By Nick Land, Special to The China Post
According to the quarterly report of the Goldman Sachs Economic Research Group, Taiwan’s economy is suffering from an external shock rather than internally generated economic weakness. The report calls for a modest depreciation of the NT dollar and progress on cross-strait economic links.
The drastic U.S. turn-down has inflicted “the worst adverse external shock since the oil crisis in 1974” upon the Taiwan economy, says the report. Year-on-year industrial output fell 11.5 percent in June, the sharpest contraction for 20 years. The report estimates that GDP may actually have declined by 2 percent, with the short-term outlook remaining gloomy.
The tech-led slowdown in the U.S. economy has triggered a collapse of U.S. demand for electronic products, resulting in a crisis for the export-dependant Taiwan information and communications technology (ICT) sector, a key driver of the local economy. The fall in exports has fed through into an output and capital investment slump, harming loan-quality and spreading misfortune throughout the economy.
The report says that attempts to boost liquidity by lowering interest rates have been frustrated by finance-sector weakness, whilst fiscal expansion plans have been undermined by political gridlock in the Legislative Yuan. These problems leave exchange rates as the only available tool for economic stimulus, the report argues.
For this reason, the report praises the recent policy stance of the Central Bank of China, which has tended to favor a weakening of the NT dollar. The local currency is seen as depreciating to around NT$36.5 to the greenback in the short-term, whilst stabilizing at roughly NT$35 on a twelve-month time-frame.
The report says the CBC’s relatively weak currency stance provides some badly needed succor to exporters. In addition, the alternative policy of seeking to fix the exchange rate at a higher level could lead to higher domestic interest rates, putting intolerable pressure on Taiwan’s financial system at a time when loan-quality problems are causing serious concerns. Taiwan’s financial sector reforms along with potential policy initiatives stemming from the newly formed economic advisory committee are also broadly welcomed by the report, although further focus on the issues of asset quality in the financial sector and cross-strait relaxation is called for.
On a more positive note, the report says that the U.S. contraction has probably reached its trough, so the worst should be over for Taiwan exporters. U.S. orders for electronics products are likely to pick-up slowly, although major improvements are not expected before the end of the year.
The report also notes that the non-performing loans problems bedeviling Taiwan’s financial sector, whilst serious in their effects, are at least a stock rather than a flow problem. This is to say that Taiwan’s NPL back-log is inherited from past weaknesses and difficulties posed by structural change, rather than stemming from imbalances in current business revenues.
GDP growth of 5 percent is forecast for 2002.