SINGAPORE, Oct. 28 (UPI) -- While most Asian countries have seen their growth slowed down in the third quarter, the latest indicators in Taiwan point to an economy that is still performing strongly. Though a softening of this performance is expected in the fourth quarter, analysts believe this positive macro outlook somewhat counterbalance the increasing political risk from an investors' point of view.
Fitch Ratings, the international ratings agency, recently affirmed Taiwan's long-term foreign debt at 'A+' though warning it was closely monitoring political developments "in light of the shifting dynamics of cross-strait relations."
In recent weeks, there has been a clear worsening in cross-strait relations.
The unexpected spring re-election of President Chen Shui-bian has intensified China's concerns regarding Taiwan's imputed movement towards independence and despite the conciliatory tone of Chen's Oct 10 speech, no breakthrough in cross-strait relations is likely in the near term. Chen called for talks with the mainland on easing cross-strait tensions and allowing direct flights, while proposing such talks could be initiated on the basis of the "1992 consensus."
The mainland immediately rejected his proposal, citing Chen's failure to acknowledge the "one-China principle" and his lack of sincerity. China's reaction, largely expected, virtually ruled out the possibility of a resumption of direct transport in the near term.
Several other developments on cross-strait relations have irritated China in recent weeks. These include Chen's threat last month that Taiwan would retaliate with missile strikes on Shanghai if China tries to launch a military attack, Taiwanese cabinet's defence budget proposal that involves $18 billion purchases of advanced weapons (including offensive capabilities) from the United States, and a recent pro-independence conference held in the Capital Hill of the United States.
Moreover, the forthcoming parliamentary election that could result in a majority for the pan-Green coalition of the Democratic Progressive Party and Taiwan Solidarity Union (TSU) and the pro-independence TSU could strong-arm the administration into adopting a more aggressive stance on Taiwanese autonomy by virtue of its swing vote position within the legislature.
Many analysts said they are concerned about these risks of heightened cross-Strait tensions in the next few quarters, particularly given the uncertainty about Chen's bid to revise the island's constitution. The constitutional reforms in Taiwan could also become a touchstone for further problems in the cross-strait relationship.
Yet, the economic situation of the country still makes the country an attractive investment's proposition, economists said.
The leading indicators index surprised most by being unchanged in September, bucking the consensus view for a further month-on-month decline.
Export growth continued at a strong annual 19.2 percent in September, virtually unchanged from August, while imports grew an annual 29.4 percent as a result of recovering domestic consumption and higher oil prices.
"We expect export growth to moderate slightly to around 15 percent in the remainder of this year reflecting the less favorable base effect and some gradual slowing in the Chinese and U.S. economies," economist Jun Ma wrote in Deutsche Bank's latest monthly research. The bank projects 5.5 percent GDP growth for the third quarter, followed by 4.8 percent in the fourth.
The latest monthly survey by the Council of Economic Planning and Development indicated manufacturers have become marginally more cautious on the outlook of the business environment. Yet, although business sentiments have generally turned more cautious, manufacturers do not appear to be excessively bearish, especially in view of the fact that capital goods imports, the most timely indicator of fixed investment activities, had shown two consecutive months of recovery through September, economists said.
Meanwhile, the country's domestic recovery story remains strong. While money supply is losing momentum, as reflecting in broad M2 money supply eased from 7.3 percent year on year in August to 7.1 percent in September, credit is still expanding, rising on a quarter-on-quarter basis for a 16th consecutive month to 0.4 percent from 0.2 percent in August.
Loan growth remains healthy and provides a further indicator of the domestic economic revival. Private credit growth was up 11 percent year on year in September, still led by mortgage and household debt but also supported by domestic corporate demand especially in real estate and services.
"Although we believe that the Taiwan economy can continue to perform relatively well versus the rest of Asia, we do anticipate signs of decelerating growth as the impact from slower export growth feeds through," said Joseph Lau, economist at CSFB, "However, we also think that domestic demand can provide a buffer against the sharp downturn expected in exports."
CSFB is forecasting GDP growth of 5.8 percent this year and 3.8 percent in 2005.
"Looking forward, despite the external headwinds of moderating global growth, our view is that the Taiwan economy is not going to see an abrupt downturn, but rather is settling into a more sustainable growth phase in the coming quarters," said Grace Ng, economist at JP Morgan.
"In particular, we maintain a positive outlook on domestic demand as supportive fundamentals remain unabated. The real GDP growth forecast for 2004 stays at 5.7 percent, with the 2005 forecast at 4 percent," she added.
