Economics & Strategy DBS Focus Taiwan Outlook: Ten predictions for 2022 Economics/growth/monetary/fiscal

 Ma Tieying, CFA/Economist

Taiwan has maintained steady and strong economic performance during the 2020-21 period, thanks to its success in containing the Covid pandemic and the boom of the semiconductor sector. Can Taiwan continue to perform well in 2022? Which sectors will be the bright spots? What are the implications for companies, consumers, and government and central bank policies? We outline ten predictions for the year ahead.

#1 GDP growth will remain solid at around 3%

We project real GDP to grow 2.8% in 2022

, a slower rate than the 5.5% this year, but still in line with the long-term average trend. Export growth is expected to moderate, due to the slowdown of the Chinese economy and the technical impact from a high base. Domestic demand is expected to pick up, thanks to the improvement in Taiwan’s Covid situation and restoration in consumers’ purchasing power.

Looking at the trajectory of GDP, Taiwan will remain the outperformer among the four Asian Tigers in 2022. Setting the aggregate output in 2019 at 100, it shows that Taiwan will end 2022 about 12% above the pre-pandemic output level. In contrast, Hong Kong SAR, Singapore and South Korea will only be 2-6% higher than the levels of three years ago.

#2 Semiconductor sector a bright spot

According to the World Semiconductor Trade Statistics (WSTS), global semiconductor market will grow 8.8% in 2022, a slower pace than the 25.6% in 2021, but still solid compared to the long-term growth rate of mid-single digit. Against the backdrop of post-pandemic global recovery, consumer spending will shift away from PCs and other electronics devices that support remote work and distance learning. Nonetheless, spending on smartphones is likely to continue to grow, driven by the upgrade to 5G devices and recovery in emerging market demand. Furthermore, the new normal after the pandemic will continue to facilitate the process of digital transformation, driving demand for AR/VR hardware, autonomous vehicles, smart factories, among others.

In Taiwan, the major foundries including TSMC, UMC, Powerchip and VIS have all indicated more than 10% hike in their chip prices next year. TSMC has confirmed the plan to build a new chip plant in Kaohsiung in 2022 to expand the capacity of 7nm and 28nm production. The company also aims to enter the mass production of 3nm chips in 2H22. Capital spending in the semiconductor sector is expected to continue to bolster Taiwan’s investment growth next year.

#3 Property market will remain buoyant

The current round of property market rally in Taiwan, which started in 2H20, could be largely attributed to the abundant liquidity and low interest rates environment after the pandemic. Going forward, interest costs are set to rise in 2022, in the context of monetary policy normalisation by global major central banks. On the other hand, unemployment rate is likely to continue to decline and wage growth is likely to pick up, which should help to lend some fundamental support to the property sector.

Aggressive policy tightening appears unlikely. The central bank has adopted selective credit control measures since end-2020, lowering the loan-to-value ratio for third/fourth home purchases and high-price properties. The government amended the integrated house and land transaction income tax, raising the tax rates on the sales of properties within five years of purchases. These measures were introduced in a progressive and transparent manner, indicating policymakers’ intention to discourage the speculative activities and engineer a soft landing in the property market. Admittedly, the risk of government policy intervention could rise in the later part of 2022, when the year-end local elections draw close.

#4 Companies will seek to further diversify their supply chains

On the corporate front, a new wave of outward investment appears underway. The China-US trade war, which broke out in 2018, has prompted Taiwanese manufacturers to move their production from the mainland back to Taiwan in the last few years.  More recently, the Covid pandemic urges manufacturers to further diversify their supply chain network on a global basis, increasing the ratio of local production for local consumption in the major markets. Meanwhile, the rise in cross-strait tensions also plays as a catalyst for Taiwanese manufacturers to build the offshore production bases, to hedge the risk of supply chain disruptions during the unexpected future shocks.

Taiwan’s outward FDI surged by 17% YoY to USD14bn in the first ten months of this year. In the semiconductor sector, TSMC is already building its first chip plant in the US and has announced to construct a plant in Japan in 2022. UMC is reportedly reviewing the plan of expanding its chip production capacity in Singapore. In electronics, the large OEMs including Foxconn, Pegatron and Wistron have started to invest into India, as part of their “China+1” diversification strategy. In the traditional industries, Pou Chen – an important OEM for international footwear brands – is considering further diversifying the locations of its production facilities, from Vietnam to Indonesia and other ASEAN countries.

#5 Consumers’ purchasing power will improve

We also expect consumers’ purchasing power to improve next year as real wage growth returns to the positive territory. Nominal wage growth is expected to pick up to about 2% in 2022, as corporate earnings continue to increase and a government-pushed 5% minimum wage hike takes effect. 

CPI inflation, on the other hand, is projected to ease to 1.3% next year from 1.9% this year (Brent oil assumption: USD75-80/barrel on average). In response to the recent surge in global energy prices, the state-owned Chinese Petroleum Corporation has activated the price stabilisation mechanism to cap the adjustments in retail fuel prices, and the Taiwan Power Company has frozen electricity tariffs. There is adequate leeway for the government to stabilise the important livelihood prices via fiscal measures, thanks to the sound fiscal position and low public debt burdens. 

#6 Government is in no hurry to end the Covid-zero strategy

As many countries have moved towards “living with Covid”, Taiwan also faces the pressure to end its Covid-zero strategy. But the government may not be in a hurry to do so.

First, the percentage of fully vaccinated people in Taiwan has remained lower than the 80% mark, at 60% as of early-December. As the process of mass vaccination spreads over a relatively long time of period, the risk of vaccine efficacy decline cannot be neglected. Second, global virus situation remains fluid, given the emergence of the new Omicron variant and the resurgence of infections in Europe. Third, the outlook for domestic Covid policies will also be complicated by the local elections next year.

#7 The central bank may start to normalise monetary policy

To the central bank, conditions for monetary policy normalisation should be ripe next year. Unemployment rate and wage growth are expected to return to the pre-pandemic levels by mid-2022. Meanwhile, recovery is expected to become more broad-based across exports, domestic demand, manufacturing, and services in 2H22. In addition, the US Fed is likely to start to raise rates in 2H22, which will pave the way for more EM central banks to follow. We expect Taiwan’s central bank to deliver two 12.5bps hikes next year. The benchmark discount rate is projected to rise to 1.25% in 3Q22 and 1.375% in 4Q22, up from 1.125% currently.

#8 CPTPP and trade issues will receive greater public attention

To maintain the long-term trade competitiveness, Taiwan has submitted the application to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership this year. It has also resumed the Trade and Investment Framework Agreement talks with the US. Note that the Regional Comprehensive Economic Partnership, a multilateral free trade agreement that excludes Taiwan currently, will take effect in January 2022. The pressure for Taiwan to accelerate the CPTPP entrance will likely increase next year.

Following Taiwan’s application, the CPTPP Commission will decide whether to commence the accession process and set up an accession working group. If the working group is formed, Taiwan will need to submit its offer for terms of market access within 30 days. Given that many CPTPP members are large exporters of agricultural goods, Taiwan may need to review its current policies on agricultural trade, such as the bans on food imports from Fukushima of Japan. This could cause broad debates and draw the public’s attention, against the backdrop of local elections next year. The government’s move of easing US beef and pork imports has caused public concerns this year, triggering a referendum on the imports of pork containing the growth and leanness agent ractopamine.

#9 Green investment will continue to gain momentum

Green investment is another theme for 2022 and the years beyond. According to the latest report from the United Nations Intergovernmental Panel on Climate Change, global warming will reach 1.5 degrees by 2040 even in a best-case scenario of deep cuts in greenhouse gas emissions. To address the growing climate change challenge, more than 130 countries have pledged carbon neutrality by 2050, with nearly 40 countries putting the pledges into laws or policy documents. Taiwan currently is also assessing the feasibility of setting a firm 2050 carbon neutrality target. The government has proposed to introduce a carbon pricing mechanism by 2023, in the form of a low carbon tax for big emitters during the initial phase. Meanwhile, government support on green investment has increased notably in recent years, including outright spending under the special infrastructure budget and gradual deregulations of the green financing rules.

Currently, coal and natural gas account for 46% and 36% of Taiwan’s total electricity generation respectively, while the share of nuclear is 10% and that of renewable energy is only 6%. Between 2010 and 2021, coal and nuclear declined by 4ppt and 7ppt. This was mainly offset by the increase in natural gas (12ppt) and to a less extent, renewable energy (2ppt). The official goal is to achieve 30% coal, 50% gas and 20% renewables by 2025, while phase out nuclear at the same time. This will require 30% per annum growth in renewable energy supply during the 2021-25 period, far faster than the 7% seen in the past decade. While the official target might be too ambitious, inferred from the underlying trend, we think over 10% YoY growth in renewable energy supply should be achievable during the 2021-25 period.

#10 Digitalization demand to remain strong

Digitalization is also an important long-term theme. The Covid pandemic has expedited the process of digital transformation worldwide. In Taiwan, e-commerce and digital payments both experienced rapid growth in the last couple of years. The value of online retail sales accelerated further by 26% YoY in 1Q-3Q21, after growing 19% in 2020 and 14% in 2019. The number of digital payment users increased to a record 15mn as of September, more than doubled from the 7.3mn seen in January 2020. The penetration rate of digital payments in total population also increased sharply to 64% from 31% during the same period. Going forward, growth of digitalization demand is likely to ease somewhat next year, as offline economic activities continue to normalise after the pandemic. But growth rate will likely remain well above the long-term trend levels, driven by the change in consumer behaviours and the advancement in digital infrastructures.

According to official estimate, the overall size of Taiwan’s digital economy reached a record TWD4.9tn in 2020 (25% of GDP), including TWD2.1tn of software services (11% of GDP). The government targets at boosting the size of digital economy and that of software services to TWD6.5tn and TWD2.9tn respectively by 2025 (30%, 13% of GDP). Both targets should be easily achievable, taking into account the acceleration trend after Covid. We expect the total size of Taiwan’s digital economy to reach the TWD7tn mark by 2025.