Hot spots: Taiwan.(international)

The economy virtually fell off a cliff at the turn of the year, and its prospects are now much grimmer than the pundits had anticipated only a short while ago. The global credit and economic crisis has been pummeling exports across Asia, and Taiwan has been one of the hardest-hit countries in this respect. Export orders received by Taiwanese companies in January were down by a stunning 41.67% from a year earlier, following a 33% plunge in December. Orders from China and Hong Kong, which are the two most important markets for Taiwan, nosedived by 54.71% from a year earlier, after they had dropped 47.13% in December.

Many Taiwanese electronics makers send parts and components to the PRC, which are then re-exported as finished products. The weak performance of Chinese exports, therefore, has a direct impact on Taiwanese producers. The January numbers may have been somewhat distorted by the fact that the Lunar New Year holiday this time fell into January, whereas in 2008 it took place in February, but this cannot change the truth that both orders and output were far worse than expected.

The government now says that real gross domestic product will contract by 2.97% this year (as recently as last November, the authorities had projected 2.12% growth). Private expectations are pegged much lower, with bank forecasts that now range from a GDP fall by 5.2% to one by 6.5%. The Central Bank has been cutting interest rates aggressively in an effort to counteract the trend. Most recently, it lowered its benchmark discount rate on 10-day loans to banks to 1.25% from 1.50% in the seventh reduction since late December.

More than likely, the bellwether will be trimmed further, perhaps to as low as 0.50%, but this will have only a minor effect on business activity until the prospects for exports brighten.

Of somewhat greater help may be the weakening of the Taiwan dollar in the exchange markets, since capital flows in the near term will most likely remain adverse and the currency is apt to lose more ground. Also, President Ma Ying-jeou's administration plans to apply a fiscal stimulus of TWD 858.5 billion (about USD 25 billion) over four years, which is roughly equivalent to 6% of GDE The program envisions spending on infrastructure projects and consumer grants, as well as tax cuts. The government handed out TWD 82.9 billion of "shopping vouchers" in January, which the Statistics Bureau insists added 0.66 percentage points to GDP (a rather implausible result).

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The fact remains that Taiwan has entered its first full-fledged recession since the dot-com bubble burst back in 2001, and there is not much hope that, in the short run, demand for the output of such companies as Taiwan Semiconductor Manufacturing Co. (the maker of computer chips) or Quanta Computer Inc. (laptops) will pick up. Central Bank Governor Perng Fai-nan and his board of directors have been making it clear that their institution will pump money into the economy if Taiwan's lenders fail to provide more credit, but expansionary fiscal policies coupled with a loose monetary policy cannot, by themselves, power an export-oriented economy.