Taiwan

Taiwan has experienced solid GDP growth over the past two decades, averaging +3.9% in the 2000s and +3.6% in the 2010s. The efficient handling of the pandemic and exposure of the economy (and of exports in particular) to the key semiconductor sector enabled Taiwan to continue growing through the Covid-19 crisis by +3.1% in 2020, after +3.0% in 2019. The economy accelerated further in 2021, with growth approaching +6%, on the back of strong global demand and resilient domestic demand (especially investment). 2022 onwards should see some cooling and a normalization of the growth path.

The fiscal policy also helped the economy through the exceptional times, with tax breaks, loan moratoria and subsidies. These are likely to stay in place as long as the pandemic represents a risk to the economy. Taiwan’s public finances allow for continued support, given a fiscal deficit and public debt ratios that are low by international standards.

On the monetary front, the Central Bank of the Republic of China (CBC) is likely to cautiously start a tightening cycle in 2022. A policy rate hike to tackle rapidly growing credit could be implemented. The approach is expected to be gradual as the CBC is wary of exacerbating corporate debt burdens and potential hits to export competitiveness (even though the US and Taiwan’s competitors are also in a monetary tightening cycle).

Taiwan ranked 15th in the 2020 World Bank Doing Business survey. It performed especially well in dealing with construction permits, getting electricity and enforcing contracts. The island indeed benefits from quality infrastructure and technological readiness. The main area of improvement is access to credit.

Regarding the political landscape, the ruling Democratic Progressive Party (DPP) continues to enjoy relatively large support. Criticism over the handling of the pandemic amid a rise in cases in 2021 has faded away as the sanitary situation returned to normal. A resurgence of Covid-19 cases in H1 2022 could potentially be used as an argument by the Kuomintang (KMT, the pro-mainland China opposition party) against the government. Another piece of leverage at the disposal of the opposition party is the condemnation of the recent lifting of a ban on US pork imports, largely opposed by the population over food safety concerns. That said, these are unlikely to significantly impact the ruling DPP’s political standing. Before the next presidential election scheduled in 2024, the local poll occurring in November 2022 will be a test for the DPP. Should the party remain popular, a likely scenario for 2024 would be the election of candidate William Lai Ching-te, which could risk straining further relations with China. Indeed, Mr. Lai has been rather vocal in calling for Taiwan’s independence, though we do not expect his coming-into-power to imply a disruption to the status quo. In any case, Taiwan is set to deepen its ties with the US in the coming years. Although a military conflict with China is highly unlikely in the short-term, concerns are likely to remain around the tense geopolitical equilibrium.