Will Taiwan Stimulus Cut Reliance on China Trade?: QuickTake Q&A

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Taiwan is betting that its $28.9 billion stimulus package will reinvigorate an economy that’s all too dependent on exports. The government is banking on an overhaul of aging infrastructure, backed by private investment, to boost economic growth at a time when deteriorating relations with China put a cloud over ties with its largest trading partner.

1. So where’s the money going?

Mostly upgrading public works, from railways and water works to rural facilities. Prime Minister Lin Chuan, outlining the budget March 23, said it was an “indispensable step” to transform the economy. About two-thirds of gross domestic product is derived from exports, some 40 percent of which go to China. The government expects to bring in an additional $58.7 billion in private investment. The combined public-private boost, spread over eight years, equates to about 15 percent of a single year’s GDP.

PurposeAmountPrivate Investment
Railways$14.0B$2.6B
Water Resources$8.3B$413.4M
Digital Infrastructure$1.5B$7.9B
Green Energy$793.8M$46.9B
Urban & Rural Development$4.5B$888.4M
TOTAL$29.1B$58.7B
Source: Taiwan Cabinet

2. What impact will it have on the economy?

The government lifted its 2017 GDP growth forecast to 2.1 percent from 1.92 percent and sees 2.7 percent growth in 2018. Fubon Financial Chief Economist Rick Lo says the plan will help reduce reliance on foreign trade and boost consumer and investment confidence in the short term. Lo raised his forecast for growth this year to 2.1-2.2 percent from 1.5 percent.

3. Why the drastic action?

Taiwan was hit hard by the 2008 financial crisis and entered a recession in September 2015 that lasted through the second quarter of last year. The infrastructure project is the ruling Democratic Progressive Party’s first major attempt to stimulate the economy by fiscal means since taking power last May. That period has been marked by strained relations with China. President Tsai Ing-wen has complained that China was reverting to “threatening and intimidating” tactics after Beijing responded angrily to her telephone conversation with Donald Trump, then U.S. President-elect.

4. What impact will the stimulus have on bond markets?

The plan will be entirely financed through public debt, with an estimated $793.9 million (NT$24.2 billion) raised this year and $3.2 billion in 2018. The increase in debt supply, coupled with a possible economic rebound, could lift yields. Vince Lin, a senior trader at Concord Securities, forecasts 10-year yields will test 1.20 percent in the near term (they’re currently around 1.11 percent). Tobby Lin, a senior trader at Yuanta Securities, says the impact will be limited as doubts remain over how much of a boost GDP will get.

5. How have markets reacted since the announcement?

The Taiwan dollar has reached its strongest level since October 2014. Stocks have fallen slightly, but are trading near 17-year highs as the economic growth outlook improves. Taiwan held its benchmark interest rate steady for a third straight quarter in March.

6. Will the plan affect Taiwan’s creditworthiness?

Premier Lin says the government will stick to the basic principles of fiscal stability. The special budget will not push the debt-to-GDP ratio above 34.6%, he said, well below the legal limit of 40.6%. Spending on new infrastructure aside, Lin said the annual budget over the next few years will remain about $65.6 billion, preventing a deterioration in Taiwan’s debt profile.

The Reference Shelf

  • The newest member of the Taiwan central bank board says domestic demand is crucial to growth.
  • President Tsai aims to spur domestic demand with infrastructure development plan.
  • A QuickTake explainer on Taiwan’s relationship with China.
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