Taiwan, still counting its dead more than a week after being swept by Typhoon Morakot, may have escaped economic loss on a scale that matches what is considered the fourth-worst such event in the past 18 years. The devastation killed at least 100 people and possibly several times that when the final count comes in, and agricultural losses are severe. Yet the physical plant of the all-important technology sector emerged unscathed and may even have profited from the weather, as the regions where it is located had been suffering from drought all summer and needed the rain to refill reservoirs on which it draws for its water-intensive chipmaking and other industrial processes.
The steel and construction sectors perversely rallied as investors anticipated increased demand for reconstruction in the wake of the wide physical destruction, estimated at US$900 million. Consolidation of gains in these sectors contributed to a general pullback of stocks on Monday and Tuesday this week.
Farming losses that drive up costs of foodstuffs in the near term will fuel consumer price inflation. The tourism industry has also suffered and will continue to do so until tourist facilities are repaired at an estimated cost of $25 million.
Liang Kuo-yuan, president of the Polaris Research Institute in Taipei, estimated that the domestic economy would still take a hit of about 0.5% in the third quarter as a result of the typhoon.
There is, however, the likelihood that both the government and the Asian Development Bank will accelerate the availability of funds and resources for reconstruction. This would boost economic growth in the medium term. Against that, a cabinet reshuffle may be in the cards as a result of public perceptions of delays in undertaking emergency measures in favor of the areas afflicted by the typhoon.
A new Reuters survey reveals a consensus estimate that Taiwan's gross domestic product (GDP) fell 7.5% in the second quarter, an improvement from the first quarter’s 10.2% decline, on the back of improved export figures. That is also an improvement from the 8.5% consensus estimate for the second-quarter decline from a May survey.
Overall contraction for the current calendar year is now estimated to be 4%, slightly worse than estimates for Hong Kong and Singapore. This forecast takes account of the still atrocious but nevertheless improving trade turnover figures, as Taiwan's exports in July fell 24.4% from the same period a year earlier, this being however the smallest drop during the current year as foreign demand continues to recover.
In the immediate aftermath of the storm, investors drove the Taiwan Stock Exchange Index (TSEC) up 2.9% last week, reversing the previous week's 2.95% decline. That sentiment was short-lived, with the index down 4% to 6,790 on light turnover in the first two trading days this week.
This level is just above a short-term support from six weeks ago that it has already once respected, at the end of the first week of the current month. The TSEC could settle into a trading range between 6,850 and 7,200 before deciding when to make its next move to the upside, possibly retracing as far as 6,600 or lower before stabilizing around 7,000.
Investors in Taiwan are also watching the Chinese market, where the Shanghai Stock Exchange Composite recovered on Tuesday to almost 2,900 after falling 17% from nearly 3,500 in the past fortnight. Taiwan is a springboard for foreign investment in the mainland, and the island also has the experienced businessmen that Beijing needs.
Thus further bad news, of medium- rather than short-term significance to investors, would have been Taiwan President Ma Ying-jeou's revelation in an interview after the typhoon hit that the widely anticipated Economic Cooperation Financial Agreement with China (ECFA, in practice something like a free-trade agreement) would probably not be signed until next year.
At the same time, a report last week by the Chung-Hua Institution for Economic Research concluded that an ECFA would not benefit the island's economy overall but result only in diverting Taiwanese exports from the rest of the world to China, creating a trade dependence that would not necessarily be beneficial in the long run.
Output in Taiwan itself would decline as industries in the medical equipment and modern technology sectors would shift production to China. Those that would benefit would be high-polluting, high-external-cost industries such as in the chemicals, petrochemicals, steel and machinery sectors.
Defending Taiwan firms from Chinese investment is another problem that could prove problematic in the long run. Taiwanese public opinion, now favorable to the opening to China, will be less likely to support this policy if people do not see that concessions are being reciprocated.
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First published as Asia Times Online, 19 August 2009.