Taiwan Country Risk Report & Analysis

Earlier exit from the crisis likely, but challenges ahead

MEDIUM RISK for enterprise

Economic risk
Business environment risk
Political risk
Commercial risk
Financing risk

Economic risk
Business environment risk
Political risk
Commercial risk
Financing risk

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GDP	USD610.78bn (IMF 2019)
Population	23.76mn, (IMF 2019)
Form of state	Multiparty Democracy
Head of government	Tsai Ing-wen (President)
Next elections	January 2024, presidential and legislative

Functioning, stable democracy with robust institutions
Good record of sound economic management, pro-business environment, well-trained workforce
Demonstrated economic flexibility, enabling rapid shifts along the value-added scale
High domestic savings and investment
Very strong external liquidity

Increasingly tense (geo)political relationship with mainland China
Highly dependent on demand from mainland China, Hong Kong and the U.S. (export-dependent economy)
Openness of the economy leaves it vulnerable to external demand shocks
Heavy concentration in the IT/electronics sector

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A shallower recession and an earlier exit from the crisis

The Taiwan economy fell into recession in H1 2020 (two consecutive quarters of negative sequential growth). That said, it was a relatively shallow one compared to some Asian neighbors, and we see Taiwan as being among the economies recovering earlier from the Covid-19 economic shock. This is thanks to a management of the local epidemic that was deemed successful, and strong economic ties with a recovering mainland China. Furthermore, Taiwan will benefit from the global drive for equipment for remote working and online schooling. Indeed, the electronics sector performed well in H1 2020, partly making up for the slump in non-technology industries and tourism, which were hit hard by the global pandemic.

We expect Taiwan's economy to register a full-year recession in 2020, with GDP contracting by -0.3% (after +2.7% in 2019). A gradual recovery should bring growth to +3.4% in 2021. In this scenario, GDP should come back to pre-Covid-19 levels around the middle of 2021. Downside risks to our scenario include developments in the global pandemic,in the short term, and Taiwan’s increasingly tense relationship with mainland China and potential further escalations in the U.S.-China trade tensions in the medium run.

Policies: measures and leeway to cushion the shock

Taiwan’s public finances are healthy by international standards: public debt stood at 33.6% of GDP in 2019. Authorities are committed to put in place measures that support the economic recovery in the context of the global pandemic. We estimate that the measures announced in H1 2020 should result in a deterioration of the fiscal balance by 2pp of GDP. They include financial assistance for companies, employment subsidies and plans to issue consumption vouchers. The government has also committed to another package as large as TWD210bn (1.1% of GDP), if necessary.

On the monetary side, the policy rate was cut by 25bp to 1.125% in March, for the first time in around four years, bringing it to a new record low. A funding facility worth TWD200bn (1.1% of GDP) was set up to support SME funding. Inflation is low (0.6% in 2019, 0.3% expected in 2020), leaving room for further monetary easing if needed.

External position: healthy

The current account surplus stood at a healthy +10.4% of GDP in 2019 and is expected to narrow only slightly in 2020 (+9.2%). Extensive foreign exchange reserves cover nearly 20 months of goods imports. Long-term risks do exist and stem from elevated tensions with mainland China (Taiwan’s main trade partner) and a strong dependence on the electronics sector. In this context, diversification of trade partners and product innovation will be pivotal. In that respect, the Tsai administration has put the emphasis on various initiatives, including the improvement of infrastructure to improve accessibility, a reshoring drive (Invest in Taiwan), an ambitious industrial policy (5+2 Major Innovative Industries policy) to create new competitive growth drivers and a cooperation policy (New Southbound Policy with South East Asian market) in order to boost and diversify trade with other Asian partners.

Trade structure by destination/origin

(% of total)

Exports	Rank	Imports
China 25%	1	19% China
China, Hong Kong SAR 14%	2	17% Japan
United States 12%	3	12% United States
Japan 7%	4	6% Korea, Republic of
Singapore 6%	5	4% Germany

Trade structure by product

(% of total)

Exports	Rank	Imports
Electrical machinery and apparatus 34%	1	19% Electrical machinery and apparatus
Telecom and sound recording apparatus 5%	2	11% Petroleum products and related materials
Professionnal and scientific instuments 5%	3	6% Specialised machinery
Miscellaneous manufactured articles 5%	4	4% Professional and scientific instruments
Plastics in primary forms 4%	5	4% Organic chemicals