VZCZCXRO2185
RR RUEHGH
DE RUEHIN #0221/01 0300857
ZNR UUUUU ZZH
R 300857Z JAN 07
FM AIT TAIPEI
TO RUEHC/SECSTATE WASHDC 3904
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUCPDOC/USDOC WASHDC
RUEHBK/AMEMBASSY BANGKOK 3566
RUEHBJ/AMEMBASSY BEIJING 6291
RUEHUL/AMEMBASSY SEOUL 8427
RUEHGP/AMEMBASSY SINGAPORE 6795
RUEHKO/AMEMBASSY TOKYO 8443
RUEHML/AMEMBASSY MANILA 9936
RUEHJA/AMEMBASSY JAKARTA 3997
RUEHKL/AMEMBASSY KUALA LUMPUR 3673
RUEHHI/AMEMBASSY HANOI 3223
RUEHBY/AMEMBASSY CANBERRA 4441
RUEHWL/AMEMBASSY WELLINGTON 1710
RUEHHK/AMCONSUL HONG KONG 7523
RUEHGH/AMCONSUL SHANGHAI 0774
RUEHGZ/AMCONSUL GUANGZHOU 9954

UNCLAS SECTION 01 OF 04 TAIPEI 000221 
 
SIPDIS 
 
SIPDIS 
 
STATE PLEASE PASS USTR 
STATE FOR EAP/RSP/TC, EAP/EP 
USTR FOR ALTBACH and Stratford 
USDOC FOR 3132/USFCS/OIO/EAP/WZARIT 
TREASURY FOR OASIA/LMOGHTADER 
TREASURY ALSO PASS TO FEDERAL RESERVE/BOARD OF 
GOVERNORS, AND SAN FRANCISCO FRB/TERESA CURRAN 
 
E.O. 12958: N/A 
TAGS: EINV EFIN ECON PINR TW
SUBJECT:  Taiwan 2007 Economic Outlook 
 
 
SUMMARY 
------- 
 
¶1.  Consumer debt problems dampened consumption and excess 
manufacturing capacity reduced investment, but strong export growth 
still produced 4.4% real GDP growth in Taiwan in 2006.  Export 
growth slowed in Q4 as higher interest rates reduced demand in major 
export markets.  Economic growth in 2007 will depend on reviving 
domestic consumption.  The collapse of a troubled business group in 
early January 2007 will have only a minor effect.  Most observers 
anticipate about 4% GDP growth in 2007.  END SUMMARY. 
 
Performance in 2006 
------------------- 
 
¶2.  Exports accounted for 60% of Taiwan's GDP and 75% of GDP growth 
in 2006 with 13% y-o-y growth to US$224 billion.  Imports increased 
by only 11% to US$202.7 billion, resulting in a 34.6% rise in 
Taiwan's trade surplus to US$21.3 billion.  However, y-o-y export 
growth in Q4 slowed dramatically and contributed to a decline in 
real GDP growth from 4.7% in H1 and 5% in Q3 to barely above 3% in 
Q4. 
 
Weak Domestic Demand in 2006 
---------------------------- 
 
¶3.  Delinquent credit/cash card debt increased sharply in early 2006 
dampening private consumption.  Excess production capacity 
contributed to a decline in private investment in H1.  However, 
strong export growth kept unemployment below 4%.  Declining 
international petroleum prices helped reduce inflation from 2.3% in 
2005 to below one percent in 2006. 
 
Limited Economic Effect of Politics 
----------------------------------- 
 
¶4.  Political uncertainty in Taiwan continued in 2006 as the 
opposition parties launched several moves to recall the President. 
Peaceful sit-ins and protests took place in September and lasted for 
almost two months.  Taiwan's stock market defied the political 
uncertainty with higher prices and trading volume.  However, many 
observers believe the political uncertainty contributes to a 
substantial undervaluation of Taiwan companies and stock prices. 
 
Rapid Trade Growth Thanks to China 
---------------------------------- 
 
¶5.  Cross-Strait economic exchanges were a major factor behind 
Taiwan's export growth in 2006.  Many Taiwan firms with export bases 
in China increased purchases of production inputs from Taiwan. 
Exports to Greater China (including Hong Kong) reached 40% of 
Taiwan's total exports in 2006.  Greater China's sales to Taiwan 
reached 13% of Taiwan's total imports.  Taiwan's approved investment 
in China grew from less than 50% of total approved outbound 
investment prior to 2004 to 71% in 2005 and 67% in the first 11 
months of 2006. 
 
Widening Income Disparity 
------------------------- 
 
¶6.  Globalization has contributed to a growing income disparity in 
Taiwan over the past three decades.  Local economists note that a 
NT$100 billion investment in a 12-inch wafer fab project will 
created a few thousand jobs for highly-skilled engineers and 
technicians, but only a few hundred jobs for less-skilled workers. 
The income of the richest 20% households was 4.3 times the income of 
the poorest 20% in the 1970s.  The ratio increased steadily to 6.4:1 
in 2001.  Social welfare programs adopted in the 2000s have kept the 
 
TAIPEI 00000221  002 OF 004 
 
 
income gap from broadening.  Taiwan launched an ambitious program in 
2006 that aims to double per capita income to US$30,000 and reduce 
the income ratio to 6:1 by 2015. 
 
Domestic Demand to Drive 2007 Growth 
------------------------------------ 
 
¶7.  Economic growth relied more on domestic demand in Q4 of 2006. 
Imports of capital goods, an indicator of domestic investment, 
showed y-o-y growth of 8% in Q3 and 15% in Q4.  Consumer goods 
imports increased from a monthly average of US$1.27 billion in H1 to 
US$1.30 billion in H2.  The Directorate General of Budget, 
Accounting and Statistics (DGBAS) anticipates private consumption 
will accelerate from 1.5% growth in 2006 to 3.0% in 2007 while 
investment growth will increase from 0.15% in 2006 to 1.9% in 2007. 
 
Planning Agency Estimates 
------------------------- 
 
¶8.  In December 2006, the Council for Economic Planning and 
Development (CEPD) estimated that Taiwan's 2007 GDP growth will rise 
to 4.6% from 4.4% in 2006 and that that expansion of domestic demand 
will contribute 65% of the island's 2007 real GDP growth, up from 
only 25% in 2006.  CEPD projects growth of 9-10% in China that will 
offset the adverse effects of economic growth slowdown in the United 
States on exports.  Major indicators forecast by CEPD with estimated 
2006 figures in parentheses: 
--Per capita GDP (US$): 16,886 (15,573); 
--Inflation rate (%): below 2% (0.68%); 
--Unemployment rate (%): 3.9% (3.9%); 
--Private consumption growth (%): 3.2% (1.5%); 
--Private investment growth (%): 4.5% (0.15%). 
 
Exports Could Be Better Than Expected 
------------------------------------- 
 
¶9.  Academia Sinica also predicts higher Taiwan economic growth in 
2007 for two reasons:  First, declining international petroleum 
prices will lower Taiwan's import costs and stimulate world demand. 
Second, the U.S. real estate sector has had a soft landing, keeping 
U.S. import demand strong.  In addition, new products such as 
Windows Vista, Office 2007, iPhone, and a new iPod series will bring 
Taiwan electronic firms large export orders. 
 
Investment Growth More Than Expected 
------------------------------------ 
 
¶10.  In early 2006, PowerChip planned a joint venture with Elpida 
Memory of Japan to build 12-inch wafer fabs in China, but the 
investment never materialized.  Instead, these two companies decided 
to invest in Taiwan.  DGBAS estimates the investment at NT$450 
billion (US$13.8 billion).  The unanticipated project will raise 
estimates of private investment growth and real GDP growth in 2007 
in future economic forecasts. 
 
Excess Liquidity Facilitates Foreign Acquisitions 
--------------------------------------------- ---- 
 
¶11.  To address excess liquidity, Taiwan's Central Bank began in 
2006 to permit foreign investors to use credit obtained from local 
banks to finance direct investment projects.  Carlyle Group, a U.S. 
private equity fund, announced in late November 2006 plans to use 
local funds to acquire Advanced Semiconductor Engineering (ASE), an 
M&A likely to materialize in early 2007. 
 
Changing Attitudes Towards Investment in China 
--------------------------------------------- - 
 
 
TAIPEI 00000221  003 OF 004 
 
 
¶12.  In a striking demonstration of changing views, Taiwan 
independence-minded economists previously strongly opposed to Taiwan 
investment in China have recently told AIT/T that without improved 
cross-Strait ties, Taiwan will lose its competitiveness.  These same 
economists recently told AIT/T that improved cross-Strait ties could 
reduce business costs, increase efficiency, and ultimately lead to 
an increase in Taiwan's 2007 real GDP growth by up to a full 
percentage point, boosting GDP growth to nearly 5%. 
 
¶13.  Taiwan's Ministry of Economic Affairs (MOEA) in December 2006 
authorized transfer of 0.18-micron semiconductor technologies to 
China, largely because the 0.18 technologies are no longer 
competitive with the more sophisticated chip production in Taiwan, 
and must be relocated to China and other less advanced chip 
production areas in order to maximize profits for the Taiwan 
companies that own them. 
 
Taiwan's Changing Economy 
------------------------- 
 
¶14.  Taiwan's economy has changed radically over the past two 
decades.  The industrial sector's contribution to GDP declined from 
45% in 1986 to 25% in 2005.  Agriculture's share fell from 5.4% to 
1.7%, while the service sector's share increased from 50% to 73%. 
DGBAS economists told AIT/T that as a developed economy Taiwan's 
real GDP growth was unlikely to exceed 5%. 
 
Private Consumption to Grow Faster 
---------------------------------- 
 
¶15.  Public consumption will remain sluggish in 2007 under the 
opposition-controlled legislature.  However, private consumption, 
which accounts for 61.5% of GDP, will likely grow faster in 2007 
than in 2006.  Delinquent card debt problems have been mostly 
resolved.  The recent large increases in real estate and stock 
prices will create a "wealth effect" which will stimulate spending 
in 2007.  According to Academia Sinica, prices in Taiwan's real 
estate market have been rising since 2003.  Taiwan's share price 
index increased 25% in H2 of 2006.   Legislative elections in 
December 2007 will also stimulate spending during 2007.  Chinese 
tourism to Taiwan will be another significant contributor to 
Taiwan's economy if it materializes in 2007, according to Academia 
Sinica. 
 
Business Scandal and Collapse 
----------------------------- 
 
¶16.  Taiwan took over three problem banks in late December 2006 and 
early January 2007 when China Rebar Pacific Group (CRPG) collapsed 
following requests for reorganization of two affiliated firms.  The 
business scandals have caused two senior financial regulators to 
step down, and stock price fluctuations.  However, the aggregate 
debt of CRPG is less than one percent of Taiwan's banking system, 
and the effect on the economy is expected to be minor. 
 
Forecast 2007 Growth 
-------------------- 
 
¶17.  Latest 2007 economic growth rates forecast by selected Taiwan 
and foreign observers follow: 
Foreign: 
--Goldman Sachs: 4.5%; 
--Credit Suisse Investment Consulting: 4.2%; 
--Merrill Lynch: 4.0%; 
--Nomura Securities: 3.7%; 
--UBS Securities Investment: 3.5%; 
--Morgan Stanley: 3.5% 
--Lehman Brothers: 3.5%; 
 
TAIPEI 00000221  004 OF 004 
 
 
--Deutsche Securities: 3.5%; 
--Mastercard: 1.3%. 
Taiwan: 
--DGBAS: 4.14%; 
--Academia Sinica: 4.21%; 
--Chunghua Institution for Economic Research (CIER): 4.13%; 
--Taiwan Institute of Economic Research (TIER): 4.11%; 
--Taiwan Research Institute (TRI): 4.08%. 
YOUNG