Boston, MA -- (SBWIRE) -- 10/02/2013 -- Core Views

In our review of the implications of China's 12th Five Year plan on Taiwan's economy, we find that Taiwan's semiconductor and flat-panel sectors face the greatest risk from Chinese competition over the long term, due to a prolonged lack of progress in high-end manufacturing. In the medium term, however, upside potential for Taiwan stems from a reinvigoration in Taiwanese homebound investment, a possible return of skilled labour, and a liberalisation in cross-strait banking. We argue that unless Taiwan makes material efforts to move up the value chain, China's imminent rise in the global tech sphere will eventually threaten the industrial model on which the island's economy is built.

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Despite renewed optimism in Taiwan's economic growth prospects for the rest of the year, we are sticking to our downbeat expectations on the island's economy. We expect the trade rebound to be transient, with progressive weakness outweighing the trade support provided by the ASEAN region. Indicators such as retail sales and inflation have also reflected subdued domestic demand conditions.

The remarkable deceleration in Taiwan's consumer price inflation continues to augment our contention that the island's economic conditions are not taking a turn for the better. With the slowdown in economic momentum likely to intensify in the coming quarters, we believe that inflation is likely to remain subdued going forward. Meanwhile, we believe that the surge in property prices has not been founded on solid economic fundamentals and the risks of a correction in the sector are progressively increasing.

We believe that Taiwan is likely to proceed with the operation of its fourth nuclear plant, for now. In the event that it fails to come online, however, Taiwan's economy would not just face a higher energy bill, but more importantly, the attractiveness of its business environment would also likely be diminished, consequently presenting a considerable threat to the country's industry-led economic model.

We believe that Transparency International's findings of alleged widespread corruption within Taiwan, particularly in the public sector, will certainly cast a negative light on the government's efforts to draw in more foreign direct investment. However, debate regarding the veracity of its findings is still ongoing, preventing us from making a more definitive conclusion. In particular, we would not be too fixated on the bribery claims, and believe that other structural deficiencies within Taiwan's business environment warrant more immediate concern.

Major Forecast Changes

We have consequently downgraded our 2013 and 2014 real GDP projections from 3.0% and 4.0% to 2.1% and 3.0%, respectively.

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