Alicia García Herrero (Natixis) | With high inflation globally and supply chain disruptions in Mainland China, Taiwan will face more headwinds in growth. Even though the economic fundamentals are still supportive, the worsened environment can multiply risks in capital outflows and corporate profits.
Above all, the good news is exports and investment remain the strong pillars. With buoying global demand, Taiwan’s export grew 24% YoY in Q1 2022. There was also no sign of a sharp slowdown in export orders in March 2022, the period where the lockdowns began in Shanghai. Firms will mitigate such negative impact through production locally and in ASEAN, and the drag on the domestic economy is somewhat shielded. Foreign direct investment also grew 124% YoY, reflecting the popularity of manufacturing and wind farms from Europe and Japan.
The Omicron wave is not good news for consumption, but the government has announced its endemic path and it is unlikely to see big mobility restrictions. Taiwan will reopen its economy at its own pace to avoid another shock on household spending. After all, even though manufacturing forms 37% of the economy, the services sector makes up 60% of jobs. While the expected mobility relaxation should benefit retail and aviation, it hinges on whether the casualties from the Omicron wave are mild enough and would not deter the government plan.
Therefore, the risks mainly lie in corporate profits and capital outflows. Mainland China’s lockdowns pose substantial risks to supply chains in the affected cities. The case of Shanghai is the perfect example of being a hub for auto-parts and electronics of Taiwanese firms. As if this were not enough, Taiwan’s local omicron wave also creates hurdles for firms to cope with higher import costs because of the war in Ukraine. Industrial profits can suffer from the risks of production halts and delays in logistics. ICT will be the most affected for sectoral impact, with 90% of export orders made overseas, mainly in Mainland China.
With the risk-off sentiment, Taiwan saw net capital outflows of $9.4 billion in March 2022, close to the peak of $12.1 billion at the initial stage of Covid-19 in early 2020. Although direct investment and repatriation of funds from overseas were helpful, there were still overall net capital outflows of $6 billion. The TWD lost 5.8% YTD against the USD, the second-worst performer in Asia after the JPY. With higher import prices, we revise our CPI forecast from 2.2% to 2.6% in 2022. With the more hawkish FED, the CBC will hike the rate by up to 50 bps to curb inflation and home prices in the rest of 2022.
All in all, Taiwan’s growth should moderate to 3.4% YoY in Q1 2022, and we have lowered our forecast from 4.6% to 4.2% for 2022. Under an optimistic scenario, Taiwan will see a limited impact if it moves toward the de-facto “living with virus” model and lockdowns in Mainland China end soon. Still, the higher-than-average economic outlook may not buffer the growing risks in corporate profits and portfolio outflows.