Strong macroeconomic fundamentals, critical export dependencies

Taiwan has recorded robust GDP growth over the past decades, with an average annual rate of +3.9% in the 2000s and +3.6% in the 2010s. Even amidst the Covid-19 pandemic, the economy showed remarkable resilience, achieving growth of +3.4% in 2020 and +6.6% in 2021, thanks to its strong competitive advantages in the semiconductor sector. However, being an export-driven economy, Taiwan is also vulnerable to fluctuations in demand. While the export scale of electronic components still reached a record high in the first half of 2022, economic activity slowed down markedly in the second half and beyond, impacted by mainland Chinese epidemic-prevention policies as well as inventory issues in the supply chain. Overall, full-year GDP expansion moderated to +2.4% in 2022. Sluggish global growth and a downturn in the global electronics cycle will continue to slow down the Taiwanese economy in 2023. We forecast GDP growth to come in at around +1% in 2023, followed by a recovery to +3% or so in 2024.

Fiscal policy also helped the economy through the pandemic, with tax breaks, loan moratoria and subsidies. The annual fiscal deficits came in at -2.9% of GDP in 2020 and -2.1% in 2021, before falling to -1.2% in 2022. We expect a somewhat larger shortfall in 2023 as government spending will increase ahead of the general elections in early 2024. This increase should soften after the elections, reflecting attempts to reimpose fiscal discipline after several years of elevated public spending since the pandemic. Despite the latter, the public debt-to-GDP ratio has remained on a downward trend, having fallen from 33% in 2019 to 27% in 2022, a favorable ratio compared to most other countries in the region.

On the monetary policy front, we expect the Central Bank of the Republic of China (CBC) to adopt a gradually easing monetary policy stance from the second half of 2023 to the end of 2024, after headline inflation fell from a peak of 3.7% in June 2022 to 1.8% one year later. At the same time, slowing growth in money supply (M2) and the weak economic outlook suggest very limited incentives for further rate increases. Previously, the CBC had embarked on a cautious monetary tightening between March 2022 and March 2023 to suppress inflation expectations at the time while avoiding exacerbating corporate debt burdens and potential hits to export competitiveness. Overall, we expect the CBC to continue its credible monetary policy approach.

The business environment for corporates in Taiwan is very strong. The World Bank’s annual Worldwide Governance Indicators surveys suggest that the regulatory and legal frameworks are business-friendly and the level of corruption is low. Likewise, the Heritage Foundation’s annual Index of Economic Freedom surveys have put Taiwan in the top 10 out of some 184 economies in recent years (rank 4 in 2023), reflecting very strong scores with regard to property rights, judicial effectiveness, government integrity, tax burden, business freedom and trade freedom. Only labor freedom and financial freedom are scored below average. However, Taiwan scores less favorably with regard to environmental sustainability, owing to a very low level of renewable electricity output and a moderate recycling rate, though it does well with regard to energy intensity and CO2 emissions. In all, Taiwan ranks 109th out of 210 economies in our proprietary Environmental Sustainability Index.