Taiwan: Diversification has helped Taiwan to thrive for another quarter, but stronger investment push is needed

Under the rising tide of protectionism, Taiwan sustained a resilient export growth at 11.2% YoY in Q2 2018. Although the direct contribution by China has reduced, there is a big jump in Hong Kong possibly due to the trade war. Overall, though, export growth into Greater China remained flat while other markets continued to expand. Specifically, the larger contribution by ASEAN and Europe helped Taiwan to sustain export growth. The inflows of ASEAN tourists also offset the reduction from Chinese tourists. However, the fading base effect will make the trade condition more challenging in H2 2018.

As far as domestic demand is concerned, consumption remained solid but investment was weaker than expected. The fall in investment has significantly narrowed comparing to 2016, but both private and government investment seems to be stalled. Approved FDI for the first half of 2018 has also reduced 20% YoY. This indicates the government will need to accelerate its infrastructure plan to stem off the impact of global uncertainties on private investment.

Another cloud in the horizon relates to the impact of higher oil prices and a weaker NTD, which fed import costs by 10% YoY in June 2018. This could eventually weigh on corporate profits as the increase in domestic sales and export prices was much slower than that of import prices. In other words, Taiwanese firms might continue to face higher costs but find it hard to raise prices in front of global competition.

For market developments, Taiwan’s equity market performed relatively better than emerging Asia. Foreign outflows were offset by domestic investors’ interest in stocks. In fixed income, Formosa bond issuance grew 26% YoY to 7,458 USD million in Q2 2018 driven by MENA governments and financial institutions, but issuance from other regions fell significantly. There are also good signs in the property market with more transactions and higher price increase in Taipei City. Demand seems to be supportive with an accelerating mortgage growth.

On monetary policy, Taiwan’s rate cycle has long decoupled from the FED and we do not expect any hike until 2019. Limited inflation pressure, the need to support investment and the uncertainty in the trade war mean there is no urgency in a rate hike.

All in all, Taiwan’s economic performance continues to be good for 2018. However, the fading base effect in trade will make the external condition more challenging and it will be dependent on the pull effect from Apple related supply chain. The decline in investment narrowed but a stronger push is needed by the government for provide future buffer. We expect Taiwan to grow faster at 2.8% in Q2 2018, slightly slower than the last quarter.

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