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Cablegate: Taiwan Economy Slows in Third Quarter

This record is a partial extract of the original cable. The full text of the original cable is not available.









E.O. 12958: N/A
SUBJECT: Taiwan Economy Slows in Third Quarter


1. Taiwan's export and industrial production growth slowed
in the third quarter, but economists still expect real GDP
growth of nearly 6 percent this year, and above 4.5 percent
next year. Overall, the economy should be a positive factor
for the ruling party in the December legislative elections.

GDP Growth Mid-Range Among Asian Tigers

2. In spite of high oil prices (which economic planning
officials think could cut GDP growth by 0.2 percent) and
efforts to cool China's economic growth (China is Taiwan's
largest trade partner), economists expect Taiwan to have
real GDP growth of nearly 6 percent this year. They see
2005 growth above 4.5 percent with unemployment remaining
below five percent. Taiwan's GDP rose 7.2 percent in the
first half of this year, behind Singapore's 10 percent and
Hong Kong's 9.6 percent, but above the 5.4 percent recorded
in South Korea in the first half of this year. The IMF in
September predicted average GDP growth for Asian NIEs of 5.5
percent for 2004 and 4.0 percent for 2005.

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Trade Growth Still Rapid

3. Taiwan's export growth slowed in July and August to an
annual rate of 23 percent, down from nearly 30 percent in
April to June. Meanwhile, import growth slipped from 40
percent to 33 percent. Growing inventories of unsold goods
contributed to a delay in projects intended to increase
production. This slightly slowed the growth in imports of
capital goods from 54 percent in the second quarter to a
still rapid 32 percent in July-August 2004.

Slower Industrial Growth - Tech Sector Impact

4. The slowdown in exports contributed to high inventories
in both finished products and intermediate goods.
Consequently, manufacturing growth slowed from 15 percent in
the first half to 10 percent in July-August. Growth rates
for capital- and technology-intensive industries slipped
from 19 percent in the first half to 13 percent in July-
August. According to Central Bank of China (CBC) Economic
Research Department Deputy Director Yeh Jong-chao, the
slowdown is particularly significant for semiconductor and
flat panel screen manufacturers. Citigroup Equity Research
has lowered its 2004 and 2005 earning estimates for flat
panel screen makers by more than 20 percent because of
potential oversupply. However, iron, steel and
petrochemicals have continued rapid growth due to strong
demand in both local and foreign markets. China Steel, for
example, expects strong demand for its products to continue
into next year.

Investment: Weak Domestically, Strong Overseas
--------------------------------------------- -

5. Inbound direct investment in July-August 2004 declined
four percent from a year ago, down sharply from 28 percent
growth in the first quarter and 56 percent growth in the
second quarter. However, approved out-bound direct
investment in July-August 2004 grew nearly 30 percent year-
on-year. Approved investment to China was up 39 percent.
Overseas investment to places other than China grew 2.6
percent in the second quarter, and ten percent in July-
August 2004.

Portfolio Investment Down

6. Partly in response to unsettling political and business
events, foreign portfolio investors withdrew US$3.7 billion
from Taiwan in the second quarter. Net inward remittances
in July-August 2004 were only US$200 million, far less than
the net inflow of US$7.8 billion in the same period in 2003.
The unsettling news included the large demonstrations after
the March presidential election, and financial
irregularities in listed companies uncovered by Taiwan Stock
Exchange examiners. As a result of these incidents, Taiwan
business firms' issuance of global depository receipts
(GDRs) dropped to only half a billion of US dollars in July-
August 2004.

Foreign Exchange Reserves Up Modestly

7. With large capital outflows and fewer GDRs, Taiwan's
accumulation of foreign exchange (forex) reserves slowed to
US$3.6 billion in the second quarter and US$1.5 billion in
July-August 2004, down from US$16 billion in the last
quarter of 2003 and US$20 billion in the first quarter of
2004. Nevertheless, Taiwan's forex reserves as of August
2004 amounted to US$231.6 billion, three times Taiwan's
outstanding external debt of US$75 billion (as of March

Oil and Inflation Prompt CBC to Raise Interest Rates
--------------------------------------------- -------

8. Rising international oil prices pushed Taiwan's
inflation rate to a six-year high of 3.3 percent in July and
2.5 percent in August of this year. This prompted CBC to
raise interest rates for CBC-issued negotiable certificates
of deposit from 1.075 percent to 1.085 percent, and the
interest rate for overnight inter-bank call loans to 1.1
percent in late September. On October 1, CBC raised the
discount rate and its interest rates for accommodations by
0.25 percentage points.

Implications for Taiwan's Economy

9. The increase in prices and interest rates will slow
Taiwan's economic growth by blunting the export sector's
competitive edge, dampening the real estate market, and
reducing private consumption. The extent of the impact will
depend on how long these trends last, but Taiwan's Council
for Economic Panning and Development (CEPD) has already cut
2004 growth estimates by 0.2 percent. Statistics Bureau
officials believe seasonal factors are responsible for the
unemployment rate rising to 4.7 percent in August. This is
still lower than the 5.2 percent unemployment of a year ago.

10. According to Peng Shu-ling of the Chunghua Institution
for Economic Research, Taiwan's economy is still performing
well. August export orders grew 25.5 percent. Strong
performance in the iron, steel, and petrochemical industries
mitigates the downturn of the semiconductor and liquid
crystal display manufacturers. A CEPD survey showed the
percentage of business firms expecting better performance in
three months increased from 12 percent in July to 18 percent
in August. These generally favorable economic trends and
optimistic expectations bode well for the ruling DPP party
in the year-end legislative elections.

(Please see the website "
web" for following tables:
Appended Table 1 Major Economic Indicators for Jan-Aug 2004
Appended Table 2 Economic Indicator Estimates for 2004
Appended Table 3 Economic Indicator Forecasts for 2005
Appended Table 4 Major Economic Indicator for 2001, 2002 &

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