The government's dour economic report combined with expectations for a prolonged downturn will likely send the TAIEX down sharply today, but analysts say the slide should only run for a few days.
Foreign investors in particular were taken completely by surprise when the Directorate General of Budget, Accounting and Statistics announced Friday that Taiwan's economy contracted 2.35 percent in the second quarter, and would decline 0.37 percent for the year, the first year of negative growth on record for Taiwan.
The nation's statistics agency originally estimated Taiwan's economy would grow 4.02 percent this year.
Among four analysts interviewed by the Taipei Times, three expect the stock market to plummet today due to shock from the GDP announcement. The market is expected to pick up again after two or three days.
Even the government appears to be preparing for a stock market drop.
In order to support the local bourse, Minister of Finance Yen Ching-chang (顏慶章) over the weekend asked the Securities and Futures Commission to keep a close eye on the stock market today, especially on trades made by foreign institutional investors.
Not even a 25 basis-point cut by the central bank, which brought key rates down to 3.25 percent, will help keep stocks buoyant. Analysts said real interest rates for consumers remain high and thereby a barrier to business and personal borrowing.
They did say, however, that the disastrous economic figures are likely to result in drastic policy responses by the government. In particular, the steep GDP drop will further pressure government officials to open direct links with China and speed up reforms in the financial sector.
"There's not much the government can do about the global tech meltdown, but they can do something about cross-strait trade," said one analyst on condition of anonymity.
Euphoria over pledges by the Taiwan government to open direct trade links with China last week jump-started the Taiwan Stock Exchange, sending the transportation index rocketing 22.3 percent.
Many people in Taiwan believe direct trade with China would instantly boost the local economy due to China's large market and the low cost of doing business there.
China Airlines Co (
Shares of Yang Ming Marine Corp (
Any real government policy decisions, however, are expected to take time. A lack of preparation for direct links in Taiwan and negative comments from Beijing on the matter translate into major delays in implementing any new policies.
"Even if the government shows a willingness to open up investment and trade to China, they are acting cautiously -- even with the gloomy economic forecasts," said Andrew Yang (
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