EDITORIAL: More economic challenges to come

Sun, Feb 03, 2013 - Page 8

Taiwan’s media have truly followed the government’s every move in the latest Cabinet personnel changes: Premier Sean Chen (陳冲) planned to resign… The possible successor to Chen was… and President Ma Ying-jeou’s (馬英九) approval rating.…, et cetera. However, the major challenge facing Taiwan today is on the economic front and the reappointment of central bank Governor Perng Fai-nan (彭淮南) for another five-year term is as important as Vice Premier Jiang Yi-huah (江宜樺) replacing Chen.

On Friday, local media cited sources at the Presidential Office and Legislative Yuan as saying that Perng, whose third term in office ends on Feb. 25, will continue for another five years as the top monetary policymaker. Perng has headed the central bank since February 1998, and his reappointment will make him the nation’s longest-serving central bank governor.

Over the past 15 years, the nation has faced several challenges domestically and internationally, including the 1997-1998 Asian financial crisis, the Sept. 21, 1999, earthquake, democratic transition in 2000 and the 2008-2009 global financial crisis.

The central bank under Perng’s leadership has used various monetary tools to fine-tune currency and interest rates to maintain stability in domestic consumer prices and financial markets, and guide the nation through turbulent global waters over the years.

At the end of last year, Taiwan’s foreign exchange reserves rose to a high of US$403.17 billion, and over the past 15 years the central bank has contributed more than NT$2 trillion (US$67.5 billion) to state coffers from the increase in foreign exchange reserves. Even though some people have criticized the central bank’s “weak currency” stance for increasing Taiwanese exporters’ operating costs compared with those of their South Korean rivals, the New Taiwan dollar has seen a less volatile exchange rate between 1998 and last year than the South Korean won.

Last year, Global Finance magazine rated Perng among the world’s best central bankers for the eighth straight year. He is the only central banker to have won an “A” rating nine times from the New York-based magazine. However, how much longer will Perng enjoy his top ranking in the world, as he faces more challenges in his next five-year term?

First, as central banks in advanced countries, especially Japan, Europe and the US, have been pursuing aggressive monetary easing to boost their economies, the depreciation pressures on Asian currencies have become a hot issue for many of the region’s export-oriented economies. Perng faces the challenge of trying to adopt balanced policies that can maintain a competitive national currency amid a potential global devaluation race without increasing inflation because of the higher costs of imported goods.

Second, property prices are high in Taiwan, especially in the Greater Taipei area, largely because of the central bank’s low interest rate policy, the government’s reduction of inheritance tax and advanced economies’ quantitative easing measures that have ensured ample market liquidity and indirectly led to an influx of speculative capital into the real-estate sector. This low interest rate environment also constrains the earnings of local financial institutions.

How the central bank can move in a measured way to reverse the low interest rate environment without compromising economic development will be Perng’s second major challenge.

Third is the challenge of developing Taiwan into a major offshore center of trade for the Chinese yuan, while safeguarding the nation’s financial stability.

In the short term, the central bank needs to ensure a smooth implementation of direct currency exchanges and capital flows across the Taiwan Strait.

In the longer term, the central bank will need to talk with its Chinese counterpart about the establishment of a cross-strait currency swap mechanism before adding yuan-based assets to Taiwan’s foreign exchange reserves and serving as a backstop against regional economic turmoil.