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Asia-PacificJuly 1 2003

Taiwan expects to bounce back

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Government efforts to combat the economic fallout of the SARS outbreak and boost confidence includes 80% guarantees for local bank loans to affected industries. Dennis Engbarth writes from Taipei.

With the outbreak of severe acute respiratory syndrome (SARS) now contained, Taiwan’s administration, led by the Democratic Progressive Party (DPP), aims to repair the damage inflicted by it and by the Iraq war by boosting confidence and public works spending.

Following the spread of SARS from southern China to Hong Kong in March, by June 19 the World Health Organisation (WHO) had recorded 8462 cases worldwide including 804 fatalities. The People’s Republic of China officially acknowledged 5326 cases with 347 deaths, while Hong Kong registered 1755 cases with 296 deaths.

By June 19, the SARS outbreak in Taiwan had resulted in 695 probable cases with 84 deaths. The worst period occurred in the wake of cluster infections in two Taipei City municipal hospitals, ultimately traceable to an imported case from Hong Kong.

After a panicky May and the resignations of Taiwan’s health minister and the director of Taipei City’s health bureau, decisive measures to curb hospital infections, stringent quarantine measures on people who were likely to have been in contact with SARS patients, tight immigration controls and pervasive temperature-taking in public and private facilities combined to contain the outbreak by early June.

Recovery efforts

Although blocked from participating in the work of the WHO due to pressure from China, Taiwan has met the organisation’s conditions for deletion from the SARS travel advisory list. It has applied for removal from the list, which Taiwan health officials anticipate should take place by the end of June.

With the worst of the SARS outbreak over, the government’s attention has shifted to recovery, including rebounding from the trauma inflicted on the economy and financial system. In the wake of the rapid spread of infection, virtually all China-bound tour groups from Taiwan cancelled planned trips for April and May. During the March-May period, travel to and from Taiwan virtually dried up. Tourism arrivals, which had grown by 12.7% in the first quarter to 755,863, plunged 53.6% in April to 116,320 and 82.9% in May to a mere 40,256, according to Tourism Bureau data. Departures from Taiwan plunged by 64% in April and 83% in May.

As a result of the drop in foreign and domestic tourism and recreational consumption, revenues in airlines, travel, hotels, retail and wholesale commerce and foreign trade sectors were expected to drop by NT$64.3bn ($1.86bn) in the second quarter.

In macro-economic terms, the degree of impact was reflected in the sharp downsizing of the official economic growth forecast by the Directorate-General for Budget, Accounting and Statistics (DGBAS) to 2.89%, down from its prediction for 3.68% expansion in inflation-adjusted gross domestic product (GDP) issued in February.

Fortunately, Taiwan’s apparent success in curbing the new flu-like disease should render irrelevant the more dire forecasts of a plunge in growth to as low as 1.44%, had SARS continued to burn through the third quarter. The DGBAS forecast that private consumption expenditures would contract 1.13% in inflation-adjusted terms in the second quarter and that the real increase in consumer spending would rise only 0.75% for 2003.

Banks under pressure

Sinopac Holdings senior executive officer Daniel Chen says: “Banks will face additional pressure from SARS, especially banks whose business is focused on consumer lending and credit cards. Credit card transactions will fall with consumer spending, unemployment will rise and the percentage of non-performing consumer loans will increase, but the effect will be short-term.” He predicts that consumer confidence and spending will begin to revive in June and pick up in July.

Nevertheless, Taiwan was fortunate in that its manufacturing sector was not badly affected by the SARS outbreak. “Merchandise exports growth did slow in May to $11.3bn or 2.1% year-on-year, compared with the 7.8% pace in April, but the slowdown was due mostly to a drop in exports to Hong Kong and China,” says Council for Economic Planning and Development (CEPD) vice chairwoman Ho Mei-yueh.

For the first five months of 2003, Taiwan’s exports expanded by 8.2% to $55.2bn, while imports grew 12.8% to $48.8bn, leaving a $6.48bn surplus, according to customs data.

Stable outlook

“We expect conditions in Hong Kong and China to stabilise soon now that the SARS outbreak is also coming under control in those areas, and thus our exports should improve in the coming months,” says Ms Ho.

The government’s attempt to cope with the crisis included submitting a draft special law to the legislature in early May to enhance authority to implement quarantine and other policy tools to combat SARS, and to mandate assistance programmes to affected industries, companies and individuals. In the face of public anxiety over SARS and its social and economic effects, the usually recalcitrant opposition majority in the legislature co-operated with the DPP-led cabinet by passing the law on May 11 and approving the related NT$50bn budget, which includes NT$20.2bn to assist SARS-affected industries, companies and individuals.

The main focus of the assistance programmes will be travel and entertainment related industries, especially airlines. “Many companies have taken a severe and sudden blow from SARS and we should not let them just fail because of this but will try to help them get over this difficult pass,” says Ms Ho.

Guaranteed loans

In particular, the government is providing loans to help affected companies maintain cash flows and cover the wages and salaries of workers caught up in the outbreak and will also provide interest and tax relief for affected industries, especially airlines. “Commercial airlines are a highly capital-intensive industry and require large amounts of funds to maintain cash flow and are thus vulnerable to the types of sudden drops in passenger traffic as occurred in the wake of the SARS outbreak,” Ms Ho says.

The government has therefore provided 80% guarantees for loans from consortiums of local banks to six domestic airlines whose revenues fell by more than 30% in May, totalling NT$15.5bn to maintain operations and cash flow in the crisis period.

In addition, after a delay of six months, the legislature approved emergency cabinet special budgets to reduce unemployment – namely a NT$20bn “public service employment expansion” plan and NT$57.7bn in funds for small-scale public works. The two programmes aim to provide more than 110,000 jobs to qualified unemployed workers, a priority now even more essential given expectations of a SARS-induced spike in job losses.

With the launch of programmes to revive the post-SARS economy and the passage of the combined total of NT$127.7bn in special budgets, the CEPD has set a revised target of 3% economic growth for 2003 followed by 4% expansion in 2004, says Ms Ho. “We hope first to begin to revive domestic tourism and travel as that can take spending and revitalise commerce and economic activity all over Taiwan.

“Encouraging people to get out of their houses and take vacations, especially employees of the civil service, will be the best way to take spending and confidence all the way down into rural and scenic areas,” she adds.

The government is also attempting to repair the country’s international image through publicity and promotional activities to spread the word that “Taiwan is safe for travel” now that the SARS outbreak is under control. Ms Ho says the CEPD believes that a target for foreign arrivals of 1.8 million for the year, compared with an initial target of three million, is “feasible”. However, she says the target of reducing the average unemployment rate to 4.5% will not be realised and will be reinstated as the target for 2004.

Investor confidence

Foreign investors apparently remain confident in Taiwan’s fundamentals, says Ms Ho. During May, foreign direct investment amounted to $200m and net inflow of qualified foreign institutional investors into the island’s securities and capital markets soared to $1.8bn.

The CEPD and other cabinet agencies have begun drawing up a special budget of NT$300bn for major public works investments during 2004–2006 that will be presented to the legislature when it reconvenes in September. In contrast to the small-scale and dispersed character of the NT$57bn programme, the proposals ill focus on large-scale projects in public transportation, renewable energy sources, education, cultural facilities and water resources and sanitation. If all goes well, the programme could add a percentage point to Taiwan’s economic growth rate for each of the three years.

Even if domestic confidence revives, the longer-term consequences of SARS will influence Taiwan’s future economic course, especially economic and trade ties with China. The rapid spread of SARS through Hong Kong and China, and the attempts by the Beijing authorities to cover up the gravity of the crisis, has dampened Taiwanese bankers’ and investors’ enthusiasm for the China market, which absorbed 31.2% of Taiwan’s $130.64bn in merchandise exports and $6.72bn in approved direct capital investment last year.

Most banks have been clamouring for the finance ministry to relax restrictions on the establishment of representative offices (now eased), but analysts say the SARS crisis may force adjustments in cross-strait business plans.

“The lack of transparency in China’s SARS information has bred doubts among international companies, which may readjust their distribution of orders until they feel the Chinese authorities are handling this crisis in a more transparent manner and the personal safety risks are lowered,” says National Taiwan University economist Professor Wu Chung-chi. “The resulting decline in effective management control will add operational and financial risks and may lead many companies to delay new investments in China and discourage Taiwanese banks from lending to firms with mainland Chinese investments.”

Taiwan Thinktank chairman Chen Po-chih says: “Banks and businesses in Taiwan and other advanced countries will pay more attention to business risk in China now and will diversify their investment strategies as a result. SARS has allowed everyone to realise that information and data from China is often false.” The former CEPD chairman cautions that SARS “could be a major blow to the positive spiral of rapid growth and incoming investment in China”.

Whether Taiwan could benefit from foreign and Taiwanese companies’ need to disperse risks would rest on whether it could retool its own systems to ensure safer living conditions and secure production and commerce in the post-SARS era, he says.

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