Taiwan Country Risk Report & Analysis

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. Even during the years of the Covid-19 crisis, the economy showed remarkable resilience, recording a growth of +3.4% in 2020, +6.6% in 2021 and +2.6% in 2022, broadly outpacing the annual average growth of the Asia-Pacific region by +1.2pp during this period (+4.2% v.s +3%). In addition to effective containment strategies and swift policy action, the economy’s competitiveness in terms of manufacturing, notably of semiconductors, can be attributed to its resilience during this period. Moreover, on the back of a recovery in global demand and a rebound in the electronics cycle, GDP growth in Taiwan is expected to increase to +3.9% in 2024, before settling at +2.4% in 2025 and +2.5% in 2026. However, protectionist US trade policy and endeavors from the US and China to develop their own chip production pose downside risks to Taiwan’s economic outlook.

Fiscal policy in Taiwan has been broadly accommodative. To provide relief during the pandemic, the government accelerated fiscal spending, tax breaks, loan moratoria and subsidies. The annual fiscal deficits came in at -2.1% of GDP in 2021 before declining to -0.5% of GDP in 2022 and remaining stable in 2023. Going forward, we expect the fiscal balance to keep a constant path with a slight surplus of +0.5% for 2024 and 2025, on the back of softer government expenditure and increases in tax enforcement, reflecting their attempts to impose fiscal discipline in the line of the Fiscal Discipline Act.

Headline inflation remained relatively high compared to historical levels in 2022 (+3%), and 2023 (+2.5%) (albeit low relative to international standards) and consequently led to the tightening of domestic monetary policy in 2022-2023. In March 2024, the Central Bank of the Republic of China (CBC) unexpectedly increased its discount rate by 12.5bps back to 2% due persistent inflationary pressures. Looking ahead, we expect a gradual easing of monetary policy by the CBC as we forecast inflation to ease to +2.0% in 2024 and +1.4% in 2025 and 2026.

Taiwan has a solid business environment with well-developed physical infrastructure, an educated workforce and business-friendly policies. The Heritage Foundation’s annual Index of Economic Freedom surveys have put Taiwan in the top 10 out of 185 economies in recent years (rank 4 in 2023), reflecting very strong scores with regards to judicial effectiveness, fiscal health, government spending, trade freedom, business freedom, monetary freedom, property rights, tax burden and government integrity. Indicators that have the potential to improve further include those related to financial freedom, labor freedom and investment freedom. Likewise, the World Bank Institute’s annual Worldwide Governance Indicators 2023 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 regards to environmental sustainability, owing to a very low level of renewable electricity output and a moderate recycling rate, although it does well with regards to energy use and CO2 emissions. Overall, Taiwan ranks 117 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. By contrast, KMT won the legislative elections with 52 seats while DPP lost 10 seats and retained 51. Since 57 seats are needed for a parliamentary majority, the third party – Taiwan People’s Party (TPP) which won eight seats will be the kingmaker until the next elections. These results lead us to expect a broad containment in cross strait tensions in the near term with negligible impacts on businesses and financial markets as the DPP’s China skeptical policy stance will be constrained by the opposition’s push for a more conciliatory approach. However, uncertainties to the medium-term political stability of the economy cannot be ruled out and will remain a function of the collaboration between the government and the opposition, and factors external to Taiwan.