Taiwan: 5 things you need to know about the aging population

Economics Taiwan: 5 things you need to know about the aging population DBS Group Research 18 August 216 Taiwan s population is aging fast. The working age population will begin to shrink this year; the pace will be the fastest among Asian NIEs Potential GDP growth will slow, falling to the mid-2% level in 216-2 and lower thereafter The industrial structure may change as consumer demand shifts. Medical equipment/services, biotech and the smart industry will be the key areas with growth opportunities Portfolio investment will also be affected. Investor demand will likely shift away from risky assets and move towards the instruments with stable returns and low volatility Outbound direct and portfolio investments will continue to increase. Companies and insurers/pension funds would want to look for overseas investment opportunities to enhance returns 1. Taiwan is growing old Like many mature economies, Taiwan is facing the acute problem of population aging, the result of a low fertility rate and a longer life span. Growth in working age population has fallen to an average of.4% (YoY) in the recent five years (211-15), down from.9% in the 2s. And the situation is set to worsen. According to the projections from National Development Council, working age population will shrink -.6% per year in 216-2 and -1.1% in 221-3. This pace of decline will be the fastest among the four Asian NIEs (Chart 1). Chart 1: Working age population growth % YoY 4. TW KR HK SG 3. Forecast 2. 1.. -1. -2. 21 26 211 216 221 226 Chart 2: Taiwan's population profile by age group 85+ 8-84 75-79 7-74 65-69 6-64 55-59 5-54 45-49 4-44 35-39 3-34 25-29 2-24 15-19 -14 5-9 -4 215: 12.5% of total 23: 24.1% of total persons, thou 3 2 2 3 Ma Tieying (65) 6878-248 matieying@dbs.com 1

Chart 3: TW: GDP growth labor & productivity % YoY 12 8 6 4 2-2 GDP: 4.2% in 21- Working age population GDP per WA population GDP GDP: 2.5% in 211-15 Chart 4: Labor participation rate %, 215 7 6 5 4 3 2-4 21 23 25 27 29 211 213 215 TW KR SG HK The demographic structure will undergo significant changes. The share of population aged 64 and above will rise to 16% by 22 and 24% by 23, up from 13% in 215 (Chart 2). For every elderly person, there will be just 2.7 working adults for him/her to depend on in 23, compared to 5.9 in 215. Taiwan s median age will rise sharply to 48.2 in 23 from 39.9 in 215. 2. Potential GDP growth will slow Slower working age population growth implies slower GDP growth. Meanwhile, old people are often less productive than those of middle age, which also has negative implications for potential growth. It seems that a structural growth slowdown is already taking place in Taiwan. Real GDP grew just 2.5% on average in the recent five years, notably lower than the 4.2% witnessed in the 2s. The two key components labor and productivity have both deteriorated (Chart 3). Much can be done to address Taiwan s demographic drag, such as boosting the birth rate, increasing labor utilization, and relaxing the immigration policy to introduce foreign workers. The labor force participation rate in Taiwan stood at just 58.7% in 215, while the corresponding levels in South Korea, Hong Kong and Singapore were all above 6% (Chart 4). Lifting the labor participation rate to 6.5% by 22 would largely offset the decline in working age population and avoid a contraction in labor supply. Much can also be done to boost productivity. The growth in GDP per working age population a proxy for labor productivity has fallen to 2.2% in the past five years. But the historical experiences of Asian economies suggest that labor productivity could continue to grow at the 4% pace when per capita income reaches USD 22, the level where Taiwan is positioned nowadays [1]. Addressing the demographic problem and boosting productivity both require reform. This won t be easy in the short-run. Some reform measures could be socially and politically controversial such as boosting the labor participation of elderly people (postponing the retirement age) and relaxing immigration rules. Some other measures would only produce results in the long term such as boosting the birth rate and lifting productivity through technological advancement. Assuming partial reforms were undertaken, we reckon potential GDP growth will remain in the mid-2% range over the coming five years (table next page). Without reform, potential growth could fall to 1% on the same time frame. 3. Impacts on industries In addition to headline GDP growth, demographic changes would also have impacts on consumers spending patterns and the structure of industrial sectors. As 2

Table: scenario analysis: Taiwan's potential GDP growth Best Neutral Worst Working age population growth (216-2 avg, % YoY) -.6 -.6 -.6 Labor participation rate (22, %) 6.5 59.6 58.7 Labor force growth (216-2 avg, % YoY) -.3 -.6 Labor productivity growth (216-2 avg, % YoY) 4. 3. 2. Potential GDP growth (216-2 avg, % YoY) 4. 2.7 1.4 population ages, consumers demand will shift towards healthcare, elderly care and the related services, away from the basic needs like food, clothing and housing. As showed by the household income and expenditure surveys, the share of healthcare in Taiwan s total household expenditures has risen most notably over the past decade, from 11% in 2 to 15% in 214 (Chart 5). Rising demand in this area should be a long-term trend, which would benefit the industries including medical equipment/services, pharmaceuticals and biotech. Another interesting area will be smart industry. Commercial demand for robotics, intelligent machines and advance automation will increase, not only in manufacturing but also in construction, medical and other services sectors, as a mean to cope with labor shortages arising from an aging population. 4. Implications for portfolio investment Shifting demographics also has implications for financial investment. People normally want to save and accumulate assets during their working life. During retirement however, they will reduce savings and liquidate the stock of assets in order to pay for the living expenses. Moreover, old people tend to be more risk-averse than the middle-aged people as the time horizon of their investment is shorter. As such, in an aging economy, investors can be expected to shift away from risky assets (e.g., equities) and move towards instruments with more stable returns (e.g., bonds, annuities and long-term care insurance). Taiwan s household saving rate is falling. After reaching a peak of 3% in early- 199s, it fell to 26% in 2 and 21% in 214 (Chart 6). The stock of financial assets held by Taiwanese households is still expanding but the pace may slow going forward as the saving rate declines further (Chart 7). In terms of household asset allocation, a structural shift has already occurred. Insurance and pensions account- Chart 5: TW: Distribution of household expenditures % 9% 8% 7% 6% 5% 4% 3% 2% % % 199 1995 2 25 2 Food Clothing & Footwear Housing & Utilities Furnishing & Household equipment Health Transport & Communication Recreation & Education Restaurant & Hotel Miscellaneous 3

Chart 6: TW: Household saving ratio % 35 3 Chart 7: TW: Household financial assets TWD trn 8 7 6 25 2 5 4 3 Net assets Total assets 15 Household savings / Household disposable incomes 198 1985 199 1995 2 25 2 2 Liabilities 2 22 24 26 28 2 212 214 ed for 23% of total household assets as of 214, up sharply from 9% in 2 (Chart 8). The share of equities fell to 22% from 25%. Assuming portfolio rebalancing continues this trend, new funds flowing into insurance and pensions could amount to TWD 8bn per year. The rapid expansion of assets managed by insurance firms and pension funds should benefit the domestic fixed income market, especially the TWD government bonds and high rated corporate bonds. 5. Outbound investment Another secular trend we foresee is that outbound investment will continue to rise. Companies will face a tougher business environment at home, due to slower growth rate and labor shortages / higher wages. Shifting investment abroad could keep income growth from falling as much as it otherwise would. Meanwhile, insurers and pension funds will face pressure due to higher payout burdens of an aging population. They may also venture abroad to enhance returns. Taiwan s outward direct and portfolio investments have been both on the rise (Chart 9). Outward portfolio investment, in particular, surged rapidly in the past few years and reached an all-time high of USD 63bn in 215. Insurers and pension funds played a key role here. Of their total assets, the share of foreign securities has risen to more than 4% since 211 and to 51% in 214 (Chart ). The authori- Chart 8: TW: Household asset allocation % share 5 45 4 35 3 25 2 15 5 2 22 24 26 28 2 212 214 Deposits Insurance & Pensions Equities Debt securities Mutual funds 4

Chart 9: TW: BOP: outward investment USD bn - -2-3 -4-5 Direct investment -6 Portfolio investment -7 2 23 26 29 212 215 Chart : TW: Asset allocation of insurance firms & pension funds: share of foreign securities % 55 5 45 4 35 3 25 2 15 5 2 22 24 26 28 2 212 214 ties lifted the ceiling imposed on insurers overseas investment to 45% (of total assets) in 27, up from 35% previously. They further eased regulations in recent years by excluding the foreign currency insurance policies and Formosa bonds from the 45% cap, in order to create more investment avenues for the insurers to meet their return requirements. A further rise in capital outflows from domestic companies and financial institutions could put depreciation pressures on the TWD in the long-term. But such pressures should be at least partially offset by overseas earnings as reflected in the current account. Meanwhile, Taiwan s position as a net international creditor will be strengthened as outward investment increased and could mean the TWD assumed a degree of safe haven status during times of global turbulence. Notes: [1] Global growth: what is potential and where is it going? DBS Group Research, 25 Feb 216 Sources: All data are sourced from CEIC, Bloomberg, National Development Council (Taiwan), United Nations Population Division. Forecasts and transformations are DBS Group Research. 5

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