.1 percentage points, and 1.7 percentage points respectively to the overall growth. Private consumption rose by 5.6 percent, boosted by optimistic expectations about the presidential election, the launch of new telecommunications and Internet products, and an upsurge in local tourism. Private investment grew by 13.7 percent, reflecting vigorous expansion in the semiconductor and opto-electric industries. In real terms, exports of goods and services registered a 17.3 percent growth, led by a worldwide boom in information technology, the continued expansion of the U.S. economy, and the strengthening recovery of the European and Asian economies. Imports increased by 14.9 percent, fuelled by strong domestic investment and increased demand for raw materials for export production. INFLATION Although rising international oil prices and the booming world economy generated upward pressure on domestic prices, the rising exchange value of the domestic currency produced an opposite effect and helped keep the increase in wholesale prices to a modest 1.8 percent. Consumer prices rose by only 1.3 percent, kept down by the stability of food prices, building rentals, and service-sector wages. EMPLOYMENT The labour market has seen rising unemployment in recent years as industries cut hiring as a result of changes in comparative advantage, management reorganization, and production automation. In the first three quarters of 2000, the labour market generally reflected the overall expansion of the economy, and the unemployment rate was down from the previous year. But as the economy lost momentum in the fourth quarter, the unemployment rate rose again to reach an average of 3 percent for the whole year. The manufacturing industry and the wholesale, retail, and restaurant sector saw the largest gains in new jobs, while construction posted a decline in employment.

2 Monthly earnings of labour increased by 2.5 percent, the lowest level ever recorded. Labour-management disputes heightened as the number of factory closures increased. Most affected were low-skilled workers, such as machine and equipment operators and manual labourers. Workers with a junior-high-school education or less accounted for 34.6 percent of the unemployed, and those in the 45-to-64-year-old age group accounted for 15.1 percent. EXTERNAL TRADE ACCOUNT Driven by the global upswing and strong demand for information technology products in the international market, Chinese Taipei s exports rose by 22 percent in This was the highest growth rate in 13 years, and an all-time high for the customs-tallied aggregate export value of US$148.3 billion. High-tech products accounted for 55.8 percent of total exports, up from 52.6 percent in Imports in value terms increased by 26.5 percent to US$140.0 billion, driven by a surge in the purchase of capital equipment and higher international prices of oil and certain industrial raw materials and finished goods. Exports and investment expansion induced demand for imported raw materials and capital goods. The goods trade balance showed a surplus of US$8.3 billion for the year. Trade in services grew steadily in the 1990s. In 2000, it accounted for 14.4 percent of trade in goods and services, down a little from 15.5 percent in 1999 as trade in services expanded less rapidly than trade in goods. Services exports in 2000 increased by 17.8 percent to US$20.3 billion, with exports of trade-related services growing by 33.3 percent. Trade-related services have become the key component of services exports since 1997, as global logistics activities by domestic industries have gained increasing importance. Services imports grew by 10 percent, to US$26.9 billion, with travel services accounting for the lion s share of the total. For the year, trade in services posted a deficit of US$6.5 billion. The current account balance recorded a surplus of US$8.9 billion and the capital account a deficit of US$0.29 billion. The current account surplus as a percentage of GNP increased slightly to 2.9 percent. The financial account in the fourth quarter recorded a net outflow at the highest quarterly level in history, spurred by a widening spread between domestic and foreign interest rates and an expectation of devaluation of the domestic currency. For the year, the financial account displayed a net outflow of US$8.02 billion. The overall balance of payments posted a surplus of US$2.48 billion thanks to a sizable current account surplus. The overall balance of payments surplus was much smaller than the previous year s. For the first quarter of 2001, the current account registered a surplus of US$3.9 billion, up from US$1.4 billion a year earlier. The widening surplus was attributable to an increase in merchandise trade surplus and a decrease in services deficit. The capital account exhibited a deficit of US$0.06 billion. The financial account reversed the trend of the last three quarters to record a net inflow of US$2.1 billion, mainly due to net inflows of foreign direct investment and portfolio investment. EXCHANGE RATE

3 The exchange rate of the New Taiwan (NT) dollar against the U.S. dollar strengthened to NT$ in April It then weakened to over NT$33, first because of a strengthening U.S. dollar, then owing to negative reports on several domestic economic events. The devaluating pressure continued as deposits in foreign currencies mounted as a result of the widening spread between domestic and foreign interest rates. To contain the pressure and maintain adequate foreign currency liquidity in the banking system, the central bank imposed a 5 percent reserve requirement on newly-taken foreign currency deposits with the domestic banking units of financial institutions in early December and this was further raised to 10 percent in late December. The currency then rebounded slightly to NT$ at the end of the year, a depreciation of 4.8 percent from a year earlier. In the first half of 2001, the NT dollar first rose to NT$ against the US dollar then weakened amid the depreciation of the Japanese yen and the slowdown of the domestic economy. At the end of June, it fell to NT$ against the US dollar, depreciating by 4.19 percent from the end of FISCAL POLICY Government revenues totalled NT$1,854 billion in 2000, marginally down by 0.3 percent from the previous year. Government expenditure fell by 4.3 percent to NT$2,313.2 billion. As a result, the fiscal deficit fell by 17.7 percent to NT$459.2 billion. Tax revenues fell for the second consecutive year owing to a series of tax cut measures, including a reduction in the business tax rate for financial and insurance services. Tax revenues as a percentage of GNP stood at 13.8 percent, the lowest level on record. The ratio of tax revenue to government expenditure shrank gradually in the 1990s, reaching 59 percent in 2000, with a corresponding lessening of the tax burden. Government revenues were expected to be boosted with the planned acceleration of government stock sales as part of the privatisation process of public enterprises. However, the process was delayed repeatedly owing to resistance to privatisation. The budget deficit then was met with public debt, resulting in higher dependency of government expenditure on debt. To avoid further worsening of the fiscal deficit, the government has laid out plans to improve the tax system and public property management, step up government reorganization, and encourage private participation in public projects. MONETARY POLICY Upward pressure on prices continued in the first half of 2000 as economic expansion accelerated and as international prices of energy and raw materials kept climbing. To prevent further buildup of inflationary pressure, the central bank twice raised the rediscount rate by percentage points, once in March and once in June. However, indications of deceleration of economic expansion emerged in the second half of the year, after several quarters of recession in real estate and downshifts in the stock market. Meanwhile, some traditional industries encountered internal financial difficulties and tightening credit conditions. In a move to encourage bank lending and stimulate traditional industries, the central bank began paying an extra 0.8 percentage point interest on bank s

4 required reserves. To further ease lending, the bank lowered reserve ratios of checking deposits and time deposits by 1.5 percentage points and 0.75 percentage points, respectively, in October, and raised the reserve ratio of savings deposits by 1 percentage point. The weighted average required reserve ratio declined to 6.29 percent at the end of the year. As signs of recovery did not appear with the year-end approaching, the bank then cut the rediscount rate by percentage points to keep the money supply at ease. Interest rates moved little and remained low in The one-year time deposit rate remained at around 5 percent throughout the year, while the basic lending rate stayed at around 7.2 percent. Both rates represent the lowest level since The money market remained at ease through the first four months of the year but began to tighten in May as interest rates rose in the United States and bank lending tended towards conservatism in response to a flurry of financial scandals and ongoing instability in the stock and foreign exchange markets. As a result, the overnight call-loan rate moved upward from 4.61 percent early in the year to 4.80 percent in September before settling back slightly to 4.72 percent in December. The overdue loan ratio continued to hit record levels in Several factors contributed to the rise from 5.86 percent in the first quarter to 6.20 percent in the fourth quarter, in particular 1) financial unease in some business sectors, 2) increasing difficulty in liquidating collateral owing to the continued decline in the real estate market, and 3) weakening debt-repaying ability owing to the business slide throughout the economy. The annual growth of broad money supply M2, measured on a daily average basis, was 7.04 percent in 2000, lower than the preceding year s 8.33 percent. The expansion is largely attributable to an increase in net foreign assets, followed by financial institutions claims on government and those claims on public and private enterprises. The M1B narrow measure of money supply posted a growth rate of percent, the highest in three years. The increase was driven by a surge in stock market transactions in the first quarter. Subsequently, M1B growth declined month by month in tandem with the falling stock market index, to just 0.37 percent at the end of the year. With inflationary pressure remaining subdued through the first half of 2001, the central bank continued an easy monetary policy to boost the domestic economy amid a global slowdown. The discount rate was reduced six times to a record low of 3.5 percent by the end of June. Both long-term and short-term interest rates have come down accordingly, further reducing cost of funds for businesses. MEDIUM-TERM OUTLOOK A deceleration of the economy is expected in The moderation of global economic expansion will lead to softened foreign demand for Chinese Taipei exports, in particular for information technology products. At the same time, imports will increase much more slowly, owing to the combined effect of falling private purchase of capital equipment, already past its peak; weakening performance of the domestic economy; and slackening export-induced demand. Both exports and imports of goods are forecast to see a marked decrease by 14.9

5 percent and 19.1 percent respectively, from 22 percent and 26.5 percent in Exports of goods and services in real terms will shrink 6.2 percent and imports 9.8 percent. The effects of reductions in equity wealth and widening structural unemployment on consumer confidence will lead to slower growth of private consumption, estimated to be 1.7 percent in Despite large-scale investment in several ongoing projects such as the high-speed railway, fixed-line networks, and independent power plants, private investment will be dampened by the waning vigour of the global economy. In real terms, it is expected to decline by 14.6 percent. As the government cuts back outlays for general purchase and military development, government consumption will shrink 1.9 percent in Though plans were made to step up government investment as part of the effort to create employment opportunities and stimulate the domestic economy, implementation has been slower than expected. Consequently, public investment slipped by 2.7 percent in the first half of 2001, while its growth for the year is forecast at 3.1 percent in real terms. Investment by public enterprises will increase by 0.9 percent, with a major contribution from electric power infrastructure development. In sum, the economy is forecast to contract by 0.4 percent in The global and domestic economic slowdown, together with tariff reductions under Chinese Taipei's WTO accession commitments, will help keep prices stable. Moreover, as the real estate sector has yet to show any signs of recovery, rent increases will be limited and the price levels of services held steady. Consumer prices and wholesale prices are expected to increase 0.4 percent and decrease 0.4 percent, respectively. The continued rise of oil prices will not have a significant, direct impact on the domestic economy, but it may be affected indirectly, however, if oil prices continue to climb to a level that will significantly depress the world economy. Annex I CHINESE TAIPEI: OVERALL ECONOMIC PERFORMANCE GDP and Major Components (percent change, year over year earlier period, except as noted) Nominal GDP (level in US$ billion) Real GDP Consumption Private Consumption

6 Government Consumption Investment Private Investment Government Investment Exports of Goods and Services Imports of Goods and Services Fiscal and External Balances (percent of GDP) Budget Balance (percent of GNP) Merchandise Trade Balance Current Account Balance Capital Account Balance Economic Indicators (percent change, year over year earlier period, except as noted) GDP Deflator CPI M Short-Term Interest Rate (percent) Money Market Rate Real Effective Exchange Rate (level, 1997=100) Unemployment Rate (percent) Population (millions) Annex II CHINESE TAIPEI: FORECAST SUMMARY (percentage change from previous year)

7 Official IMF Link ADB Official IMF Link ADB Real GDP Exports of Goods and Services Real Imports of Goods and Services Real -6.2 N.A. 5.1 N.A. N.A. N.A. 8.1 N.A N.A. 4.0 N.A. N.A. N.A. 5.9 N.A. CPI * * 1.8 Note * Private consumption deflator. N.A. Not available. Sources: IMF forecasts, The World Economic Outlook Database (September 2001). LINK forecasts, Project LINK World Economic Outlook (April 2001). ADB forecasts, Asian Development Outlook Annex III CHINESE TAIPEI: MEDIUM-TERM TREND FORECAST (percent) average Real GDP 6 CPI <2.0 Source:

The Economic Outlook of Taiwan

The Economic Outlook of Taiwan by Ray Yeutien Chou and An-Chi Wu The Institute of Economics, Academia Sinica, Taipei October 2017 1 Prepared for Project LINK 2017 Fall Meeting, Geneva, Oct. 3-5, 2017 2