New | Taiwan’s economy faces challenges as next president prepares to take helm
Tsai Ing-wen, the island’s first female president, has pledged diversifying the economy as a top priority
Taiwan’s economic outlook is coming under scrutiny following the election victory earlier this month of the stridently pro-independence Democratic Progressive Party, with some analysts saying they’ll be watching for signs of how the relationship with Beijing unfolds.
And while president elect Tsai Ing-wen was careful not to use language on the campaign trail that might upset the “One China” status quo - a linguistic contortion that gives face to both China and Taiwan over who is boss - she is expected to come under pressure from within her party to adopt a more muscular stance on independence while at the same time stimulate growth in an economy heavily tied to a slowing mainland economy.
“Taiwanese corporates are still massively dependent on China. Tsai needs to be very careful in how she approaches the One-China model. This is specially true since the Taiwanese economy has entered a hard-landing. The most urgent thing that Tsai faces is to jump start growth,” Natixis analyst Alicia Garcia Herrero said.
Garcia Herrero says she expects Tsai to try and expand economic ties with Japan and India, adding that it will be interesting to watch how China reacts to her attempts to diversify the Taiwanese economy.
China and Hong Kong combined account for 40 per cent of Taiwan’s exports, according to Natixis data, though some of those exports will be components used in assembly before being shipped again. The next largest destination for Taiwanese exports is the US at 12 per cent.
While out stumping for votes Tsai promised to address inequality and raise living standards by building more public housing, at the same time playing up the failures of the ruling Kuomintang Party to deliver growth despite closer ties to Beijing. Among her policy ideas was closer scrutiny and a possible cap on Chinese foreign direct investment.
BMI Research cited concerns over Tsai’s untested government in downwardly adjusting their outlook for Taiwan’s economic growth. The group revised its growth forecast in 2016 to 1.5 per cent from 1.9 per cent, and in 2017 to 2.3 per cent from 3.5 per cent.
“With Tsai coming to power on slightly unrealistic expectations, we expect investors to adopt a ‘wait and see’ approach with regard to her policies as they assess her ability to convince the bureaucracy and the various factions within the DPP to work together. This will have a negative impact on foreign direct investment in the country,” BMI Research analyst said in a research note.
Analysts say one hurdle for Taiwan is that it sits outside many of the major trading blocs and was unable to get a seat at the recently concluded Trans Pacific Partnership negotiations that will reduce trade barriers among member states.
Sean Darby chief global equity strategist at Jefferies said: “They need to embrace free trade...I think she will need to make sure that Taiwan is included in the next round (of TPP talks) that would allow the country some room to manoeuvre without being entirely driven by China.”
Darby is less bearish on the island’s outlook, saying the service sector, which makes up 73 per cent of Taiwan’s economy and is underrepresented on the stock market, is “doing quite well”. He added that there is room for Taiwan’s central bank to cut interest rates “given the benign inflation”.
Making a comparison with South Korea’s female president Park Geun-hye, Darby said that Tsai also needs to focus on corporate governance and attacking the grip of big business on the economy. “It’s reforms which are the things which are driving markets,” he said.
