Polaris says bad debts will shave growth by 0.13%

Escalating bad consumer loans are expected to trim the nation's economic growth rate by 0.13 percentage points, the Polaris Research Institute (寶華綜合經濟研究院) said in a report released yesterday.

But this will be offset by rapid expansion in the nation's exports, leading the institute to adjust upward its GDP forecast for this year to 4.3 percent, from the 4.18 percent it predicted in December.

Liang Kuo-yuan (梁國源), president of Polaris, said at a press conference yesterday that the nation's cash and credit card debt problem is less serious than the South Korean consumer financing debacle in 2002, but the issue must not be neglected.

South Korea recorded an annual 9.8 percent growth rate in private consumption in early 2002, boosted by the strong promotion by the government and the financial sector of consumer financing products to boost the nation's GDP.

Its lending balance on plastic cards in 2002 was 1.3 times the total volume of private consumption. Installment payments and cash advances constituted the majority of that balance, Liang said.

Surging bad loans caused South Korea's private consumption growth rate to shrink to minus 2 percent in the third quarter of 2003.

In contrast, Taiwan's lending balance from cash-advance and credit cards as of January totaled NT$782.6 billion (US$24.1 billion), accounting for only 11.2 percent of private consumption at NT$7 trillion.

"The impact is less severe, but the rising card debts have made banks tighten credit to curb people's shopping impulses. As a result, we forecast that private consumption will decrease by NT$15 billion this year," Liang said.

But the nation's exports will continue to show solid growth due to the New Taiwan dollar's depreciation from a year ago and strong growth in major economies, he said.

The local currency's exchange rates will not show marked fluctuations in the first half of the year, Polaris predicts. Its movements in the second half would depend on Japan's monetary policy and spread, Liang said.

The institute expects exports to expand by 8.03 percent and imports to grow by 5.75 percent year-on-year.

"Taiwan's economy will pick up at a faster pace than last year but the growth rate should decrease quarter by quarter," he said.

Due to the higher comparison basis in the second half of last year, Polaris forecast the GDP would climb 5.70 percent in the first quarter, followed by 4.66 percent in the second, 3.73 percent in the third and 3.24 percent in the last quarter.

Most institutes have predicted that Taiwan will post a growth rate above 4 percent this year. The Directorate General of Budget, Accounting and Statistics predicted 4.25 percent, Goldman Sachs Asia predicts 4 percent, Merrill Lynch forecast 4.7 percent and Lehman Brothers forecast 5 percent.

The widening US trade deficit, crude oil prices hovering at high levels and a possible avian flu outbreak are variables that could threaten the global economic outlook, Liang said.