Taiwan: Mild contraction won’t derail the positive outlook from tech demand and limited mobility restrictions

• As the world struggles to overcome the Covid-19 crisis, Taiwan is a rare oasis with hardly any local mobility restrictions. The early containment measures from January have taken a toll on the economy but not as much as the global lockdown. Still, the prospects are positive for the H2 2020, especially in semiconductors and biotech. The reasons for the tailwinds are the 5G rollout and the Covid-19 related demand. 
• Taiwan’s GDP growth has reverted from 1.59% in Q1 2020 to -0.73% YoY in Q2 2020. Unlike Asian peers being hit by mobility constraints, the pressure on consumption is smaller but not inexistent under the worsening labour market. The escalation of the Covid-19 globally has also disrupted exports but much less than other competitors, such as Korea. The silver lining comes from accelerating investments from both the government and firms. Taiwanese firms are bringing overseas operations home with an approved amount of NTD 865 billion or 4.6% of GDP. FDI has also grown 9% in H1 2020 with Europe being the biggest foreign investor especially in manufacturing and energy.
• Despite the short-term turbulence, Taiwan’s economic outlook remains moderately optimistic. The first reason is there has not yet been a second wave of Covid-19, which differentiates Taiwan from the fate of Hong Kong, Japan or Singapore. Second, ICT export orders have sprung back significantly. Third, corporate revenue has bounced from a collapse in Q1 2020 (-7% YoY) to stability in Q2 2020 (0% YoY). In particular, the semiconductor industry continues to boom with 24% YTD revenue growth as of June 2020. Lastly, home prices is growing with a low vacancy rate for office space and an uptick in industrial land prices.
• With a very mild impact of the Covid-19 on domestic mobility and the smaller dependence of the Taiwanese economy on foreign visitors, Taiwan’s central bank is likely to keep its bullets unused for the time being, especially under the very low interest rate environment. Together with the better global risk sentiment and bigger foreign capital inflows, the TWD has stayed strong. It is hard to see how this trend may change any time soon as it probably fits the central bank’s intentions. The reasons are two-folded. Not only there is a risk of the Trump administration giving the label of currency manipulation, exports have also held up quite well given the circumstances. But a very rapid appreciation of the TWD is also not on the cards in any events.
• All in all, we maintain our forecast that Taiwan’s economy will grow 1.5% in 2020 and 2.9% in 2021. The most immediate risk is a second wave of Covid-19 but a worsening global situation will also be detrimental even if Taiwan manages to isolate itself sanitarily. More structurally, the ongoing global transition towards “Industry 4.0” will continue to lift demand for Taiwan’s 5G related exports and data centres. At same time, Taiwan’s green energy plan should continue to boost investment on top of the repatriation of profits from the rest of the world.

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