Taiwan: Outlook remains solid – BBH

Taiwanese assets have performed well this year as strong fundamentals and a stabilizing mainland economy should continue to underpin Taiwan’s outlook, feels the research team at BBH.

Key quotes

“The economy is still sluggish.  GDP growth is forecast by the IMF to accelerate modestly to 1.7% in 2017 from 1.5% in 2016, and picking up further to 1.9% in 2018.  GDP rose 2.6% y/y in Q1, down slightly from 2.8% in Q4, which was the strongest rate since Q1 2015.  On the other hand, export orders and leading indicators have been slowing, and support a more cautious outlook for growth.”

“Price pressures remain low, with CPI rising 0.6% y/y in May vs. 0.1% in April.  The central bank does not have an explicit inflation target.  However, low inflation supports the case for steady rates.  It just left rates unchanged last week, whilst noting that “massive” inflows have led to TWD appreciation, which in turn has limited the need for rate hikes.”

“Since it last cut 12.5 bp in June 2016, Taiwan’s central bank has kept rates at 1.375%.  Next quarterly policy meeting is in September and no change is expected then.  Bloomberg consensus sees steady rates through year-end with potential tightening to start by mid-2018.”

“Fiscal policy has remained prudent despite sluggish growth.  The budget deficit came in at an estimated -0.3% of GDP in 2016, little changed from -0.2% 2015.  It is expected to widen to around -1% of GDP in both 2017 and 2018.”

“The Taiwan dollar continues to outperform.  In 2016, TWD rose 2% vs. USD and was behind only the best performers BRL (22%), RUB (20%), ZAR (13%), COP (6%), CLP (5.5%), and IDR (2%).  So far in 2017, TWD is up 6% YTD and is behind only the top EM performer MXN (15%).  Our EM FX model shows the Taiwan dollar to have VERY STRONG fundamentals, so this year’s outperformance is likely to continue.”

“USD/TWD has traded largely in the 30.00-30.50 range since mid-April.  The pair has retraced less than a quarter of this year’s drop.  Retracement objectives of that move come in near 30.89 (38%), 31.19 (50%), and 31.49 (62%).  The 200-day moving average comes in near 31.06.”

“Our own sovereign ratings model shows Taiwan’s implied rating at A+/A1/A+ and is right at the borderline for AA-/Aa3/AA-.  As such, actual ratings of AA-/Aa3/AA- are facing very modest downgrade risks.”