US embassy cable - 04TAIPEI3235

UNCLAS SECTION 01 OF 03 TAIPEI 003235 
 
SIPDIS 
 
STATE PLEASE PASS AIT/W AND USTR 
 
STATE FOR EAP/RSP/TC, EAP/EP AND EB/IFD/OIA 
 
USTR FOR SCOTT KI 
 
TREASURY FOR OASIA/ZELIKOW AND WISNER 
 
TREASURY PLEASE PASS TO OCC/AMCMAHON 
 
TREASURY ALSO PASS TO FEDERAL RESERVE/BOARD OF 
GOVERNORS, AND SAN FRANCISCO FRB/TERESA CURRAN 
 
E.O. 12958: N/A 
TAGS: EINV, EFIN, ECON, TW 
SUBJECT: Taiwan Economy Slows in Third Quarter 
 
SUMMARY 
------- 
 
1.  Taiwan's export and industrial production growth slowed 
in the third quarter, but economists still expect real GDP 
growth of nearly 6 percent this year, and above 4.5 percent 
next year.  Overall, the economy should be a positive factor 
for the ruling party in the December legislative elections. 
SUMMARY. 
 
GDP Growth Mid-Range Among Asian Tigers 
--------------------------------------- 
 
2.  In spite of high oil prices (which economic planning 
officials think could cut GDP growth by 0.2 percent) and 
efforts to cool China's economic growth (China is Taiwan's 
largest trade partner), economists expect Taiwan to have 
real GDP growth of nearly 6 percent this year.  They see 
2005 growth above 4.5 percent with unemployment remaining 
below five percent.  Taiwan's GDP rose 7.2 percent in the 
first half of this year, behind Singapore's 10 percent and 
Hong Kong's 9.6 percent, but above the 5.4 percent recorded 
in South Korea in the first half of this year.  The IMF in 
September predicted average GDP growth for Asian NIEs of 5.5 
percent for 2004 and 4.0 percent for 2005. 
 
Trade Growth Still Rapid 
------------------------ 
 
3.  Taiwan's export growth slowed in July and August to an 
annual rate of 23 percent, down from nearly 30 percent in 
April to June.  Meanwhile, import growth slipped from 40 
percent to 33 percent.  Growing inventories of unsold goods 
contributed to a delay in projects intended to increase 
production.  This slightly slowed the growth in imports of 
capital goods from 54 percent in the second quarter to a 
still rapid 32 percent in July-August 2004. 
 
Slower Industrial Growth - Tech Sector Impact 
--------------------------------------------- 
 
4.  The slowdown in exports contributed to high inventories 
in both finished products and intermediate goods. 
Consequently, manufacturing growth slowed from 15 percent in 
the first half to 10 percent in July-August.  Growth rates 
for capital- and technology-intensive industries slipped 
from 19 percent in the first half to 13 percent in July- 
August.  According to Central Bank of China (CBC) Economic 
Research Department Deputy Director Yeh Jong-chao, the 
slowdown is particularly significant for semiconductor and 
flat panel screen manufacturers.  Citigroup Equity Research 
has lowered its 2004 and 2005 earning estimates for flat 
panel screen makers by more than 20 percent because of 
potential oversupply.  However, iron, steel and 
petrochemicals have continued rapid growth due to strong 
demand in both local and foreign markets.  China Steel, for 
example, expects strong demand for its products to continue 
into next year. 
 
Investment: Weak Domestically, Strong Overseas 
--------------------------------------------- - 
 
5.  Inbound direct investment in July-August 2004 declined 
four percent from a year ago, down sharply from 28 percent 
growth in the first quarter and 56 percent growth in the 
second quarter.  However, approved out-bound direct 
investment in July-August 2004 grew nearly 30 percent year- 
on-year.  Approved investment to China was up 39 percent. 
Overseas investment to places other than China grew 2.6 
percent in the second quarter, and ten percent in July- 
August 2004. 
 
Portfolio Investment Down 
------------------------- 
 
6.  Partly in response to unsettling political and business 
events, foreign portfolio investors withdrew US$3.7 billion 
from Taiwan in the second quarter.  Net inward remittances 
in July-August 2004 were only US$200 million, far less than 
the net inflow of US$7.8 billion in the same period in 2003. 
The unsettling news included the large demonstrations after 
the March presidential election, and financial 
irregularities in listed companies uncovered by Taiwan Stock 
Exchange examiners.  As a result of these incidents, Taiwan 
business firms' issuance of global depository receipts 
(GDRs) dropped to only half a billion of US dollars in July- 
August 2004. 
 
Foreign Exchange Reserves Up Modestly 
------------------------------------- 
 
7.  With large capital outflows and fewer GDRs, Taiwan's 
accumulation of foreign exchange (forex) reserves slowed to 
US$3.6 billion in the second quarter and US$1.5 billion in 
July-August 2004, down from US$16 billion in the last 
quarter of 2003 and US$20 billion in the first quarter of 
2004.  Nevertheless, Taiwan's forex reserves as of August 
2004 amounted to US$231.6 billion, three times Taiwan's 
outstanding external debt of US$75 billion (as of March 
2004). 
 
Oil and Inflation Prompt CBC to Raise Interest Rates 
--------------------------------------------- ------- 
 
8.  Rising international oil prices pushed Taiwan's 
inflation rate to a six-year high of 3.3 percent in July and 
2.5 percent in August of this year.  This prompted CBC to 
raise interest rates for CBC-issued negotiable certificates 
of deposit from 1.075 percent to 1.085 percent, and the 
interest rate for overnight inter-bank call loans to 1.1 
percent in late September.  On October 1, CBC raised the 
discount rate and its interest rates for accommodations by 
0.25 percentage points. 
 
Implications for Taiwan's Economy 
--------------------------------- 
 
9.  The increase in prices and interest rates will slow 
Taiwan's economic growth by blunting the export sector's 
competitive edge, dampening the real estate market, and 
reducing private consumption.  The extent of the impact will 
depend on how long these trends last, but Taiwan's Council 
for Economic Panning and Development (CEPD) has already cut 
2004 growth estimates by 0.2 percent.  Statistics Bureau 
officials believe seasonal factors are responsible for the 
unemployment rate rising to 4.7 percent in August.  This is 
still lower than the 5.2 percent unemployment of a year ago. 
 
10.  According to Peng Shu-ling of the Chunghua Institution 
for Economic Research, Taiwan's economy is still performing 
well.  August export orders grew 25.5 percent.  Strong 
performance in the iron, steel, and petrochemical industries 
mitigates the downturn of the semiconductor and liquid 
crystal display manufacturers.  A CEPD survey showed the 
percentage of business firms expecting better performance in 
three months increased from 12 percent in July to 18 percent 
in August.  These generally favorable economic trends and 
optimistic expectations bode well for the ruling DPP party 
in the year-end legislative elections. 
 
(Please see the website "Taipei.state.gov/ait_s/econ/econ- 
web" for following tables: 
Appended Table 1 Major Economic Indicators for Jan-Aug 2004 
Appended Table 2 Economic Indicator Estimates for 2004 
Appended Table 3 Economic Indicator Forecasts for 2005 
Appended Table 4 Major Economic Indicator for 2001, 2002 & 
2003.) 
PAAL