Taiwan

Seeking growth in an uneasy (geo)political landscape

Strengths & weaknesses

Economic overview

Strong position in the global value chain ensures stable growth momentum

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.

Fiscal policy in Taiwan has been broadly accommodative. To provide relief during the pandemic, the government accelerated fiscal spending through measures such as tax breaks, loan moratoria and subsidies. The annual fiscal deficits came in at -2.9% of GDP in 2020 and -2.1% of GDP in 2021 before declining to -1.7% of GDP in 2022. Going forward, we expect the fiscal balance to turn to a slight surplus starting in 2023 (+0.3%) and moderate in 2024 and 2025 (+0.2%) on the back of softer government expenditure and increases in tax enforcement, reflecting their attempts to impose fiscal discipline.

Headline inflation remained relatively high compared to historical levels in 2021 (+2%), 2022 (+3%) and 2023 (+2.5%) (albeit low relative to international standards) and has consequently led to the tightening of domestic monetary policy since March 2022, with a cumulative increase of +75bps so far, with the policy rate currently standing at

I. 875%. Looking ahead, we expect a gradual easing of monetary policy by the Central Bank of the Republic of China (CBC) as we forecast inflation to ease to +1.8% in 2024 and +1.2% in 2025, in addition to limited incentives for further tightening due to slowing growth in money supply (M2) and the weak economic outlook. However, risks to inflationary pressures from higher international fuel prices, adverse weather conditions (notably on food prices) and a weakening currency cannot be completely ruled out.

Solid macro-fundamentals tied down by geopolitical tensions

On the back of a well-developed and resilient financial system and sound external and fiscal balances, the short­term financing risk in Taiwan remains low. We expect the fiscal balance to register a surplus in the near term until 2025, public debt to remain low at 22% of GDP in 2024 and 19% in 2025 and the current account balance to stabilize around 12% of GDP during this period.

Taiwan exhibits robust external balances with a strong track record of more than 20 years of large current account surpluses - reflecting its strong position within the global value chain. The expected recovery in global trade, in particular a reversal of the global electronics cycle downturn, will only fuel this trend going forward. Consequently, we expect the economy's current account balance to register a surplus of 12.1% of GDP in 2024 and

II. 7% in 2025. Further, we expect gross external debt to remain low, below 30% of GDP in the near-term. However, the economy's strong dependence on external trade makes it vulnerable to challenges in the external environment. Worsening geopolitical risks and rising cross-strait tensions are also softening inbound foreign investment flows from multinational firms.

Business-friendly environment, with broad political stability

Taiwan has a solid business environment with well-developed physical infrastructure, an educated workforce and business­friendly policies. The Heritage Foundation's annual Index of Economic Freedom surveys have put Taiwan in the top ten out of 185 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. Indicators that have the potential to improve further include those related to labor freedom and financial freedom. Likewise, the World Bank Institute's annual Worldwide Governance Indicators 2022 survey suggests that the regulatory and legal frameworks are business-friendly and the level of corruption is low. On the downside, Taiwan scores less favorably with regard to environmental sustainability, owing to a very low level of renewable electricity output and a moderate recycling rate, although it does well with regard to energy use and CO2 emissions. Overall, Taiwan ranks 109 out of 210 economies in our proprietary Environmental Sustainability Index.

As we were expecting in our baseline scenario, the 2024 presidential elections were won by Lai Ching-te of the Democratic Progressive Party (DPP) with a share of 40.05% of total votes - slightly higher than that of his opponent Hou Yu-ih from the opposition Kuomintang (KMT), who earned 33.49% of votes.