Taiwan in a Post-Brexit World

Back in March, although Taiwan’s economy was still facing headwinds, leading indicators seemed to point in a positive direction. As of June, however, exports had continued their inexorable contraction for a record-setting 17 straight months, with little sign of improvement, according to the Bureau of Foreign Trade (BOFT). Exports for the first half of 2016 were down 9.1%, to US$145.5 billion, while imports declined 10.7%, led by a steep 17% drop for raw material imports.

Exports to China, which together with Hong Kong takes 38.1% of Taiwan’s exports, slowed 11.5% in the first half in annual comparisons. A 7.6% decline was registered in exports to the United States, which takes over 12% of Taiwan’s exports. Exports to ASEAN – the destination for 18.5% of exports – declined by nearly 9%.

Projections for world GDP growth have been revised downwards on diminished trade, with the U.K. referendum to exit the European Union (dubbed “Brexit”) looming large over the global economy. The direct impact of Brexit on Taiwan’s economy is expected to be muted as the U.K. is not a major trading partner (taking only 1.3% of Taiwan’s exports). Taiwan’s Premier Lin Chuan was quoted in the media as saying that Brexit might actually have positive implications for Taiwan as EU countries and the U.K. might reposition by seeking to boost economic relationships in Asia, including Taiwan. The island’s exports to the EU, which accounts for some 9.3% of Taiwan’s total, actually grew 3.2% in the first half of 2016.

Taiwan’s Central Bank (CBC) noted that Taiwan has little exposure to the pound, which accounts for only 3.4% of all foreign currency transactions and only 0.6% of the foreign currency portfolios of domestic banks.

But Brexit is expected to have an impact on European and global markets, and with Taiwan’s economy so dependent on trade, Taiwan might take some form of indirect Brexit hit after all.

According to an International Monetary Fund report, World Economic Outlook: Uncertainty in the Aftermath of the U.K. Referendum, with the Brexit vote “the global outlook for 2016-17 has worsened” due to “a sizable increase in uncertainty.” The report concluded that “this uncertainty is projected to take a toll on confidence and investment” in global financial markets and trade.

Taiwan’s CBC cautioned that Brexit might result in turbulence in global financial markets, which could have a negative impact on NT dollar exchange rates, impacting financial and economic stability. Looking at potential longer-term consequences, Gordon Sun, head of the Macroeconomic Forecasting Center at the Taiwan Institute of Economic Research (TIER), sees Brexit as a sign of growing trade protectionism that could have major implications for Taiwan’s exports.

All major economic think tanks revised Taiwan’s 2016 GDP growth projections downward in June. TIER lowered its growth forecast from 1.27% to 0.77%, and the Yuanta-Polaris Research Institute decreased its forecast from 1.42% to 0.9%. The government’s Directorate General of Budget, Accounting and Statistics (DGBAS) also cut its forecast from the previous 1.47%, but maintains a slightly more optimistic view than the others, setting the new forecast at 1.06%.

The CBC in late June again trimmed interest rates, by 12.5 basis points to 1.375%, their lowest since 2010, to try to stem the economic contraction that has gripped Taiwan for three consecutive quarters. Taiwan’s Purchasing Manager’s Index, an indicator of the health of the manufacturing sector, nevertheless moved into positive territory in July, coming in at 51. A score over 50 indicates expansion. Consumer confidence in July also revived somewhat. According to the Research Center for Taiwan Economic Development at National Central University, consumer confidence rose on its scale to 80.18, up from 74.47 in June.  Unemployment, on the other hand, increased to 3.92% in June, up from 3.84% in May.