A COVID-19 outbreak in Taiwan is expected to minimally affect the economy in the second half of the year, as the number of domestic cases continues to drop and the vaccination rate increases, while external demand remains robust, Yuanta Securities Investment Consulting Co (元大投顧) said in a report on Friday.
“External demand is the main growth engine of Taiwan’s economy,” Yuanta economists Yen Chen-hui (顏承暉) and Johan Huang (黃雍漢) said in the report.
Taiwan is one of the countries whose economies rely on US and European end demand, Yen and Huang said.
As COVID-19 has been brought under control in those markets, Taiwan is more likely to benefit from a post-pandemic recovery in the US and European countries than other emerging markets, they said.
The biggest difference between the beginning of the pandemic in the first and second quarters of last year and the local outbreak beginning in May is that the escalation of cases this time was specific to Taiwan, they added.
“In Taiwan’s largest export end markets, namely the EU and the US, the pandemic has gradually come under control, with increasing vaccination coverage and anti-pandemic measures,” Yen and Huang said. “With foreign demand seeing a recovery, the impact of COVID-19 resurgence in Taiwan is thus concentrated on domestic demand.”
Last month, the Directorate-General of Budget, Accounting and Statistics raised its projection for GDP growth in Taiwan from 4.64 percent to 5.46 percent for this year, while the central bank revised upward its economic growth forecast upward from 4.53 percent to 5.08 percent, as the agencies believe that the local outbreak is to have little negative effect on exports and private investment.
In addition, the foreseeable demand for Taiwan-made goods also reflects the increasing importance of Taiwanese suppliers in global tech supply chains over the past few years, with some upstream suppliers enjoying greater pricing power than before, the report said.
Meanwhile, uneven global economic growth might put the monetary policy cycles of central banks out of sync, while the US Federal Reserve, which is likely to clarify its policy direction at the meeting in Jackson Hole, Wyoming, next month, might start tapering soon, the report said.
However, Taiwan’s current account balance is healthy and the exchange rate of the New Taiwan dollar has shown resilience, helping the nation to withstand the effects of international capital flows stemming from diverging monetary policies worldwide, it said.
Taiwan's current account surplus rose to US$25.96 billion in the first quarter from US$16.93 billion a year ago. It was the third-largest current account surplus ever recorded, as local companies continued to benefit from demand for 5G devices and other emerging technologies, the central bank reported in May.
The nation's consistently large current account surplus has enabled it to accumulate high foreign exchange reserves — which climbed to US$543.28 billion at the end of last month and marked the second-highest figure in the nation’s history — and therefore prevented the country from the negative impacts of capital outflows.
While the current account balance is an important indicator, Yen and Huang said that the relative exchange valuation of a country’s currency also affects the soundness of its foreign-exchange market.
“If the exchange rate of a country is significantly lower than the fundamentals — that is, when the exchange rate is relatively cheap — the willingness of foreign investors to invest in the country’s assets will increase, and the willingness of hot money to flow out will not be too high,” they said. “Taiwan is relatively healthy in both its balance of payments and exchange rates among emerging markets.”
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