Taiwan: Not only a trade story, also consumption bolstering growth

• Taiwan’s economy has grown faster in Q4 2017 as we expected. Despite the ongoing positive trade momentum, we believe Taiwan will continue to benefit from higher consumption demand in 2018.
•  On a positive note, exports will continue to expand rapidly but at a slower pace. The key question mark comes from iPhone sales, and more generally on the mobile phone sector, before other electronic products in the ecosystem of 5G or internet of things can take the lead. For consumption, a positive equity market performance will improve consumer confidence and generate a positive wealth effect to bolster growth. In addition, rapid growth in inbound ASEAN and Chinese tourists will also contribute to the pick-up in retail sales.
• Both exports and consumption should be strong enough to buffer the still lacklustre investment, which has been dragging down growth in 2017. Although public investment has contributed to a larger part of GDP growth, the scale is too small to offset the overall decline in private sector investment.
•  As for market developments, Taiwan Capitalization Weighted Stock Index (TAIEX) reached as high as 11,253 in January 2018. The outperforming sectors have been glass, oil and semiconductors. For the bond market, the issuance of Formosa bond has fallen 39% YoY to 4,984 million USD in Q4 2017, mainly due to a big decrease from US and European corporates. However, APAC has become the new driving force, with nearly double as much issuance as last year (92% YoY) and now make up to 61% of total Formosa issuance. Besides, CNH denominated Formosa bond issuance has come back to the market after having dried up for quite some time. We expect Formosa bond issuance to improve in 2018, especially for APAC and even MENA financials. The reason is foreign asset demand from Taiwan’s investors has not yet faded and Formosa funding costs have so far remained very competitive.
• All in all, Taiwan will benefit from stronger domestic consumption on top of the positive global trade momentum in 2018, offsetting the impact from weak investment.

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