Editorial: Economic fundamentals are strong

The nation's main bourse suffered its worst week so far this year as investors were haunted by a spate of bad news both at home and abroad.

Technically, the benchmark TAIEX broke through its 200-day moving average (6,500 points) as it shed 515 points, or 7.4 percent, to finish up at 6.444.63 for the week to Friday. Psychologically, market sentiment turned bearish as investors saw gains made over the first half of the year vanish completely.

But the fundamentals of Taiwan's economy are still healthy. Exports hit a record high of US$18.93 billion last month, the bad loan ratio of the nation's banks declined to 2.54 percent in April and the jobless rate is hovering at its lowest level in five years, just 3.78 percent.

So if the selling spree on the Taiwan Stock Exchange was overdone, why?

The market sell-off commenced with concerns about an interest rate hike by the US Federal Reserve. Last Monday, Fed Chairman Ben Bernanke sent a clear message to the market that his priority is to fight inflation as core consumer prices, which exclude food and energy costs, are nearing the limits of the central bank's tolerance.

Bernanke's were later echoed by other Fed officials, who said that US policymakers must remain attentive to danger signs on price trends. Their remarks only boosted market expectations that the Fed will hike rates a 17th straight time at its policy meeting on the 28th of this month.

But ahead of the Fed's upcoming meeting, some central banks in other parts of the world have already taken steps to fight inflation. South Korea's central bank and the European Central Bank both raised key rates on Thursday last week, as did India on Friday.

In Taiwan, since the current rates are still some distance away from what central bank governor Perng Fai-nan (彭淮南) has called a "neutral stance," the recent developments worldwide all but guarantee another rate hike here when the central bank's board meets later this month.

Both here and abroad, investors are worried that rate hikes by central banks to keep inflation in check could lead to a potential slowdown in the world economy. But in Taiwan, the market's nervousness will likely extend into this week due to an escalating political standoff between the governing and opposition parties, following the recent corruption scandals involving President Chen Shui-bian's (陳水扁) family and top aides.

This month's political confrontation has greatly affected local securities markets, the property sector and consumer spending. Worse than this, however, it has also stalled the government's economic and fiscal reform efforts, a situation that Standard & Poor's warned on Friday may result in it downgrading Taiwan's sovereign credit rating. If this happens, it would mean higher borrowing costs for corporations and adversely affect the flow of foreign direct investment into the country.

The two main political camps may differ sharply on supporting or recalling the president, but there shouldn't be differences among them over efforts to promote economic growth -- least of all as crude oil prices remain above US$70 a barrel, which carries an ongoing threat of inflation.

Riding a positive business outlook and the prospect of reduced cross-strait tensions after Premier Su Tseng-chang (蘇貞昌) took office in late January, the TAIEX surged above 7,000 points last month. Given the economy's strong fundamentals, the current stock market setback is a correction, not an outright reversal. But there is a qualification: politicians know what they should do to push economic reform initiatives through the legislature, and the downside could be great if they don't.