UBS: Taiwan economy faces hard road to clear recovery in short term

It will be difficult for Taiwan's economy to stage a meaningful recovery in the short term since the country is suffering from insufficient domestic investment, Switzerland-based banking group UBS said Monday.

Kevin Zhao, head of UBS's global sovereign, currency and fixed income division, said that people in Taiwan have a large chunk of savings but remain reluctant to invest in the domestic market to push up the real economy.

According to the Directorate General of Budget, Accounting and Statistics (DGBAS), Taiwan's excess savings, the amount of savings that exceed planned investments, are expected to total NT$2.61 trillion (US$82.86) in 2016. At the same time, the excessive savings rate, the ratio of savings to the gross national income, is likely to hit a new high of 14.89 percent in 29 years.

While domestic investments in Taiwan are slowing, Zhao said, Taiwanese are keen to move their funds overseas, imposing an adverse impact on the local economy.

Data compiled by Taiwan's central bank showed that Taiwan registered a net outflow of US$15.4 billion in financial account, which measures the flow of direct investment and portfolio investments, in the second quarter of this year. It was the 24th consecutive quarter in which Taiwan has recorded a net financial account outflow.

Zhao said that the current obstacles Taiwan's economy is faced with are likely to keep the country's economy weak over the next two years, so it is unlikely for the economy to have any immediate turnaround.

Zhao said that he understood the local central bank has been trying to make the Taiwan dollar cheaper to boost the country's global competitive edge and strengthen its export performance in a bid to help the economy steam ahead.

But, he said that the efforts to push down the Taiwan dollar will be limited since Taiwan is sitting on a large amount of foreign exchange reserves. As of the end of July, Taiwan's forex reserves hit a new record high of US$434.09 billion, marking the sixth consecutive month forex reserves have smashed the previous record.

Zhao said that the central bank has a hard time using its financial tools to help the local economy. Taiwan heavily depends on the U.S. and China markets, but with the two major export markets becoming aged societies and their consumer structures changing as a result, Taiwan's export-oriented economy is expected to feel the pinch of the impact of such unfavorable circumstances.

The Taiwan government appeared more upbeat, saying there have been signs that the local economy is improving. The DGBAS has raised its forecast for Taiwan's economic growth to 1.22 percent from an earlier estimate of a 1.06 percent increase.

Source: Focus Taiwan News Channel