Taiwan: Holding Pattern

Beset by global macro-economic trends and trade tensions, Taiwanese businesses and policy-makers are taking steps to revive growth—especially in tech.

Jiufen Old Street in Taipei, Taiwan.

After several years of solid growth, Taiwan’s economy has been buffeted this year by geopolitical tensions, sluggish international demand and slumping government spending and private consumption. The biggest area of concern may be exports, which account for 77% of Taiwan’s total GDP, according to DBS Bank. Mainland China and the US together account for more than two-fifths of Taiwan’s gross exports, and Taiwanese manufacturing is caught in the crossfire of the escalating trade war between those countries following the announcement of new US tariffs on billions of dollars of Chinese goods.

US-Chinese tariff tensions will remain a key focus over coming quarters, predicts Tay Qi Hang, country risk and financial markets analyst at Fitch Solutions.

“We have already seen a massive slowdown in exports in the first half of 2019,” Tay says. The trend toward deglobalization started with the deterioration of the US-China trade relationship, but Taiwan will be further hampered if US trade dynamics with other countries weaken as well. “This will be the main challenge going ahead,” he says.

Yet Taiwan’s manufacturers are already feeling the pain. Overall first-quarter economic growth was 1.71% according to Taiwanese officials, down from 3.15% year over year and the lowest quarterly growth rate the island has recorded since the second quarter of 2016. Taiwan’s budget office forecasts 2019 GDP of $580 billion, of which manufacturing will account for more than 40%. Sales of semiconductors and computer chips—both core products—are dropping. According to technology research firm Canalys, global year-over-year smartphone sales could dip by 3.1% in 2019.

Smartphone manufacturing slowdowns are stymying related industries. “There are ripple effects all along the supply chain, from ports and logistics to paper packaging,” says Iris Pang, Greater China economist at ING Wholesale Banking. “And these are downstream to upstream, like equipment manufacturing, LED manufacturing and camera manufacturing.”

In Pursuit of Growth

Taiwan has weathered challenges before. Despite geopolitical risks in 2018, the economy expanded 2.63%. And while growth in 2019 is expected to decline, the government is working to counter anti-growth forces. The effective tax rate is about 14%, and the ratio of government tax revenue to GDP is lower than in Japan, South Korea and many other developed markets. The government is spending on infrastructure as well as offering rebates to consumers who buy energy-saving automobiles, according to ING. The Central Bank of the Republic of China (Taiwan) propped up the Taiwan dollar in May; since June 2016, Taiwan’s benchmark interest rate has remained steady at 1.375%.

The Heritage Foundation Index of Economic Freedom this year ranked Taiwan 10th out of 186 countries, based on factors such as property rights, taxes, fiscal health, government spending, trade, and labor flows. In a move to bolster the business sector further, Premier Lai Ching-te in June directed the Ministry of Economic Affairs to ease investment and tax regulations on small and medium-size enterprises.

Taipei is using tax incentives and loans to lure chip- and hardware makers, and helping companies cope with energy and water shortages that have hampered electronics production. Over 70 companies, including Quanta Computer, Sercomm, Flexium Interconnect and Wistron Corporation, are investing more than $15 billion in aggregate. This June, Google announced it will create a new Taiwan headquarters and move production of some hardware items there.

“They are making efforts to stem the dramatic slowdown in exports,” Tay says. “This will help boost investment in the economy.” With more than $4.6 trillion in foreign exchange reserves, according to the IMF, Taiwan can hold on until initiatives bear fruit.

Bullish on 5G

Pang is also bullish on 5G. The Internet of Things (IoT) and 5G are intertwined, whether in automated smart home systems, irrigation systems that supply farmers with real-time soil-water readings, or devices that alert caretakers when an elderly patient has fallen. All will incorporate 5G, Pang says. And while it will take a couple of years for 5G infrastructure to expand globally, Taiwan’s experienced labor force will be well positioned to manufacture phones and equipment using the new cellular technology once it’s in place.

“5G is going to be commercialized not only for businesses, but also for consumer use,” Pang says. “Then the Taiwan semiconductor industry can go up again, because IoT actually means a lot of semiconductors. Almost every physical good will have a chip inside if you want it to be included in the 5G network. That means there are a lot of opportunities for Taiwan,” she adds.

Because Taiwan’s primary economic drivers are science and technology, “as the whole world moves toward high-tech manufacturing and 5G and AI [artificial intelligence] development, this is a great business opportunity for Taiwan’s financial and manufacturing industries,” says Lo Wei, chief economist and senior executive vice president at Fubon Financial Holdings. International investment will play a role as well: “Foreign corporations need to pay attention to Taiwan’s future science and technology development, because science and tech initiatives require direct investment,” says Lo.

Taiwan’s financial-services sector lags regional competitors in several respects. Compared with Hong Kong and Singapore, the island’s capital markets are more insular and less internationalized. And while mainland China has rapidly adopted electronic payments, Taiwan still relies heavily on cash and credit cards.

Taiwan’s banking industry is intensely competitive. While financial-service companies have been slow to adopt fintech, they recognize the need to do so going forward, Lo says. “Every company is doing [fintech] research,” he says. Financial institutions do have capacity to lend more. Taiwanese banks currently have some $970 billion in savings on their books and a loan-to-savings ratio below 75%.

Taiwanese banks, meanwhile, stand to gain from mainland manufacturers moving to Taiwan and other neighbors in Southeast Asia. “This is an opportunity for Taiwan’s financial industry,” says Lo. “Manufacturers will need to install new equipment systems and new factories.”

The need for traditional financial services hasn’t gone away, either. By 2026, Taiwan is expected be “super-aged,” with at least a fifth of the population 65 or older. Hence, ING’s Pang sees opportunities in the insurance and eldercare industries. “The Taiwan economy has to take care of its aging population,” she says.

Financial solutions are necessary, especially to supplement public pensions, Lo says: “This will have a big impact on Taiwan’s financial industry.”

Other sectors also show promise. Tourism has blossomed; in April, Taiwan welcomed more than 1 million visitors for the first time, including record numbers from Japan, Singapore, Malaysia, Thailand, the US, Canada, Germany, the Netherlands, Australia and the Philippines. That diversity mitigates the impact of China’s recent ban on tourism to the island.

Still, none of these promising developments negate the tensions looming over Taiwan. Economists expect tepid growth for the rest of this year and into 2020. Companies are taking a wait-and-see approach leading up to national elections next year, says ING’s Pang. “After the elections, the mainland could give more business opportunities to Taiwan,” she says—again, depending on the outcome. Meanwhile, while many decisions impacting Taiwan’s economy are being made thousands of miles away, the island’s public and private sectors are taking steps to push it forward.