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Taiwan in the Economic Storm

A Sound Vessel Travels Troubled Seas


Thanks to a solid financial base, Taiwan has so far remained largely undamaged by the recent financial meltdown. But concerns over the fundamentals of Taiwan's economy are slowly surfacing.



A Sound Vessel Travels Troubled Seas

By Isabella Wu
From CommonWealth Magazine (vol. 409 )

Aftershocks from the global financial earthquake continue to wreak havoc round the world, and the epicenter has shifted to the emerging markets. The Financial Times and the New York Times are even pointing to the South Korean economy as the next likely victim of the crisis. The U.S. Federal Reserve Board has even extended emergency currency swap lines to Singapore and South Korea to alleviate a U.S. dollar shortage.

Yet Taiwan, which used to be mentioned in the same breath with Singapore and South Korea, does not rank among the affected nations this time.

"Amid this entirely pessimistic outlook few people dare to talk about good news," notes Tony Phoo, chief economist of Standard Chartered Bank Taiwan. "Taiwan's situation will stand out even more in the current financial crisis."

A Model Student with Sound Finances

Numbers speak for themselves. The predominant characteristic of this financial turmoil is drastic currency depreciation, which affects a nation's ability to service its debts. Taiwan remains in comparatively excellent condition.

Taiwan has ample foreign currency reserves and low external debt. Taiwan's foreign reserves are worth US$280 billion, some US$40 billion more than South Korea. Taiwan's external debt of US$85 billion amounts to less than one third of the island's foreign reserves, whereas South Korea has a staggering external debt of more than 70 percent of its foreign reserves.

On top of that, Phoo believes that "Taiwan's financial system is relatively healthy," because the island dealt with its debt problem early on. When Taiwan was engulfed by spiraling credit card debt in 2005, stronger controls were implemented over consumer finance. In 2006 Taiwan began to rein in housing loans, bringing down the loan-to-value ratio. Over the past year loan growth has been very slow. Presently, the loan-to-deposit ratio of Taiwan's financial institutions is lower than that of their counterparts in South Korea and Hong Kong.

Not only are Taiwan's financial fundamentals sound, but also its "financial officials are particularly sensitive," observes Cheng-Mount Cheng, vice president of Citigroup Taiwan. Over the past several years, Taiwan has had to live with adverse circumstances such as low interest rates and capital outflow. "It's as if a never-ending string of small ailments has honed the central bank's skills to react particularly quickly," Cheng asserts.

Most recently this was the case when the U.S. Federal Reserve lowered the interest rate by 0.5 percentage points on Oct. 29. On the following day Taiwan's central bank rushed to hold a press breakfast before the stock market opened in the morning to announce an interest rate cut, lowering the base interest rate by 0.25 basis points. As a result the local stock market soared 277 points, the largest gain in a single trading day in eight years.

The ability of financial officials to respond is particularly important during a crisis.

When the United States and Europe faced capital flow problems, not only did Taiwan's central bank move to cut interest rates and adjust the reserve requirement, but the Executive Yuan also took the lead by announcing that all bank deposits would be guaranteed and that there would be no guarantee cap, thus ensuring smooth capital flow. Consequently, consumers and banks did not need to move their money, which calmed public and market sentiment.

"At least in Asia, Taiwan is the frontrunner," notes Phoo with pride. Singapore, Hong Kong and Malaysia have all emulated the Taiwanese approach.

When Reserves Are Spent, Hidden Fears Surface

Even though Taiwan is an open economy with a healthy financial system, it can only try to minimize damage. "This financial crisis is like a forest fire," says Citigroup's Cheng, adding that Taiwan does not lack the U.S. dollars needed to put out the fire. "But if the fire has burnt down the forest, what will Taiwan eat next year?"

The financial wildfire has not yet died down, yet it has already engulfed the real economy, giving governments around the globe a major headache. And Taiwan is also already facing problems in the real economy.

Let's take another look at the numbers. As economic research institutes around the world announce their economic growth forecasts for 2009, there is not a single market – be it Europe, North America or China – that has not had to adjust growth figures downward. UBS even estimates that the two largest markets, Europe and North America, will post negative growth next year. For Taiwan with its export-oriented economy, this is bad news. The negative impact from shrinking consumption in Taiwan's major export markets has already begun to show in declining exports.

Aside from shrinking exports Taiwan's domestic consumption is weak and private-sector investment has massively declined, which shows that Taiwan has problems too.

"We need to pay particular attention to rising unemployment figures," since only people with a constant income have spending power, cautions Jui-Bin Hung, director general of the Department of Economic Research at the cabinet-level Council for Economic Planning and Development.

Taiwan's unemployment rate usually rises in May, when school graduates enter the labor market, and declines in September when many newcomers have found jobs. But this year the unemployment rate kept creeping upwards even in September. Since many companies are cutting jobs or salaries to reduce costs, it is presently unforeseeable when the unemployment rate will start to come down again.

Academia Sinica research fellow Chung-Shu Wu believes that Taiwan "still must depend on domestic demand" if it wants to build the strength needed to weather the storm and revive the economy in the face of shrinking export markets. Wu argues that although domestic consumption has been weak over the past years, it still accounts for more than half of the island's GDP. Domestic consumption is ultimately a force that Taiwan itself controls, and "Taiwan's private sector still has considerable strength," Wu optimistically asserts.

In order to stimulate consumption, governments around the globe, including Taiwan's, are cutting taxes and expanding public infrastructure projects. Japan's new Prime Minister Taro Aso has even announced that his government will hand out 2 trillion yen in tax rebates to Japanese families, hoping they will spend more.

Yet Wu avers, "What we need now is confidence." People must feel at ease; otherwise, they will save and not spend.

Allowing people to see real change taking place would inspire far more confidence than mere slogans and propaganda. One example would be "if the central government achieved good coordination with local governments and did a good job carrying out infrastructure projects," Wu contends. "I'm sure that after this crisis Taiwan will still be a dragon, alive and kicking.

Translated from the Chinese by Susanne Ganz

Chinese Version: 本錢夠厚,但隱憂浮現