Taiwan's 2015 real GDP growth came in at 0.9%, slightly below our forecast of 1.0%. Ongoing weakness in the Chinese economy coupled with continued uncertainty in the domestic political situation will continue to weigh on Taiwan's economic growth. However, we expect business sentiment to improve gradually in H216 as the political situation stabilises, leading to a slight improvement in growth figures. As such, we forecast 2016 real GDP forecast to come in at 1.5%.
Taiwan's opposition Democratic Progressive Party (DPP) won a landslide victory in both the presidential and parliamentary elections held on January 16. With the pro-independence DPP having yet to fully articulate its cross-Strait policy, we expect political risks to remain high, undermining investor confidence. President-elect and DPP leader Tsai Ing-wen also faces an uphill task in boosting the island's ailing economy.
We maintain our forecast for two interest rate cuts by the CBC in 2016 following the surprise 12.5bps rate cut on December 16, which took the discount rate to 1.625%. Continued export headwinds and low inflation will prompt the CBC to cut rates in a bid to support growth and keep the Taiwan dollar competitive, and we expect the central bank to take its benchmark rate to 1.375% by the end of 2016.
Taiwan's modest stimulus package aimed at supporting growth through boosting domestic spending will have a limited effect on the country's growth, which will continue to be hampered by stiff export headwinds as well as domestic political instability. The size of the package is also unlikely to have a significant impact on the 2016 fiscal deficit, which we forecast to come in at 1.6% of GDP.
Despite its strong fundamentals, the TWD is facing downside pressure from the ongoing weakness in the Chinese economy as well as domestic uncertainty. As such, we see continued weakness in the near term, with the currency ending 2016 at TWD34.30/USD. Over the long-term, an undervalued real effective exchange rate and a large current account surplus will lend support to the currency, limiting weakness and providing stability.
Major Forecast Changes
With external headwinds and domestic political uncertainty likely to persist, we have downgraded our 2016 and 2017 real GDP forecasts to 1.5% and 2.3%, respectively (from 1.9% and 3.5% previously), to reflect these challenges.
We are downgrading our 2016 end-year forecast to TWD34.30/USD from TWD32.00/USD to reflect the likelihood that the central bank will weaken the currency to support exports.
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||530.3||509.9||483.3||500.4|
|Real GDP growth, % y-o-y||3.7||1.0||1.5||2.3|
|Consumer price inflation, % y-o-y, eop||0.6||-0.1||1.6||2.0|
|Exchange rate TWD/USD, eop||31.66||32.86||34.30||34.50|
|Budget balance, % of GDP||-0.9||-1.5||-1.6||-1.6|
|Current account balance, % of GDP||12.6||12.6||13.7||14.0|
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