Presidential election 2008: Business: KMT facing three main challenges, economists say

Economic growth * Growth for last year: 5.7 percent. * Government growth forecast for this year: 4.32 percent. * Analysts' estimate actual growth rate for this year: at least 4.8 percent.

A demand for solid economic growth with fiscal stability, a call for improved cross-strait economic ties without jeopardizing the nation's sovereign status, and the pressure of rising inflation present the major challenges to the new government, economists said yesterday after the Chinese Nationalist Party's (KMT) Ma Ying-jeou (馬英九) won the presidential election.

"The election result showed that the new government will have to address these economic issues," Hsu Sung-ken (許松根), an industrial economist at Academia Sinica (中央研究院), said in a telephone interview yesterday.

"But the KMT has to realize that the nation's industrial structure and investment environment have changed since it was in power," Hsu said. "It will be a challenge for Ma to fulfill his promise of achieving 6 percent economic growth every year."

Although the nation saw its economy grow by 5.7 percent last year from the previous year, years of weak private capital spending and capital outflows have held back the nation's economic growth potential.

"The KMT has to realize that the nation's industrial structure and investment environment have changed since it was in power. It will be a challenge for Ma to fulfill his promise of achieving 6 percent economic growth every year."

Hsu Sung-ken, an industrial economist at Academia Sinica

This year, the economic growth is expected to drop to 4.32 percent, according to government statistics, amid slowing external demand as a result of global financial turmoil.

Polaris Research Institute (寶華綜合經濟研究院) president Liang Kuo-yuan (梁國源) said the nation's economy has been underperforming in recent years, as the actual growth rate was lower than the potential growth rate.

"The actual growth rate should be close to or even exceed the potential growth rate, which is at least 4.8 percent annually," Liang said by phone yesterday.

FISCAL STABILITY

Following the KMT's landslide win in legislative election in January, the new government is likely to have more control over the improvement of the domestic investment environment, economists said.

But in order to pursue economic growth, the new government will have to pay particular attention to maintaining long-term fiscal stability, both Hsu and Liang said.

Fitch Ratings forecast in December that the nation's general government debt was expected to account for 40.7 percent of GDP last year.

But that still reflected an increase of more than 4 percent over the previous four years, the economists said.

To improve the fiscal balance, the new government should continue tax reforms to expand the tax base while making way for wage increases to generate more tax revenue, they said.

Tony Phoo (符銘財), chief economist of Standard Chartered Bank, said Ma's win was not likely to make any "real impact" on the economy this year, although the market would expect him to deliver his campaign promises.

The new government will have to form a new Cabinet first and it will take several months for the new government to familiarize itself with the administrative and policy issues, he said.

"Signs of any economic impact as a result of this government change will start showing next year at the earliest," Phoo said by telephone. "But in the meantime, the market will be looking to see how the new government works to mend cross-strait relations."

Cross-strait ties

During their election campaigns, Ma and his DPP rival, Frank Hsieh (謝長廷), both advocated pursuing closer ties with China, and their other economic policies were also similar.

"The only difference is in the pace and ways of executing their policies," Chen Miao (陳淼), a researcher with the Taiwan Institute of Economic Research (TIER, 台灣經濟研究院), said yesterday.

While the new president will have to obtain a consensus among the public to deal with the cross-strait relationship, campaign promises such as the deregulation of Taiwanese banks' investment in China will ultimately be dependent upon the Chinese government, Chen said.

The idea of a "common market" across the Taiwan Strait may prove to be an especially hard nut to crack, Hsu said.

"The common market idea may not be a realistic option, as it demands a state-to-state relationship. We shouldn't pin all our hopes on China," he said.

But Wang Lee-rong (王儷容), director of the Chung-Hua Institution for Economic Research's (CIER, 中華經濟研究院) center for economic research, said the Ma camp was more active and willing to face the cross-strait reality.

Wang said the current 40 percent cap on China-bound investment is an ineffective policy and should therefore be eliminated, as businesspeople who want to invest in China will find a way to do so.

Moreover, the nation's restrictions on investments in China has lowered foreign investors' willingness to use Taiwan as a springboard to tap into the Chinese market, Wang said.

"The more open Taiwan becomes, the better for the nation's economy," Wang said. "As long as there are economic benefits in Taiwan, the nation's national security will also be protected by other countries."

Rising inflation

Another daunting task facing the new government is rising inflation, as the average consumer price index rose 3.42 percent year-on-year in the first two months of the year, exceeding the government's 2 percent annual target, government data showed.

But the pressure remains, as commodity prices are likely to keep rising.

Even so, both Liang and Hsu said the new government should let the market adjust itself, instead of applying measures to contain inflation.

"Price controls are wrong. The new government should discontinue the policy of freezing fuel prices," Liang said.

"It is unfair that taxpayers have to bear the losses of state-run companies such as CPC Corp, Taiwan [CPC, 台灣中油] and Taiwan Power Co [Taipower, 台電]," Liang said.

As long as wages and job opportunities increase along with economic growth, the public will be able to cope with inflation, Liang and Wang said.

But Chen disagreed, saying the new government should allow the floating oil price mechanism to continue operating.

He said the recent dramatic fluctuations in international crude oil prices have resulted in a market imbalance.

"Therefore, the government should play its role in correcting the market imbalance, as oil is a necessity in our society," Chen said.

Chen said the new government should seek out and provide stable economic policies while striving for administrative neutrality.

Transparency and successful execution of policies are crucial as well, Chen said.