Economic Briefing for May 2005

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E.O. 12958: N/A
TAGS: EINV EFIN ECON PINR TW ESTH
SUBJECT: Economic Briefing for May 2005

Introduction and Summary
--------------


1. This cable summarizes selected recent economic events in
Taiwan in May 2005:

-- Lowest Growth since 2003

-- FRF Funds Increased, But Not Enough

-- Plans to Relax Cross-Strait Investment Restrictions

-- ICPI Discusses Pharmaceutical Pricing and Reform

-- HIV/AIDS Infections Skyrocket

END INTRODUCTION AND SUMMARY.


2. Lowest Growth since 2003
--------------

Taiwan's economy in Q1 2005 posted its worst performance
since the middle of 2003. A steady slowdown in export
growth and a decline in manufacturing production prompted
the Directorate General of Budget, Accounting and Statistics
(DGBAS) to lower Taiwan's economic growth in Q1 of 2005 to
2.54% from the 4.03% predicted in February 2005. In
addition, DGBAS lowered its estimate for real growth in 2005
to 3.63% from the 4.21% predicted in February this year.
Nevertheless, a stronger local currency partly offset the
impact of higher energy prices and kept inflation fairly
stable. Private investment increased and unemployment
continued to decline. Business circles are optimistic about
future prospects. Local economists anticipate both exports
and manufacturing production to pick up momentum in the
second half of this year.


3. FRF Funds Increased, But Not Enough
--------------

The Legislative Yuan (LY) passed legislation to increase
funding for the Financial Reconstruction Fund (FRF),
equivalent to RTC in the United States, to NT$250 billion by
NT$110 billion. FRF must designate specific banks prior to
July 10 that would be eligible to receive FRF funds. Three-
quarters of the additional funding has already been
designated for specific purposes, leaving only NT$29.5
billion available for the FRF's discretionary use. This
amount is considered insufficient to address the seven
problem financial institutions (including four banks) that
have already been identified by the authorities. It is
likely that there are additional banks that still do not
meet minimum capital adequacy requirements set by the
government.


4. Plans to Relax Cross-Strait Investment Restrictions
-------------- --------------

Taiwan's Ministry of Economic Affairs (MOEA) Investment
Commission revealed that Taiwan is considering raising the
restrictions on the amount of capital Taiwan firms can
invest in the Mainland. The proposed reform would allow any
firm to invest up to 40 percent of the firm's net worth in
the PRC regardless of the firm's size. Large Taiwan firms
are now subject to a sliding scale restriction of 20 to 40
percent of net worth depending on the size of the firm.
According to the current regulations, large firms are
allowed to invest up to 40 percent of their net worth for
the first NT$ 5 billion (USD 160 million); 30 percent of net
worth between NT$ 5 billion and NT$ 10 billion (USD 320
million); and 20 percent of net worth over NT$ 10 billion.
Small and medium enterprises are limited to investment of up
to NT$ 80 million (about USD 2.5 million). Many Taiwan
firms have reached the ceiling limit. The move is aimed at
preventing those firms from underreporting or listing on
overseas stock markets, such as Hong Kong, in order to avoid
the restrictions. Mainland Affairs Council (MAC) Economics
Department Director Fu Don-cheng told AIT/T that MOEA's
proposal would require further consideration and supporting
measures that could delay implementation.


4. ICPI Discusses Pharmaceutical Pricing and Reform
-------------- ---

AIT joined Academia Sinica, the Taiwan Department of Health,
the International Research Pharmaceutical Manufacturer's
Association and others to organize the international
Conference on Pharmaceutical Innovation (ICPI),a two day
academic seminar which included presentations by the world's
leading health economists from the US, Japan, Australia,
Canada, Korea, Europe and Taiwan. Participants discussed
the problems facing Taiwan's National Health Insurance (NHI)
system, the value of innovative pharmaceuticals in achieving
positive health outcomes, how to appropriately reimburse for
pharmaceuticals, and healthcare reform experiences in Korea
and Japan. The conference was notable in that it was the
first open discussion of the need for and process of
healthcare financing reforms. The attendance of so many
internationally renowned health economists assured that the
conference results received high-level attention from DOH
and the Council for Economic Planning and Development.


5. HIV/AIDS Infections Skyrocket
--------------

The number of HIV/AIDS infections in Taiwan has skyrocketed
over the past year. In fact, with 1,606 new cases in 2004,
the new infection rate was 77 percent higher than in 2003.
The primary cause of the spike in cases is the increased
number of infections among intravenous drug users. Within
the IV drug group, the number of new infections among
criminals and females is particularly notable.
PAAL