Taiwan's central bank governor tells Stefania Palma how the country has helped to keep the east Asian economy in check in 2015 – one of the toughest years for emerging markets. 

The slowdown in China’s economic growth, the plunge in commodity prices and severe currency devaluation against the dollar made for a tough 2015 in emerging Asian economies. Alhough Taiwan’s gross domestic product growth has slowed – from 3.77% in 2014 to an expected 1.56% in 2015 – the central bank’s stabilisation policies helped the country weather these tough 12 months. 

Taiwan is suffering a double-whammy of slowing Chinese export demand and China remodelling its supply chain as it starts to produce rather than import Taiwan's mid-value products. Export growth to mainland China and Hong Kong – Taiwan’s largest trading partners – dropped by 11.1% in the first nine months of 2015, contributing to a 4.4% decrease in overall export growth.

“Taiwan and China’s relationship in the supply chain has changed from a complementary to a competitive one,” says Perng Fai-Nan, governor of the Central Bank of the Republic of China (CBC), Taiwan's central bank.

To counter this, Taiwan needs to diversify its export market and industrial base, according to Mr Perng. “We have not spent enough on research and development or design in the past. So, the government is encouraging firms to do more in this area all the way up to service and marketing. If all this can be put together in firms' products, profits will go up,” he says.

On the CBC’s part, the central bank proposed both monetary and macroprudential policy reforms to help keep Taiwan's head above water in 2015. CBC cut its benchmark interest rate in September 2015 by 12.5 basis points to boost consumption, investment and exports. This has also allowed fiscal policies to have an even larger and quicker multiplier effect, says Mr Perng.

“An easy money policy should be accompanied by an expansionary fiscal policy… to attain macroeconomic stability,” he adds. The Taiwanese government announced that public expenditure will increase by 13.1% year on year in 2016.

Immune to the Fed hike

Across the Pacific, however, the US Federal Reserve is moving in the opposite direction (when The Banker went to press, the market expected the Fed to start hiking interest rates on December 16). But Mr Perng is not worried – in fact, Taiwan might even profit from the hike. “We live this both as an investor and as an institution managing the economy. We are a big investor in US government bonds so we will actually make more money when they raise interest rates,” he says. 

Taiwan has not even been hit by capital outflows from emerging markets – up to $940.2bn in the 13 months to the end of July 2015 – spurred in part by investor uncertainty over the Fed’s rate hike. “We have already seen money leaving countries such as India and Indonesia… If anything, money came into Taiwan because fund managers still needed to fulfil their emerging market quotas but were avoiding countries at risk and putting money in Korea and Taiwan instead,” says Mr Perng.

Sufficient liquidity in the market and very little external or US dollar-denominated debt do not make capital outflows a problem for Taiwan, he says. 

Even on the currency front, the CBC successfully minimised the devaluation of the Taiwanese dollar relative to notes such as the Indonesian rupiah or the Malaysian ringgit, which fell by as much as 20% and 9%, respectively, against the dollar in 2015.

“The Taiwanese dollar is quite a stable currency. Our objective is to maintain the currency’s internal and external value – purchasing power at home and the foreign exchange,” says Mr Perng.

Macro-prudence policies

The CBC’s macroprudential policies were also key to Taiwan’s macroeconomic stability in 2015. In the real estate sector, these measures avoided the creation of a bubble after Taipei home prices grew to about 15 times income in 2014, according to US business news organisation CNBC. To mention one initiative, the CBC capped the loan-to-value ratio on new housing loans taken out by borrowers with two or more outstanding mortgages at 50%.

As a result, banks’ real estate-related risks and unrealistic expectations for rising housing prices were reigned in, says Mr Perng: “Real estate prices have increased but they are now falling slightly”.

The CBC is a big fan of macroprudential policies also because they do not destabilise the entire economy. “The question is: should the central bank do anything about bubbles? Raising interest rates is too blunt an instrument because it impacts the entire economy. If the real estate market overheats, it is better to use targeted policies such as macroprudential measures instead,” says Mr Perng.


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