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### Viewing cable 04TAIPEI3235, Taiwan Economy Slows in Third Quarter

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
04TAIPEI3235 | 2004-10-18 08:45 | 2011-08-23 00:00 | UNCLASSIFIED | American Institute Taiwan, Taipei

`

    This record is a partial extract of the original cable. The full text of the original cable is not available.

` `

    UNCLAS SECTION 01 OF 03 TAIPEI 003235

    SIPDIS

    STATE PLEASE PASS AIT/W AND USTR

    STATE FOR EAP/RSP/TC, EAP/EP AND EB/IFD/OIA

    USTR FOR SCOTT KI

    TREASURY FOR OASIA/ZELIKOW AND WISNER

    TREASURY PLEASE PASS TO OCC/AMCMAHON

    TREASURY ALSO PASS TO FEDERAL RESERVE/BOARD OF
    GOVERNORS, AND SAN FRANCISCO FRB/TERESA CURRAN

    E.O. 12958: N/A
    TAGS: EINV EFIN ECON TW
    SUBJECT: Taiwan Economy Slows in Third Quarter

    SUMMARY
    -------

    ¶1.  Taiwan's export and industrial production growth slowed
    in the third quarter, but economists still expect real GDP
    growth of nearly 6 percent this year, and above 4.5 percent
    next year.  Overall, the economy should be a positive factor
    for the ruling party in the December legislative elections.
    SUMMARY.

    GDP Growth Mid-Range Among Asian Tigers
    ---------------------------------------

    ¶2.  In spite of high oil prices (which economic planning
    officials think could cut GDP growth by 0.2 percent) and
    efforts to cool China's economic growth (China is Taiwan's
    largest trade partner), economists expect Taiwan to have
    real GDP growth of nearly 6 percent this year.  They see
    2005 growth above 4.5 percent with unemployment remaining
    below five percent.  Taiwan's GDP rose 7.2 percent in the
    first half of this year, behind Singapore's 10 percent and
    Hong Kong's 9.6 percent, but above the 5.4 percent recorded
    in South Korea in the first half of this year.  The IMF in
    September predicted average GDP growth for Asian NIEs of 5.5
    percent for 2004 and 4.0 percent for 2005.

    Trade Growth Still Rapid
    ------------------------

    ¶3.  Taiwan's export growth slowed in July and August to an
    annual rate of 23 percent, down from nearly 30 percent in
    April to June.  Meanwhile, import growth slipped from 40
    percent to 33 percent.  Growing inventories of unsold goods
    contributed to a delay in projects intended to increase
    production.  This slightly slowed the growth in imports of
    capital goods from 54 percent in the second quarter to a
    still rapid 32 percent in July-August 2004.

    Slower Industrial Growth - Tech Sector Impact
    ---------------------------------------------

    ¶4.  The slowdown in exports contributed to high inventories
    in both finished products and intermediate goods.
    Consequently, manufacturing growth slowed from 15 percent in
    the first half to 10 percent in July-August.  Growth rates
    for capital- and technology-intensive industries slipped
    from 19 percent in the first half to 13 percent in July-
    August.  According to Central Bank of China (CBC) Economic
    Research Department Deputy Director Yeh Jong-chao, the
    slowdown is particularly significant for semiconductor and
    flat panel screen manufacturers.  Citigroup Equity Research
    has lowered its 2004 and 2005 earning estimates for flat
    panel screen makers by more than 20 percent because of
    potential oversupply.  However, iron, steel and
    petrochemicals have continued rapid growth due to strong
    demand in both local and foreign markets.  China Steel, for
    example, expects strong demand for its products to continue
    into next year.

    Investment: Weak Domestically, Strong Overseas
    --------------------------------------------- -

    ¶5.  Inbound direct investment in July-August 2004 declined
    four percent from a year ago, down sharply from 28 percent
    growth in the first quarter and 56 percent growth in the
    second quarter.  However, approved out-bound direct
    investment in July-August 2004 grew nearly 30 percent year-
    on-year.  Approved investment to China was up 39 percent.
    Overseas investment to places other than China grew 2.6
    percent in the second quarter, and ten percent in July-
    August 2004.

    Portfolio Investment Down
    -------------------------

    ¶6.  Partly in response to unsettling political and business
    events, foreign portfolio investors withdrew US$3.7 billion
    from Taiwan in the second quarter.  Net inward remittances
    in July-August 2004 were only US$200 million, far less than
    the net inflow of US$7.8 billion in the same period in 2003.
    The unsettling news included the large demonstrations after
    the March presidential election, and financial
    irregularities in listed companies uncovered by Taiwan Stock
    Exchange examiners.  As a result of these incidents, Taiwan
    business firms' issuance of global depository receipts
    (GDRs) dropped to only half a billion of US dollars in July-
    August 2004.

    Foreign Exchange Reserves Up Modestly
    -------------------------------------

    ¶7.  With large capital outflows and fewer GDRs, Taiwan's
    accumulation of foreign exchange (forex) reserves slowed to
    US$3.6 billion in the second quarter and US$1.5 billion in
    July-August 2004, down from US$16 billion in the last
    quarter of 2003 and US$20 billion in the first quarter of
    ¶2004.  Nevertheless, Taiwan's forex reserves as of August
    2004 amounted to US$231.6 billion, three times Taiwan's
    outstanding external debt of US$75 billion (as of March
    2004).

    Oil and Inflation Prompt CBC to Raise Interest Rates
    --------------------------------------------- -------

    ¶8.  Rising international oil prices pushed Taiwan's
    inflation rate to a six-year high of 3.3 percent in July and
    2.5 percent in August of this year.  This prompted CBC to
    raise interest rates for CBC-issued negotiable certificates
    of deposit from 1.075 percent to 1.085 percent, and the
    interest rate for overnight inter-bank call loans to 1.1
    percent in late September.  On October 1, CBC raised the
    discount rate and its interest rates for accommodations by
    0.25 percentage points.

    Implications for Taiwan's Economy
    ---------------------------------

    ¶9.  The increase in prices and interest rates will slow
    Taiwan's economic growth by blunting the export sector's
    competitive edge, dampening the real estate market, and
    reducing private consumption.  The extent of the impact will
    depend on how long these trends last, but Taiwan's Council
    for Economic Panning and Development (CEPD) has already cut
    2004 growth estimates by 0.2 percent.  Statistics Bureau
    officials believe seasonal factors are responsible for the
    unemployment rate rising to 4.7 percent in August.  This is
    still lower than the 5.2 percent unemployment of a year ago.

    ¶10.  According to Peng Shu-ling of the Chunghua Institution
    for Economic Research, Taiwan's economy is still performing
    well.  August export orders grew 25.5 percent.  Strong
    performance in the iron, steel, and petrochemical industries
    mitigates the downturn of the semiconductor and liquid
    crystal display manufacturers.  A CEPD survey showed the
    percentage of business firms expecting better performance in
    three months increased from 12 percent in July to 18 percent
    in August.  These generally favorable economic trends and
    optimistic expectations bode well for the ruling DPP party
    in the year-end legislative elections.

    (Please see the website "Taipei.state.gov/ait_s/econ/econ-
    web" for following tables:
    Appended Table 1 Major Economic Indicators for Jan-Aug 2004
    Appended Table 2 Economic Indicator Estimates for 2004
    Appended Table 3 Economic Indicator Forecasts for 2005
    Appended Table 4 Major Economic Indicator for 2001, 2002 &
    2003.)
    PAAL

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