A surge in insurance sales in Taiwan is threatening to spur an increase in capital outflows, potentially dragging the New Taiwan dollar to levels seen during the global financial crisis.
Sales of insurance policies in Taiwan rose to more than NT$100 billion (US$3.05 billion) in December last year, the highest for a month since January 2022, Taiwan’s Insurance Institute data released last week showed.
The demand was mainly driven by better returns on the products compared with banks’ foreign-currency deposits.
Photo courtesy of Cathay Life Insurance Co
Analysts are concerned that Taiwan’s NT$1 trillion life insurance industry, which has been piling into overseas assets due to the lack of high-yielding fixed-income instruments at home, will accelerate those investments.
Such a move would result in heavy capital outflows and weigh on the NT dollar.
“With more policies being sold, there will also be more investment from Taiwanese lifers in dollar-denominated products, such as US bonds and dividend stocks, as these offer quite competitive yields compared to local and regional fixed income products,” said Lynn Song (宋林), an economist at ING Bank NV.
“In a vacuum, it is another factor adding to Taiwan dollar depreciation pressure over the medium term,” Song said.
The NT dollar is already weakening due to the threat of a global trade war and the nation’s large interest-rate discount to the US.
Earlier this year, the currency fell below the key psychological level of US$33 for the first time in nine years and has trailed behind most of its North Asian peers in performance so far this year.
“We see it testing the bottom of 34-35 versus the dollar this year, at least,” said Stephen Chiu (趙志軒), chief Asian foreign-exchange and rates strategist at Bloomberg Intelligence.
Those are levels seen during the global financial crisis in 2009. A weaker currency is favorable for Taiwan’s export-oriented economy, but the central bank intervened this month to stabilize the market.
President William Lai (賴清德) also vowed to keep forex, the interest rate and inflation stable amid rising geopolitical tensions.
The NT dollar is losing another pillar of support. Local insurers typically short the greenback against the NT dollar in the non-deliverable forwards market to hedge against a stronger local currency.
Expectations for Taiwan’s currency to eventually weaken closer to US$34 is limiting insurers’ hedging activity, said Ju Wang (王菊), head of regional foreign-exchange and rates strategy at BNP Paribas in Hong Kong.
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