Monday, January 27, 2014

Taiwan Economy Powers Up

We es­timate Taiwan’s December quarter GDP growth released this week to improve slightly to 1.8% on-year in the December quarter from 1.7% in the previous quarter, taking full-year growth to 1.9% in 2013.
Given the better-than-expect­ed results in December’s industrial production and the upward revisions to exports, there is a good chance that the GDP figures will surprise on the upside (at about 2.0%).

Export demand is coming back, thanks to the improvement in global macro conditions and the upturn in the electronics industry. With leading indicators (such as export orders and capital goods imports) continuing to pick up as of December last year, GDP growth should also maintain the improvement trend ahead, at least until the end of the March quarter. Our growth forecast of 3.3% for the whole year of 2014 is well on track.

The disappointment in trade and growth data over the past few months de­pressed sentiment in the Taiwan market. With signs of economic recovery be­coming increasingly visible, confidence should also improve. Foreign inflows into the equity market have already rebounded, increasing by US$1.5 billion to  January 24 from January 1.

On the Taiwan dollar, a drag in recent weeks came from the depreciation of the Japanese yen and the Korean won, as a result of over-expectations about monetary easing by the Bank of Japan and Bank of Korea, respectively. The expectations about the Bank of Japan easing in the first half of 2014 are now subsiding, as the central bank stayed on hold last week and expressed complacency about the growth and inflation outlook. The Bank of Korea also kept rates unchanged in a unani­mous decision earlier this month, and showed greater confidence about the recovery outlook in South Korea.

For now, the focus in the foreign exchange market is on the Federal Reserve’s decision at its next policy meeting this week. Given Taiwan’s strong external balance and low reliance on US dollar financing, we believe that the potential impact on the Taiwan dollar from further Fed tapering will be relatively limited.