SLUMPING EXPORTS DARKEN TAIWAN'S 2009 ECONOMIC

C O N F I D E N T I A L AIT TAIPEI 000033


STATE FOR EAP/TC
STATE PASS USTR FOR STRATFORD AND ALTBACH, TREASURY FOR
OASIA/MPISA,
NSC FOR LOI, COMMERCE FOR 4431/ITA/MAC/AP/OPB/TAIWAN

E.O. 12958: DECL: 01/08/2018
TAGS: ECON EFIN ETRD PGOV PREL TW
SUBJECT: SLUMPING EXPORTS DARKEN TAIWAN'S 2009 ECONOMIC
OUTLOOK

REF: 08 TAIPEI 1756

Classified By: Economic Chief Hanscom Smith for reasons 1.4 (b) and (d)



1. (C) SUMMARY. Although Taiwan's official 2008 GDP growth
forecast remains at 2.12%, a 42% year-on-year drop in
December exports underscored the economy's vulnerability to
slumping global demand. The weak export data prompted the
Central Bank to cut its policy rate by 0.5% to 1.5%, and
caused the stock exchange to shed 5.3% of its value on
January 8, followed by an additional 0.7% drop on January 9.
Since exports account for roughly 65% of Taiwan's GDP, the
economy seems assured of a rough ride in 2009. Most private
forecasters are now predicting 2009 GDP growth in the
negative 1-2% range, and analysts are skeptical that
government stimulus programs will be effective enough to
mitigate the slumping export sector. END SUMMARY.


2. (C) Tsai Hung-kun, Director of the Bureau of Statistics at
the Directorate General of Budget, Accounting, and Statistics
(DGBAS),told us lower-than-expected export numbers for
November and December 2008 will prompt a downward revision in
the 2008 official GDP growth rate, which now stands at 1.87%.
DGBAS will not release its first-half of 2009 growth
prediction until next month, but Tsai indicated that the
deteriorating export picture will result in a downward
revision of the current 2.1% forecast, which was made in
November. Tsai said external demand for Taiwan's exports is
unlikely to start recovering until late in 2009. Since
exports are worth approximately US $260 billion annually to
the Taiwan economy, he explained, the roughly US $5 billion
in official stimulus measures (reftel) will have limited
impact in offsetting the export decline.


3. (C) According to Taiwan Institute for Economic Research
(TIER) economist Steven Yang, December's 42% year-on-year
(yoy) drop in exports was unexpectedly large, particularly on
the heels of a yoy export decline of about 30% in November.
Taiwan is now feeling the impact of weakening demand in China
and the U.S., the island's two most important export markets.
Yang said the Central Bank's January 7 decision to cut the
prime rate by 0.5%, to 1.5%, was appropriate, but also
applauded Central Bank Governor Perng's stated opposition to
a "zero interest rate" policy. With Taiwan's savings rate at
over 20%, explained Yang, excessively low rates could reduce
interest income and hurt consumption. In Yang's view, the
Central Bank is also focused on keeping the New Taiwan Dollar
(NTD) relatively weak, thereby helping Taiwan's exporters.
Yang sees government stimulus measures, especially
infrastructure spending (reftel),as a critical means of
mitigating the slowdown, but stressed that much depends on
the timeliness and efficiency of implementation.


4. (C) Daigee Shaw, who heads the Chunghwa Institution for
Economic Research (CIER),stresses that Taiwan's economic
health depends largely on consumer demand in the U.S., which
accounts for 12% of Taiwan's direct exports, plus an
undetermined additional amount in indirect exports via Taiwan
exporters basedin China and elsewhere. Shaw was skeptical
about the effectiveness of Taiwan's economic stimulus
measures, however, observing that the Ma administration does
not seem to have done sufficient cost-benefit analysis in
planning its spending. He worried about the prospect of a
government stimulus "bubble" distorting Taiwan's long-term
economic recovery.


5. (C) Shaw's concerns were echoed by KMT legislator Liao
Cheng-ching, who told us the Ma administration's consumption
voucher program (reftel) appears to have fulfilled a
political goal of increasing public sentiment that the
government is tackling the crisis, but may not prove
economically effective in practice. Liao criticized the
administration as too slow in implementing its policies, and
maintained that the majority of planned public infrastructure
spending (reftel) would not be disbursed until the second
half of 2009.


6. (C) COMMENT. While Taiwan's financial sector remains
essentially sound, the island's vital export sector is being
buffeted by the drop in global demand. Official stimulus
measures may help ease the blow, but will have limited impact
if the export sector remains as weak as it was at the end of

2008. END COMMENT.


SYOUNG