The effect of the 921 earthquake on GDP growth should be limited according to a report released by Standard & Poor's yesterday. Despite the effects on many industries, S&P said that in the medium term economic growth may well be stimulated by increases in infrastructure and construction spending,
The report, authored by John Bailey and Xavier Chavee, Taipei-based analysts of Standard & Poor's credit rating service, examines the economic impact of the earthquake which hit Taiwan on Sept. 21.
"Despite the severe impact of the earthquake, the medium-term outlook for the economy is more optimistic, as increased government expenditure and investment will provide the impetus for stronger economic growth next year," Bailey said.
"The added expenditure on infrastructure is unlikely to create financing problems for the government, since Taiwan has little foreign debt and its foreign reserves rank third in the world behind China and Japan," he added.
To rebuild residential property and infrastructure, the government will rely on the issuance of government bonds and budgetary adjustments.
According to the report, two of the industries most affected by the earthquake are Taiwan's vitally important computer hardware and components sector and the banking sector. Insurance companies will be less severely affected and in the longer term may benefit from increased demand. Damage to the key petrochemical and steel industries has been relatively limited.
In contrast, some industries, such as steel, construction, and cement, stand to benefit in the aftermath of the earthquake as rebuilding gets underway.
Overall, structural damage and a loss in industrial production are expected to shave 0.25 percent from forecast GDP growth for 1999, and the government has trimmed its 1999 GDP growth forecast from 5.74 percent to 5.5 percent.
With around 10,000 residential buildings destroyed or damaged, the impact on the banking industry will also be dramatic as many mortgage loans are now in doubt.
"Considering the magnitude of losses incurred by mortgagees, the nonperforming loan ratio, currently at 5 percent, may rise to 8 percent by next year," he said.
"Regional banks that are centered in the most affected areas may face a rapid rise in nonperforming assets."
According to Bailey, some heavy selling on the stock market can be attributed to heavy redemption pressure from local mutual funds.
To prevent the market from free falling, the government is expected to intervene through the state pension fund and the newly established "stability fund." In addition, the daily loss limits for individual stocks have been reduced to 3.5 percent from the normal 7 percent.
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