We are downgrading Taiwan's 2016 real GDP forecast slightly to 0.7% from 0.9% previously as continued export headwinds due to the slowdown in China and a host of other domestic factors continue to weigh. However, accommodative monetary policy will lend a degree of support, limiting downside potential.
Taiwan's rejection of the Permanent Court of Arbitration's July 12 ruling on the Spratlys is a step back in the island's efforts to increase engagement with the international community by abiding by international rules. The many similarities in Taiwan's South China Sea position and that of the mainland could also further complicate already challenging cross-Strait ties while potentially undermining Taiwan's Southbound policy as its refusal to comply with the ruling leads to strained relations with Southeast Asia.
In line with our expectations, the CBC cut its discount rate by 12.5bps to 1.375% during its monetary policy meeting on June 30. Given the CBC statement, we now forecast an additional interest rate cut of 12.5bps, which will take the benchmark rate to 1.25% by end-2016 as the central bank seeks to support growth and keep the Taiwan dollar competitive.
Falling house prices in Taiwan's major cities are unlikely to lead to a significant pick up in housing market transactions as the economy's slowing growth outlook and still-high house prices continue to weigh. With housing-related taxes accounting for a non-insignificant proportion of government revenue, we maintain our forecast for the government's 2016 fiscal deficit to come in at 1.6% of GDP as housing-related revenues fall short.
We have upgraded our average 2016 TWD forecast slightly to TWD32.40/USD from TWD32.80/USD previously on the back of attractive technicals and the increased likelihood of further US dollar weakness. Over the long-term, we expect gradual strength as an undervalued real effective exchange rate, increasing reserves, and a large current account surplus lend support to the TWD.
Major Forecast Changes
We have downgraded our 2016 real GDP forecast slightly to 0.7% (from 0.9% previously) to reflect ongoing economic headwinds.
With the currency supported by strong fundamentals and the US dollar likely to continue to gradually weaken, we have upgraded our average 2016 forecast slightly to TWD32.40/USD from TWD32.80/USD previously.
Downside Risks To Growth Forecast: Should we see a re-emergence of a crisis in the eurozone, a slower than expected US recovery or a downward spiral in China's economy, we can expect Taiwan to head into a sharp recession.
|Nominal GDP, USDbn||530.8||525.8||526.2||561.8|
|Real GDP growth, % y-o-y||3.9||0.8||0.7||2.0|
|Consumer price inflation, % y-o-y, eop||0.6||-1.2||1.6||2.0|
|Exchange rate TWD/USD, eop||31.66||32.86||32.30||31.50|
|Budget balance, % of GDP||-0.9||-1.5||-1.6||-1.6|
|Current account balance, % of GDP||11.8||14.4||14.0||13.8|
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