It will be difficult for the nation’s economy to sustain solid growth momentum in the long term in the face of insufficient domestic investment, with the Directorate-General of Budget, Accounting and Statistics (DGBAS) estimating that the nation’s ratio of excess savings to GDP will remain above 10 percent for the sixth consecutive year, with cumulative excess savings close to NT$11.8 trillion (US$404.8 billion) since 2014, which means that Taiwanese businesses and consumers have large pools of savings, but are reluctant to invest or spend in the domestic market to stimulate the real economy.
According to the DGBAS, the nation’s excess savings — gross domestic savings minus the gross domestic investment — will reach NT$2.281 trillion this year, and the excess savings rate — the ratio of savings to gross national income — is likely to hit 12.49 percent. While both figures are lower than they were last year, Taiwan has seen annual excess savings of more than NT$2 trillion for five years in a row, reflecting slowing growth in the local manufacturing sector due to mass relocation of production abroad, as well as weak domestic consumption because of stagnant wage growth and an aging population.
Taiwan’s excess savings rate was 2 to 3 percent in the 1990s and gradually moved up to the high teens in the early 2000s. Double-digit percentages followed by 2009 and it reached 14.57 percent in 2015, the highest since 1988.
If a country has a high level of excess savings, these savings have a tendency to go abroad to finance investment in other countries, which is likely to affect the local economy adversely.
In Taiwan, data compiled by the central bank show that the nation’s financial account — which includes direct and portfolio investments — registered net outflows for the 30th consecutive quarter at the end of last year, at US$21.06 billion, bringing aggregate net outflows to US$354.07 billion at the end of last year, which the central bank said could finance 182 Taipei 101 skyscrapers or 23 high-speed rail systems.
There is no quick fix for the situation, as the obstacles facing the nation’s domestic investment environment — such as shortages of land, power, water and skilled labor for manufacturers — need different government agencies to make a determined and continued effort to help tackle the issues, while the nation’s effort to develop the service-oriented or innovative industries needs not just the government’s regulatory support, but also resources from all parties involved.
However, addressing the problem is a step in the right direction, as the central bank’s research findings show that weak domestic demand is the main reason for Taiwan’s underperformance over the past few years relative to its regional peers.
Between 2008 and last year, Taiwan registered average annual economic growth of 2.7 percent, lagging behind Singapore’s 4.4 percent and South Korea’s 3.1 percent. However, the problem for Taiwan is that its underperformance is likely to worsen in light of increased talent outflow due to the low growth in wages, the central bank said.
A marked change in the structure of gross domestic savings in recent years also deserves attention. DGBAS data show that household savings changed little and averaged NT$1.01 trillion annually over the 10 years up to 2016, while savings by private corporations vastly expanded to NT$2.06 trillion in 2016, from NT$868.8 billion in 2007.
There are many possible explanations for the surge in private-sector savings, but the big question is what the government can do to channel these funds into investment in the real economy. One also wonders whether the increased share of private-sector savings in overall domestic savings could be a cause of the nation’s lower domestic investment and uneven distribution of wealth.
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