Sun, Jun 15, 2008 - Page 8 News List

EDITORIAL: The economic domino effect

Inflation is becoming a major negative factor for local equities, in spite of the fact the US subprime mortgage and global credit crisis appears to be easing.

Despite expectations for a better economic outlook following the Chinese Nationalist Party (KMT) poll victory in March, investors have soured on Taiwanese shares in recent weeks, sending the benchmark TAIEX down 10.63 percent since Ma Ying-jeou’s (馬英九) inauguration last month.

Last week, the TAIEX plunged 639.76 points, or 7.32 percent, and was at one time looking to test the psychological barrier of 8,000 points. The decline made Taiwan’s performance the second-worst in Asia last week, after China’s 15 percent fall.

The weakening equities market is bad for not only investors but also firms listed on the local bourse. Based on statistics compiled by the Taiwan Stock Exchange, market capitalization of all listed firms was NT$20.6 trillion (US$676.5 billion) as of Friday, a decline of NT$1.62 trillion from NT$22.22 trillion a week earlier.

Taiwan’s stock market had been performing better than other regional markets during the first few months of the year, thanks to market expectations of improved cross-strait relations.

But investors may have been disillusioned, as the outlook for the stock market, household income and economic growth has retreated to pre-election levels. One of the main reasons behind the attitude change is that cross-strait opening is no longer a force to boost market sentiment, especially since the government announced an increase in fuel and electricity prices, which in turn increased worries about rising inflation and interest rate hikes by the central bank.

Even though higher borrowing costs tend to dampen investment, most economists are convinced that the central bank is likely to raise rates more aggressively than before to contain inflation.

While consumer confidence is already low, investors should be wary of inflationary and economic problems in neighboring Asian countries, especially Vietnam, where many Taiwanese businessmen have invested heavily over the years. A regional economic slump could pose an even bigger threat to Taiwan’s exports given the nation’s growing dependence on Asian demand.

So far this year, Vietnam’s benchmark stock index has dropped nearly 60 percent. The country’s inflation rate soared more than 25 percent last month from a year earlier and its trade deficit expanded to US$14.4 billion last month from a year earlier, exceeding the US$12.4 billion shortfall for all of last year.

With rising energy and food prices as well as growing fears over skyrocketing inflation in Vietnam, there are concerns among economists over whether a currency crisis will take shape — possibly on the same scale as the situation in Thailand and Indonesia in 1997.

Just a couple of years ago, investors were still bullish on the outlook for the Vietnamese market in light of the country’s WTO accession. Boasting a prime investment destination with an abundant, cheap labor force, Vietnam had quickly attracted huge foreign capital inflow that made it one of Asia’s fastest-growing economies, along with China and India.

But if Vietnam does not protect its currency from attacks by speculators and, most importantly, fails to get its overheating economy and excessive inflation under control, a crisis may quickly spread to other emerging economies in Asia. One has to wonder who will be next to face the risk of foreign capital flight.

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