The central bank must be concerned about the effectiveness of its monetary policy following last month’s disappointing export figures as well those for the whole year, despite its move last month to lower key interest rates by 12.5 basis points for the second quarter in a row. The latest foreign trade data, which came amid renewed turmoil in global financial markets, highlight the challenges that await the nation’s monetary authorities as they try to navigate the economy out of ever-incrasing global volatility.
The outlook for Taiwan’s export-driven economy is depressing. The Ministry of Finance on Friday said that slowing demand from China, Japan, Southeast Asia, Europe and the US contributed to last month’s weak export figures, which have been declining for 11 months.
Exports fell 13.9 percent year-on-year to US$22.06 billion, below expectations, while exports for the year dropped 10.6 percent year-on-year to US$280.48 billion, the lowest since the global financial crisis of 2008-2009, according to ministry data.
It is the third time that Taiwan has seen an annual double-digit fall in exports; the first followed the dot-com crash in 2001 and the second the global financial crisis of 2008-2009.
Like other regional economies, Taiwan’s export performance is affected by developments in major economies. Due to the slowdown in China, a fragile recovery in Europe and the continued weakness in crude prices, Taiwan, as expected, posted low outbound shipments last year.
However, the question remains as to why the nation performed worse than some of its neighbors. South Korea’s exports for last year declined 7.9 percent from 2014, China’s overseas shipments dropped 3 percent in the first 11 months of last year from a year earlier, Hong Kong posted a 1.9 percent fall in exports year-on-year during the January-November period and Japan saw a 9.8 percent annual contraction in demand for its goods overseas.
However, the reasons Taiwan’s exports performed so poorly are twofold: First, the slowdown in China is dragging Taiwan’s economy down. Last year alone, China (including Hong Kong) accounted for nearly 40 percent of Taiwan’s total exports and its slowing demand took its toll on Asian economies.
Second, and more importantly, the era of easy and low-end manufacturing is coming to an end, as Taiwanese manufacturers lose their desire to supply new products for global brands. A challenge facing Taiwanese firms is the emerging competition from their Chinese peers, at a time when Beijing is initiating schemes to support its electronics supply chain and develop its own domestic brands. This is a threat for Taiwan’s economy over the medium and long term and presents a structural challenge that will take some time to deal with.
While the exchange rate of the New Taiwan dollar has come down in recent months after the central bank’s rate cuts last year, it might not be enough to spur external demand, given weak activity in China and other major export markets. Also, a potential vicious cycle of gradual depreciation among regional currencies following the devaluation in the Chinese yuan might eat into consumers’ purchasing power and weaken private consumption. It is a situation that could make it difficult for the central bank to cut rates in the short term, despite growing weakness in domestic sales and falling consumer confidence.
Concerns over China’s growth and currency are likely to persist this year. Before Taiwan’s central bank makes its next move, it might want to see how the economy responds to the rate cuts it has implemented so far, while monitoring the consequences of divergent monetary policies around the world.
For now, monetary policymakers must find a balance between placing the nation on a sound long-term footing and maintaining market stability in the short term.
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