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Cablegate: Taipei Economic Brief for November 2007

VZCZCXRO2787
RR RUEHGH
DE RUEHIN #2558/01 3380705
ZNR UUUUU ZZH
R 040705Z DEC 07
FM AIT TAIPEI
TO RUEHC/SECSTATE WASHDC 7502
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUCPDOC/USDOC WASHDC
RUEHBK/AMEMBASSY BANGKOK 3899
RUEHBJ/AMEMBASSY BEIJING 7487
RUEHUL/AMEMBASSY SEOUL 9080
RUEHGP/AMEMBASSY SINGAPORE 7072
RUEHKO/AMEMBASSY TOKYO 9293
RUEHML/AMEMBASSY MANILA 0204
RUEHJA/AMEMBASSY JAKARTA 4148
RUEHKL/AMEMBASSY KUALA LUMPUR 3830
RUEHHI/AMEMBASSY HANOI 3407
RUEHBY/AMEMBASSY CANBERRA 4653
RUEHWL/AMEMBASSY WELLINGTON 1919
RUEHHK/AMCONSUL HONG KONG 8773
RUEHGH/AMCONSUL SHANGHAI 1503
RUEHGZ/AMCONSUL GUANGZHOU 0687

UNCLAS SECTION 01 OF 03 TAIPEI 002558

SIPDIS

SIPDIS

STATE PLEASE PASS USTR
STATE FOR EAP/RSP/TC, EAP/EP
USTR FOR KATZ AND STRATFORD
USDOC FOR 3132/USFCS/OIO/EAP
TREASURY FOR OASIA/TTYANG AND HAARSAGER
TREASURY ALSO PASS TO FEDERAL RESERVE/BOARD OF
GOVERNORS, SAN FRANCISCO FRB/TERESA CURRAN, AND NEW YORK FRB MARI
BOLIS

E.O. 12958: N/A
TAGS: EINV EFIN ECON SENV TW
SUBJECT: Taipei Economic Brief for November 2007

1. Summary. This cable summarizes selected November 2007 economic
events in Taiwan. Unexpected export boom raises Taiwan's 2007 real
GDP growth forecast by nearly 1%....Less optimism for growth in
2008.... Blame typhoons for pushing inflation to a temporary 14-year
high....Taiwan sets a goal to improve energy efficiency by 33%....
Taiwan to become world's top TFT-LCD producer in 2007....Nissan to
locate one of its international design centers in Taiwan....
Taiwan's resource recycling industry developing quickly....Big
potential in solar photovoltaic industry....END SUMMARY.

Upward Adjustment of 2007 Economic Growth
-----------------------------------------
2. In late November, the Directorate General of Budget, Accounting
and Statistics (DGBAS) raised Taiwan's 2007 economic growth estimate
by nearly one percentage point to 5.46%. An unexpected rise in
exports is credited for most of the revision. Actual year-on-year
(y-o-y) export growth in the third quarter (Q3) was 9.7%, as opposed
to the 5.8% which had been predicted in July. The rise was even
more dramatic for the month of October, which saw y-o-y export
growth of 14.4%, more than double the 6.8% projected for Q4.
Manufacturing output also accelerated throughout the year,
increasing 1.1% in Q1 y-o-y, 6% in Q2, 11.8% in Q3 and 17.4% in
October - a four year high.

3. This growth translated into profit increases for Taiwan
companies. Dividends distributed by large companies in the first
ten months grew 20% y-o-y, and growth in after-tax profits
accelerated from 12.7% in Q1 to 36.5% in Q2 and 38% in Q3. Earnings
by such industries as flat panels, DRAM, petrochemicals, and cement
in the first ten months grew 50-100%. In the service sector,
financial institutions also enjoyed handsome growth in earnings due
to brisk sales of mutual funds. At their peak in September, Taiwan
stock prices were up more than 40% over the 12 month period,
although prices have since declined. Not surprisingly, domestic
spending has finally started to increase slowly. Credit card loans
returned to growth in 2007, with the y-o-y growth rate accelerating
from nil in Q1 to 1.2% in Q2, and 5.2% in Q3. Private investment is
also accelerating - albeit slowly - up from 0.3% in 2005 and 3.0% in
2006 to an estimated 5.1% for 2007, to meet the needs of business
expansion, especially in the capital-intensive semiconductor and
TFT-LCD industries.

Slower Growth in 2008
---------------------
4. DGBAS forecasts a more modest 4.53% GDP growth rate for 2008.
With high commodity prices and the impact of the sub-prime crisis,
forecasters are expecting a downturn in both the U.S. and Europe.
This would directly effect Taiwan's export-driven economy. DGBAS
forecasts Taiwan's export growth in 2008 will slow to 6% and that
private investment growth will also decline.

Typhoon Inflation
-----------------
5. Typhoon Sepat in September and Typhoon Krosa in October severely
damaged produce farms, driving Taiwan's consumer price index to rise
by 3.1% y-o-y in September and 5.3% in October, the highest increase
in 14 years. This is largely due to the impact of higher food
prices, which rose 15% y-o-y in October. The vegetable price index
shot up 80%, with prices of such products as cabbage, cucumber,
tomatoes, green onions, and eggplant more than doubling. Produce
prices have since returned to normal levels. The overall inflation
rate will decline, but is expected to remain above 2% over the next
3-to-6 months due to higher prices of imported grains, dairy
products, and crude oil. Poor weather in Australia, for example,
pushed up prices of dairy products by more than 10%, as Australia is
Taiwan's major supplier. To stabilize prices, Taiwan authorities
adopted a series of measures, including emergency imports of

TAIPEI 00002558 002 OF 003


vegetables, temporary freezing of gasoline prices, and increased
credit lines for grain imports. Law enforcement agencies even
launched anti-trust investigations to crack down on any price
manipulation and collusion.

Energy Efficiency
-----------------
6. Economic Minister Steve Chen announced in mid-November that
Taiwan had set a goal to improve energy efficiency by 33% by 2025.
To help achieve this target, Taiwan has provided 200 major energy
users with energy-saving assistance. Taiwan is also encouraging
development of clean energy, such as solar energy, wind power, and
bio-fuel. MOEA's target is to increase renewable energy capacity to
15% of Taiwan's total energy supply by 2025. Currently, 155 wind
turbines are under construction and will be completed by the end of
this year. Many domestic companies are entering the solar energy
generation industry, and solar power, if MOEA targets are realized,
will produce 1.2 billion kilowatt hours of electricity by 2025.

Taiwan World Leader in Flat Panel Production
--------------------------------------------
7. Taiwan will become the world's number one producer of TFT-LCD
flat panel displays and account for 43% of the global market share
this year, according to the Market Intelligence Center (MIC) of the
Institute for the Information Industry (III). South Korea will
follow closely with a 40% share. As flat panel prices drop and
orders increase, Taiwan's flat panel deliveries will set a record
high of 15.5 million units, an increase of 51.3% over 2006. The MIC
projected that Taiwan will remain the world top producer in 2008
with a 42% world market share.

Nissan Opens Global Design Center in Taiwan
--------------------------------------------- -----
8. Nissan and its manufacturing partner Yulon Motors set up a new
design center in Taiwan. The Yulon-Nissan Design Center, which
covers nearly 3,300 square meters and built at a cost of NT$340
million (US$10.5 million), will join the ranks of Nissan's six major
design studios in Japan, the US, and the UK to create
next-generation vehicle designs. In the future, Taiwan's design
blueprints will serve as models for new vehicles aimed at the
markets of Japan, Taiwan, Mainland China, the US, and Europe. The
opening of the center marks Taiwan's first global automotive design
opportunity.

Resource recycling Industry
---------------------------
9. Taiwan's resource recycling industry has enjoyed rapid growth
over the past several years. Its output increased from NT$24.9
billion in 2002 to NT$38.5 billion in 2006 and is expected to reach
NT$40 billion (US$1.2 billion) this year, according to an estimate
of the Industrial Development Bureau (IDB). Taiwan recycled 10.81
million tons of industrial waste and recovered 75% of the wastes,
which has lowered costs due to environmental degradation by NT$30.35
billion (US$0.9 billion) a year. One factor behind development of
the recycling industry has been a steady rise in prices of precious
metals. This has prompted a growing number of Taiwan companies to
engage in extracting precious metals from industrial wastes.
Recently, major resource recycling manufacturers such as World
Resources Company of the US and Tanaka Precious Metals of Japan
established operations in Taiwan.

Great Potential for Taiwan's Solar PV Industry
--------------------------------------------- -
10. Taiwan has set a goal to make solar energy the next "trillion
NT$" industry on the island. The Ministry of Economic Affairs
(MOEA) projects that Taiwan will be the world's fourth-largest solar
cell producer in 2007. Taiwan's solar photovoltaic (PV) industry

TAIPEI 00002558 003 OF 003


output grew from NT$7 billion (US$215 million) in 2005 to NT$21.2
billion (US$646 million) in 2006, which accounted for 2% of global
output. The MOEA projected the output of this industry in 2007 will
surge 89% to NT$40 billion (US$1.2 billon), and that the figure will
reach NT$150 billion (US$4.6 billion) in 2010. Taiwan's strong
semiconductor industry gives it an advantage in developing solar
power that uses crystalline silicon. Taiwan's strong TFT-LCD
industry base will be used to develop thin-film solar panel
technology.

YOUNG

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