Taiwan fears being marginalised

Emerging Markets ADB editions, May 2 2013

One of Taiwan’s most prominent investment bankers has warned that the island state “will be marginalised” if significant structural changes are not made to its economy.

CY Huang, who is chairman of the Taiwan Mergers & Acquisitions and Private Equity Council, CEO of FCC Partners, and chief advisor and former CEO for the leading domestic investment bank Polaris Financial Group, made his remarks to Emerging Markets following a sharp deterioration in the country’s financial metrics. This week Taiwan said GDP grew just 1.5% year on year in the first quarter, dramatically down on analyst expectations of around 3.1% growth.

“The key to it is that the economy needs a total transformation,” Mr Huang said. He identified four key problems: an over-reliance of the export sector on IT and on the US; a failure to expand into high-growth southeast Asian emerging markets; a failure to develop sufficiently into the service industry in mainland China; and policies that have reduced stock market volumes. These problems, in turn, have created another: poor domestic consumption numbers. “Last year people were not making much money, and their wallets have shrunk as a result. They don’t have that much money to spend,” he said.

Fixing these problems required a dramatic shift in leadership, he said. “We need a strong leader. We need to have someone like Abe in Japan. There is a lack of a clear strategic direction.”

Mr Huang called for a significant loosening of regulation around investment, in particular from mainland China. “Taiwan is still relatively closed, and we are not opening up fast enough,” he said. “Taiwan has been relatively hostile towards Chinese investment, and very negative towards private equity, for several years now. The government is talking about loosening regulation, but it is slow and execution is weak.”

The GDP number was a shock to investors, with Taiwan’s growth rate now resembling that of a developed world nation (the latest US growth number was 2.5%, for example). Nomura analyst Rob Subbaraman also highlighted the impact of weak exports on domestic consumption, while ANZ’s Raymond Yeung blamed “a sluggish global recovery and the decline of global demand.”

“We had anticipated this GDP report would be a disappointment, but the weakness has even surpassed our low expectation,” added Christiaan Tuntono at Credit Suisse, who revised his full-year GDP forecast down from 3.4% to 2.7% on the news.

The opening of cross-straits business between Taiwan and the mainland was supposed to galvanise the Taiwanese economy, but many have been disappointed with the development of trade between the two, and some feel that an over-reliance on the PRC has resulted. “We are heavily concentrated on China,” Huang said. “We have not extended enough into high-growth areas like Indonesia and Thailand.” He noted that many Taiwanese manufacturing companies in China are returning home to Taiwan, “but here they are having a hard time: they cannot find land, and worse, they cannot find labour.”

Fundamentally, he called for a change in Taiwan’s presentation to the world. “The government needs to do a better PR job,” he said. “There is no excitement here. Geographically, we are a bright spot: we are friendly towards the US, China and Japan, and we can benefit as we serve as a bridge between them.

“But we screwed up. We didn’t have a clear vision. The solution is to open up and to execute policies instead of just talking about them, otherwise we will gradually be marginalised.”