Taipei Economic Brief for September 2007

UNCLAS SECTION 01 OF 03 TAIPEI 002289 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 PINR TW SUBJECT: Taipei Economic Brief for September 2007 ¶1. Summary. This cable summarizes selected September 2007 economic events in Taiwan. Economic statistics show better than expected performance and potential job growth....Biggest share of next year's government budget goes to defense and deficit expected to shrink significantly....The Central Bank hikes interest rates in the face of building inflation pressures....Taiwan attracts investment from Taiwan businesses overseas and a major Japanese glass manufacturer....Penghu Islands included in the mini three links, sort of....Taiwan world's top producer of many high-tech products....Big plans for generating wind power offshore....TSMC gets inside XBOX....And, finally, new rules for calculating bank deposit insurance premiums. END SUMMARY. Unexpectedly Strong Economic Performance -------------- ¶2. Taiwan's unexpectedly strong economic performance in July and August will likely prompt economic think tanks to further raise the island's 2007 real GDP growth estimates to 4.5-5.0%. In these two months, Taiwan's trade surplus registered year-on-year growth of 24%, a sharp contrast to the decline predicted for the third quarter (Q3) by economists. Taiwan's year-on-year export growth accelerated to 9.3% in July-August and is expected to rise in Q4. A 20% increase in export orders in July-August will translate into increased production later this year. To meet stronger foreign demand, industrial production during these two months posted year-on-year growth of 12%, a new high over the past three years. Foreign direct investment in Taiwan approved in July-August nearly tripled, compared with the same period last year. The unemployment rate stayed at 3.9%. Employment Increase Forecast -------------- ¶3. Taiwan's employment in Q4 is expected to report a net increase of 24,000, including 16,000 manufacturing jobs, according to a survey conducted by the Council of Labor Affairs. Electronics firms, the backbone of Taiwan's industrial sector, will expand their workforces to meet growing delivery requirements in Q4. Meanwhile, labor demand by construction firms is expected to decrease as several construction projects will be concluded later this year. Entertainment ventures, hotels, and restaurants will also see a decline in labor demand from September with the end of the summer holiday. Central Bank Raises Interest Rates -------------- ¶4. While the U.S. Federal Reserve Board cut its benchmark rate by 0.5 percentage points earlier this month, the Central Bank of China (Taiwan) (CBT) raised interest rates by 0.125 percentage points on September 20. This reduced the interest rate gap between the United States (3.95% for one-year deposits) and Taiwan (2.465%) to 1.485 percentage points, the narrowest for the past two years. With higher interest rates, the CBT wants to preempt inflationary pressure, due in part to higher prices for imports of crude oil, grains, and other materials and to recent price rises of vegetables and fruits damaged by typhoons. The consumer price index in August rose 1.6%, up from 1% in Q1 and 0.3% in Q2. 2008 Central Budget Proposal -------------- ¶5. In early September, Taiwan's Executive Yuan submitted the 2008 central budget proposal to the Legislative Yuan for consideration. The budget deficit in 2008 is expected to drop by 30% as planned revenue will grow faster than planned expenditure. For the first time in eight years, defense spending, at 20% of the budget, will surpass education and social welfare to account for the largest share of the budget. With a smaller deficit, Taiwan's outstanding public debt as a percentage of GDP is expected to decline to a TAIPEI 00002289 002 OF 003 five-year-low of 30% in 2008. Asahi Glass to Build Two Glass Furnaces -------------- ¶6. Asahi Glass of Japan will build two glass substrate furnaces in the Southern Taiwan Science Park in Tainan, at a projected cost of NT$10 billion (US$303 million). The project, together with glass cutting and grinding facilities currently under construction, will sharpen Asahi's competitive edge among substrate glass suppliers to Taiwan's flat panel manufacturers (in particular Tainan-based Chi Mei Optoelectronics). Attracting "Taishang" back to Taiwan -------------- ¶7. In February 2005, the Ministry of Economic Affairs (MOEA) adopted a program to attract new investment from Taiwan firms that have some or all of their operations overseas. Since then, 86 projects have been identified by overseas Taiwan firms, with a total investment of NT$7.8 billion (US$236 million). Of the 86 projects, 12 have already been completed, 36 are underway, and the remaining 38 are still in the planning stages. The 86 investors include 34 from China (mainly traditional manufacturing industries such as electronic and electrical appliances and machinery),12 from Southeast Asia (mainly textiles, construction, and wood furniture), 35 from North America (mainly biotechnology and IT),and five from New Zealand, Germany, Japan, and Africa (mainly IT, chemicals, and organic produce). Penghu Tacked on to Mini-Links -------------- ¶8. On April 1, 2007, Taiwan approved the expansion of the mini-links to include the Penghu Islands, which sit in the middle of the Taiwan Straits. This means that Penghu residents can now use the existing ferry service via Kinmen and Matsu to travel to Fujian; Fujian residents can use the mini-links to cross over to Kinmen and Matsu and continue on to Penghu. Fujian tourists to Penghu, however, are subject to a daily quota of 640. On April 19, Penghu Magistrate Wang Ch'ien-fa led the first tourist group to Fujian. The first two tourist groups from Fujian to Penghu departed on 9/28 and another on October 2. Much Has Changed in 24 Years -------------- ¶9. Taiwan's high-tech strengths are reflected in the list of products that it leads the world in producing. According to the Council for Economic Planning and Development, these products are (with world market shares in parentheses): Foundry OEM Chips (66.7%),IC packaging (47.8%),IC testing (60.3%),MASK ROM (91.4%), TN/STN-LCD panels (75.2%),TFT-LCD panels (45.7%),electrolytic copper foil (78.7%),CD-ROM (57%),ABS resin (20%),and electric mobility scooters and electric wheelchairs (45%). This is a remarkable change from what the list looked like in 1983, when Taiwan was the world's largest supplier of shoes, electric fans, bicycles, bicycle tires, brakes, and chains, umbrellas, sewing machines, thermos bottles, monosodium glutamate, and camphor. Offshore Wind Turbine Program -------------- ¶10. In early September, the Ministry of Economic Affairs (MOEA) implemented the First Stage of the Offshore Wind Turbine Development Program. The program calls for wind turbines to be built in six different areas in waters off Taiwan's west coast and Penghu. The first offshore wind turbine is scheduled to begin operation in 2013. These turbines will eventually provide power generation capacity of 300,000 kilowatts. Investment required by the program is estimated at NT$40 billion (US$1.2 billion). At present, Taiwan has 127 inland wind turbines whose combined installed capacity is 217,200 TAIPEI 00002289 003 OF 003 kilowatts. The MOEA expects that by 2010, Taiwan's wind power capacity will reach 1.2 million kilowatts, with a yearly generation of 3.3 billion kilowatt-hours. This is sufficient to meet the power demand of 825,000 households. TSMC Receives Xbox Orders SIPDIS -------------- ¶11. Taiwan Semiconductor Manufacturing Corp (TSMC) announced in mid-August that Microsoft has started production of its Xbox game consoles using TSMC's 90 nanometer embedded DRAM process. Taiwan's downstream integrated circuits (IC) manufacturers, including Advanced Semiconductor Engineering (ASE),Silicon Precision Industries Co. Limited (SPIL),and King Yuan Electronics Corp (KYEC),will benefit from Xbox production by serving as a part of the Xbox supply chain. As a result, Taiwan's consumer electronics exports in Q3 are estimated to grow by 10% over Q2. Change in Bank Deposit Insurance Premiums -------------- ¶12. The Central Deposit Insurance Corporation (CDIC),which insures bank deposits and is modeled after the FDIC in the U.S., has announced new rates for deposit insurance premiums and has changed the basis on which they are calculated. These changes are retroactive to July 1. Prior to the change, premiums were assessed only on insured deposits. Now the premiums are assessed on total deposits. In response to complaints from banks, the CDIC reduced most premium rates, especially for banking institutions with the healthiest balance sheets. According to the Banking Bureau, there will be virtually no cost impact on local banks; because of a different deposit mix, foreign banks will see their premiums increase by 2% on average. YOUNG