In 1998, as the impact of Asian financial turmoil evolved, shrinking external demand started to hurt Chinese Taipei’s exports. With domestic demand expansion also slowing down, the GDP growth rate in 1998 slipped to 4.8%, its lowest level since 1983. In mid-year, the government launched a number of policies aimed at increasing public investment as well as stimulating private investment. The "Economic Enhancement Plan" was initiated in February 1999, a mid- and long-term program tailored for reform in the financial system, corporate governance, land and housing measures, and labor related laws.

Real GDP grew by 4.8% in 1998, well below the targeted 6.7%. With exports in US dollars dropping by 9.4% in the year and domestic inventory investment put largely on hold, the real GDP growth rate decreased quarter by quarter to 3.7% in the fourth quarter of 1998 (1998/Q4) from a robust 7.1% in fourth quarter of 1997. As a result of 17% New Taiwan (NT) dollar depreciation in the year, per capita GNP in US dollars fell back to its 1995 level.

On the production side, industrial growth faltered to 3.7% in 1998, dragged down mainly by the sluggish manufacturing sector, which dropped from 5.1% in the first quarter to 1.9% in fourth quarter of 1998, the lowest rate since the third quarter of 1983.

A modest recovery of foreign demand is expected, as major Asian trading partners have been engaged in restructuring and the US economy has undergone adjustment for a soft landing. With the still rising non-performing loans and some concerns regarding the troubled listed companies, the economy in the first half of 1999 is expected to grow moderately. Yet signs for a bottoming out can be identified. Helped by an upturn in trade generated by a recovery in Asian economies, and the boost to domestic demand from the BOT projects and the replacement of information equipment for Y2K compliance, real GDP is projected to grow by 5.1% in 1999.

The consumer price index (CPI) rose by 1.7% and the wholesale price index (WPI) rose only 0.6% in 1998. Low international raw material prices, lower tariff rates, and stable service prices, including moderate growth in wages, have helped create a low inflation environment.

With stable world oil prices, the growing stronger NT dollar, and further tariff cuts for 1999 as a whole, the WPI is forecasted to decrease by 4.6%, and CPI to increase by 1.6%, with consideration of the lower pace of wage and rent increases and lower telecom fees.

The labor force was 9.3 million, with an overall participation rate of 58.0%. Total employment increased by 1.2% compared with the previous year, with the quarterly rate dropping from 1.8% in first quarter of 1998 to 0.5% in fourth quarter of 1998 under the crisis-hit economic climate. With respect to the employment structure, the service sector accounted for a record high of 53.2% of the total working population, which is one percentage point higher than that of 1997.

A historic decrease in average monthly employee earnings of the manufacturing sector occurred in fourth quarter of 1998 when profit margins declined. The unemployment rate remained at 2.7% in 1998, the highest in a decade. In January, the government launched the unemployment insurance program.

Trade contracted in 1998, as did the trade surplus. Total external trade as a proportion of GDP fell to 80% in 1998, compared with 81% in 1997. In 1998, the value of exports and that of imports amounted to US$110,178 million and US$99,647 million, respectively, reflecting decreases of 9.5% and 7.2% over the previous year. The shrinkage in exports was mainly due to the contraction of the Asian market. The decrease in imports was attributable to the slowdown in exports and domestic inventory investment.

In line with the decline in the trade surplus from US$14,365 million in 1997 to US$10,531 million in 1998, the current account surplus decreased from US$7,688 million to US$3,728 million over the same period. For many years, the services account has been in deficit. This deficit declined slightly from US$7,736 million in 1997 to US$7,393 million in 1998, resulting from reducing transportation and travel expenditure. The income account surplus narrowed from US$2,391 million in 1997 to US$1,454 million in 1998, the result of contracting investment profits on the central bank’s foreign reserves and the increase in outward remittances of equity earnings by foreign investors. Net transfer payments decreased from US$1,332 million in 1997 to US$864 million in 1998, owing to the decrease in outward remittances made to support relatives abroad.

Chinese Taipei has been a capital exporting economy for many years, and thus its financial account, equivalent to the capital account in the old BOP version, has consistently recorded net capital outflows. However, this trend was reversed in 1998. The financial account registered a net inflow of US$1,789 million, from a net outflow of US$8,380 million in the previous year. This was mainly due to a decrease in investment abroad and an increase in the inward remittances of export proceeds previously retained overseas.

Gross external public debt, defined as debt with an original or extended maturity of more than one year repayable to external creditors by the public sector, reached a peak of US$6,290 million at the end of 1983. Since then, it continued to decline and had decreased to US$46.4 million by the end of 1998 from US$74.4 million at the end of 1997.

Under the policy of promoting liberalization and globalization, Chinese Taipei is constantly striving to improve its investment environment for all sources.

Inward FDI amounted to US$3.3 billion in 1998, the second highest ever recorded, mainly from British possessions in Central America (this refers primarily to the British Virgin Islands) with 21.4%, the United States with 19.1% and Japan with 15.8%. The principal recipients of the investment were the electronic and electrical appliances industry; and the banking and insurance sector, which together accounted for 56.6% of the total.

Approved outward FDI amounted to US$3.3 billion in 1998. British possessions in Central America with a 55.8% share and the United States with 18.2% were the major recipients of capital from Chinese Taipei. The lion’s share of the outward FDI went into the banking and insurance sector; and the electronic and electrical appliances industry; these two sectors accounted for 69.9% of the total.

Throughout the late 1980s and into the 1990s, a floating exchange rate regime has been in operation. Only on a few occasions, where strong irrational expectations were in place, has the central bank intervened the market.

In 1998, the sharp decline of the Japanese yen, the outbreak of the Russian financial crisis in July, and the decrease in Chinese Taipei’s exports caused expectations of NT dollar depreciation. The NT$/US$ exchange rate reached a low of 34.896 on 10 June.

Beginning in October 1998, expectations of NT dollar depreciation reversed under the background of sharp appreciation of the Japanese yen against the US dollar, the stabilizing Asian financial markets, the effect of the ban on non-delivery forward transactions, and continuing inflows of foreign capital into the economy. The NT dollar appreciated sharply to end the year at 32.216. If a comparison is made based on the trade weighted average exchange rate involving 15 major trading partners, the NT dollar depreciated by 10.9% in 1998.

Central government expenditure grew from NT$1,151.8 billion in 1997 to NT$1,225.3 billion in 1998, an increase of 6.4%. Meanwhile, central government revenue increased from NT$996.8 billion in 1997 to NT$1,025.2 billion in 1998, an increase of only 2.9%. To bridge the gap between revenue and expenditure, the government had to deplete surpluses from previous years and to issue new bonds.

In 1998, the most significant fiscal policy adopted was the implementation of the integrated income tax system, a revolutionary tax reform aiming to solve the double taxation of dividend income. It has helped to create a more favorable investment environment

Based on 1997 figures, NT$31.5 billion tax reduction will be created as a result of the introduction of the new system, generating a positive effect in boosting domestic demand and contributing to economic growth. Computed using the 1997 GDP scale, the measure will push up the growth rate by between 0.25 to 0.35 percentage points in the first year after implementation, while in a five to ten year period the boost will be between 1.5 to 2 percentage points as a result of the multiplier effect.

To cope with the slackening economy and the bearish stock and real estate markets, the central bank has adopted a moderately easy monetary policy since August 1998. During the period August 1998 through February 1999, the central bank lowered the rediscount rate four times, from 5.25% to 4.50%, and cut reserve ratios on three occasions. In addition, the central bank appropriated NT$240 billion from postal savings re-deposits to assist business and first-time home buyers. In 1998, M2 grew at an annual rate of 8.8%, which was within the 6% to 12% target range set for the year. The average overnight interbank call-loan rate in 1998 was 6.6%, lower than the 6.9% of the previous year.

Real interest rates, computed by subtracting CPI inflation rates from one-year time deposit rates, have been on a downward trend since 1990. The average real interest rate quoted by five leading banks in February 1999 was 3.47%, far below the 5.13% recorded at the end of 1997. As for nominal interest rates, both long-term and short-term rates have fallen considerably since February 1998.

The steady recovery of the Southeast Asian economies in coming years will help Chinese Taipei shake off its sluggish exports. Meanwhile, the efforts being made to expand domestic demand will also be take effect and stimulate economic growth.

In 1999, Chinese Taipei’s government projections are as follows:

• Economic growth: 5.1%.
• Annual increase in consumer prices: 1.1%.
• Export and import of goods and services: 6.4% and 2.9%, respectively.

For the period 2000-2002, they are as follows:

• Average economic growth rate: between 5.3% and 5.8%.
• Average annual increase for consumer prices: lower than 3.0%.

• Relaxation of the limit of single foreign investor’s share in a listed company, from the previous 15% to 50%, and the total foreign investors’ share in one listed company from 30% to 50%.
• Revision of the Cable TV Law, aiming to break the monopoly market structure by local business groups and also raise the foreign ownership limit from 20% to 50%.
• Revision of the Shipping Industries Law to lift the ban on foreign nationals or juridical persons operating a shipping agency, marine freight forwarding, and other related business in Chinese Taipei.
• Some prohibited items in the Negative List for Investment by Overseas and Foreign Nationals will be recategorized as restricted items.

• Implementation of an integrated income tax system to eliminate double taxation.
• Revision of the Law Governing the Allocation of Government Revenue and Expenditures to increase the proportion of public finance available for local governments.
• Implementation of the plan to open the monopolized tobacco and alcohol market.

• Amendment of the Banking Law to allow new products, and amendment of the Deposit Insurance Act to streamline the system.
• The application of credit rating requirements to the issuing company before unsecured corporate bonds can be offered.
• Adoption of capital adequacy requirements for securities firms; and streamlining the timeframe and quality of disclosures of listed companies.

Notes:

(1) Fiscal year

(2) Short-term Interest rates are 31-90 days CP rates in the secondary market.

Table 2. Forecasting Summary (% change from previous year)

Note: Official according to DGBAS latest predicted value (may 20, 1999). The LINK forecast is from the World Outlook (Proyect LINK, May, 1999); growth projection for 1998 is for GNP. The IMF forecast is from the World Economic Outlook (IMF, April 1999). The ADB forecast is from the Asian Development Outlook (1999). The OECD forecast is from the OECD Economic Outlook (OECD, December 1998).