Taiwan: Investment sets to be a silver lining in the dark cloud of trade

The economic outlook for Taiwan is mixed, tempered by the dark cloud of the US-China trade war and weak Chinese demand. In fact, GDP growth has decelerated to 1.7% YoY in Q1 2019 pushed by the very weak exports, which fell for the sixth consecutive month (-3.3% in April 2019). But an interesting pattern is a shift towards the US starts to emerge, which could have potential implications for the Asian value chain. That said, Taiwa n seems to be heading towards less de pendence on the Chinese economy in its industrial ecosystem . Within ASEAN, strong demand is stemming from Singapore and Vietnam. Although the domestic demand is also dragged by weaker retail sales, t he silver lining is investment, especially from domestic corporates. Although approved foreign direct investment fell 56% in Q1 2019, the decline is skewed by a large deal in t he financial sector in Q1 2018 and m anufacturing FDI continued to grow at 33% YoY. In addition , companies speeded up in bringing their overseas operations home with an approved amount reaching NTD 240 billion. Going forward , the emergence of new sectors, such as 5G, data centres and offshore wind energy, are going to provide new opportunities. The trend is coupled with the import surge in equipment and machinery. On financial markets, Taiwan’s equity market is up 2.7% to 10,924 from the end of March, driven by electronics, automobile and semiconductor. Formosa bond issuance fell 50% YoY to USD 8 , 54 9 mi llion in Q1 2019 with MENA contributing to 72% of total. Home price growth has decelerated in March but mortgage growth has further accelerated. But the vacancy rate of commercial properties in Taipei city fell to 4.2% in Q1 2019, which could be a result of improving business sentiment and inflows of foreign investments. All in all, the dark cloud stemming from poor trade performance i s likely to hover above the Taiwanese economy, but a structural change is on the way. Taiwan seems to be moving away from the very high dependence on China and attracting investment from both foreign and domestic corporates. Given Taiwan’s intermediate role in the global supply chain, the recent development towards green energ y is also positive in attracting foreign investment and securing orders as more global firms (especially the US) are obliged to keep the providers green. In the short run, though, the head winds are clearly stronger and we maintain our view that the Taiwanese economy will grow 2.2% in 2019.