Taiwan’s economic growth is likely to slow to 4.6 percent next year from 9.7 percent expansion this year, as reviving consumer spending is not strong enough to buffer an expected slowdown in exports, Standard Chartered Bank said in its latest report last week.
“Weaker exports will continue to cloud the growth outlook into 2011, partly due to the higher base,” Standard Chartered Bank Taiwan Ltd (渣打銀行) chief economist Tony Phoo (符銘財) wrote in the report on Tuesday last week.
“The pace of recovery in the US and Europe is also expected to stay sluggish owing to the relatively weak job recovery,” he added.
The report said a continuing recovery in domestic demand, -particularly consumer spending, would keep the economy on a mild recovery path next year and forecast GDP growth to rise to 6 percent in 2012 when exports momentum strengthens.
The Standard Chartered’s GDP projections were followed by similar predictions made by Citibank Taiwan Ltd (台灣花旗) on Friday, which forecast a 4.2 percent growth rate next year and an expansion rate of 5 percent in 2012.
“Slowdown in advanced economies and tightening monetary policies in Asia will likely make the growth start slowly in the first half of 2011, but strengthen in the second half,” Citibank Taiwan chief economist Cheng Cheng-mount (鄭貞茂) said in a separate report. “In 2012, GDP growth will likely accelerate again when advanced economies show better growth momentum.”
Central Bank
Standard Chartered also predicted that the central bank would continue its interest rate hike cycle through the end of next year to help pre-empt accelerating asset inflation risks. It forecast consumer price inflation would rise to 2.2 percent next year from 1 percent this year.
“We expect the benchmark policy rate to be 1.625 percent by end-2010, and 2.125 percent at the end of next year,” Phoo said in the report.
That indicates the central bank is likely to raise its policy rate by 0.125 percentage points from the current 1.5 percent at its quarterly board meeting on Dec. 30 and will probably raise it by a total of 0.5 percentage points over the whole of next year.
Cheng said rising asset prices would push the central bank to raise its interest rate by 0.125 percentage points on Dec. 30 and stay on its gradual tightening path until the end of next year.
With the anticipated rise in interest rates in the coming quarters, capital flows into Taiwan are likely to continue, raising the risk of asset bubbles and economic instability.
Capital inflows
So far this year the monetary authorities have adopted various measures to manage the risk, but Standard Chartered warned the central bank might face a higher financial burden should it expand capital control measures to deter hot money inflows.
“Rising interest rates are likely to result in higher sterilization costs, making it increasingly difficult for the central bank to effectively intervene in the local foreign-exchange market,” Phoo said in the report.
Based on Standard Chartered’s estimate, the central bank is expected to generate about US$7.6 billion in interest income this year by using the nation’s foreign exchange reserves, which amounted to US$379.26 billion at the end of last month.
At the same time, the central bank has to pay up to NT$46 billion (US$1.5 billion) per year in interest on its total outstanding negotiable certificates of deposit — which are used to absorb excess market liquidity and is currently worth more than NT$6.6 trillion — and is required by law to contribute around NT$200 billion to the national treasury each year.
“This interest burden will undermine the central bank’s ability to effectively sterilize hot money inflows,” Phoo said. “As a result, we think local regulators will consider imposing additional measures such as taxes and/or fees on hot money.”
The Financial Supervisory Commission announced on Nov. 9 restrictions on foreign investors from investing more than 30 percent of their approved funds in government bonds and money-market products, while the Ministry of Finance said on Nov. 12 it was still studying a management fee on hot money that is parked in fixed-income products instead of equities.
Cheng said Taiwan was not likely to impose a Tobin tax on foreign capital inflows anytime soon as a move like that could cause massive equity outflows. However, the New Taiwan dollar is likely to experience a bumpy ride against the US currency next year because of volatility in capital flows, he said.
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