Taiwan enjoyed a rapid reversal of fortunes in 2009, with the economy quickly reversing its financialcrisis-induced nosedive. In 2010, we see real economic growth coming in at a relatively strong4.7%, a marked improvement over the estimated 2.8% contraction in 2009. However, we cautionthat although the increasing economic integration with China provides opportunities for growth,it also leaves the Taiwanese economy highly exposed to a downturn on the mainland ' whichwe currently forecast for 2011. Relations with China also continue to dominate much of Taiwan'spolitical agenda. Indeed, the recent arms sale to Taiwan by the US highlightes how contentiousan issue the island's sovereignty is to Beijing. We believe that China's long-term strategy for theisland will be one of rapprochement, but that the political status quo is set to prevail.T he US government's decision to proceed with the sale of military hardware to Taiwan provokedan angry response from mainland China. We note that while Beijing went out of its way to showits displeasure at the news, Taiwan was spared this vitriol. We believe that the lack of mainlandcriticism of Taiwan reflects Beijing's desire for rapprochement with the island. Over the long term,China will undoubtedly shape much of Taiwan's political outlook. While the risk of a sudden deteriorationin relations is ever present, we believe that Taiwan will remain largely stable and retainits current ambiguous legal status for the next decade.T aiwan's economy continued to enjoy a stream of positive economic data readings through the laterstages of 2009, demonstrating the rapid recovery made last year. We forecast that the Taiwaneseeconomy will post a respectable 4.7% real GDP growth figure in 2010, but that a dependence onChina's stimuli-fuelled recovery will result in a growth slowdown in 2011. Taiwanese monetary policyis likely to remain supportive through 2010, as inflationary pressures have not yet materialised.The Taiwanese economy will also be, in our view, supported by firmer external demand in 2010,although we believe that a Chinese slowdown will see export growth slip in 2011. Strong exportperformance in 2010 will result in an 8.4% of GDP current account surplus, putting appreciativepressure on the Taiwan dollar. We expect that the Taiwanese authorities will want to support thedomestic economy by limiting TWD appreciation via active foreign exchange intervention, continuingtheir foreign exchange reserves build-up.T aiwan continues to enjoy a strong business environment, placing it in 27th place (out of 167countries) in our business environment ratings. This robust rating is aided by strong scores in the'market orientation' and 'infrastructure' sub-categories. Going forward, we expect a potential freetrade agreement with China to provide a significant boost to Taiwan's business environment butdisappointingly, such a development with the US currently looks unlikely. In January, legislatorsfrom both ruling and opposition parties in Taiwan enacted an amendment to food safety laws,reinstating a ban on the import of beef on the bone from the US. We believe that this has the potentialto scupper any future free trade negotiations with the US, especially given the substantialprotectionist sentiment in the US Congress.

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Taiwan Business Forecast Report Q2 2010
Published on March 2010
Report Summary
Taiwan enjoyed a rapid reversal of fortunes in 2009, with the economy quickly reversing its financial
crisis-induced nosedive. In 2010, we see real economic growth coming in at a relatively strong
4.7%, a marked improvement over the estimated 2.8% contraction in 2009. However, we caution
that although the increasing economic integration with China provides opportunities for growth,
it also leaves the Taiwanese economy highly exposed to a downturn on the mainland ' which
we currently forecast for 2011. Relations with China also continue to dominate much of Taiwan's
political agenda. Indeed, the recent arms sale to Taiwan by the US highlightes how contentious
an issue the island's sovereignty is to Beijing. We believe that China's long-term strategy for the
island will be one of rapprochement, but that the political status quo is set to prevail.
T he US government's decision to proceed with the sale of military hardware to Taiwan provoked
an angry response from mainland China. We note that while Beijing went out of its way to show
its displeasure at the news, Taiwan was spared this vitriol. We believe that the lack of mainland
criticism of Taiwan reflects Beijing's desire for rapprochement with the island. Over the long term,
China will undoubtedly shape much of Taiwan's political outlook. While the risk of a sudden deterioration
in relations is ever present, we believe that Taiwan will remain largely stable and retain
its current ambiguous legal status for the next decade.
T aiwan's economy continued to enjoy a stream of positive economic data readings through the later
stages of 2009, demonstrating the rapid recovery made last year. We forecast that the Taiwanese
economy will post a respectable 4.7% real GDP growth figure in 2010, but that a dependence on
China's stimuli-fuelled recovery will result in a growth slowdown in 2011. Taiwanese monetary policy
is likely to remain supportive through 2010, as inflationary pressures have not yet materialised.
The Taiwanese economy will also be, in our view, supported by firmer external demand in 2010,
although we believe that a Chinese slowdown will see export growth slip in 2011. Strong export
performance in 2010 will result in an 8.4% of GDP current account surplus, putting appreciative
pressure on the Taiwan dollar. We expect that the Taiwanese authorities will want to support the
domestic economy by limiting TWD appreciation via active foreign exchange intervention, continuing
their foreign exchange reserves build-up.
T aiwan continues to enjoy a strong business environment, placing it in 27th place (out of 167
countries) in our business environment ratings. This robust rating is aided by strong scores in the
'market orientation' and 'infrastructure' sub-categories. Going forward, we expect a potential free
trade agreement with China to provide a significant boost to Taiwan's business environment but
disappointingly, such a development with the US currently looks unlikely. In January, legislators
from both ruling and opposition parties in Taiwan enacted an amendment to food safety laws,
reinstating a ban on the import of beef on the bone from the US. We believe that this has the potential
to scupper any future free trade negotiations with the US, especially given the substantial
protectionist sentiment in the US Congress.
Taiwan Business Forecast Report Q2 2010 Page 1/5

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Table of Content
Executive Summary........ 7
Economic Growth To Return
Chapter 1: Political Outlook.... 9
SWOT Analysis............9
BMI Political Risk Ratings............ 10
Foreign Policy...............11
China To Court Taiwan, Despite Arms Sale Anger
While the US Pentagon's announcement that it would supply a US$6.7bn arms package to Taiwan produced an angry
response from China, Taiwan has escaped any substantial criticism. We believe that this demonstrates Beijing's
eagerness to continue its pursuit of greater economic integration with Taiwan.
TA BLE: TAIWAN POLITICAL OVERVIEW................. 11
Long-Term Political Outlook.................12
Legal Status Quo To Prevail In 2010s
Taiwan's long-term political prospects are inseparable from its relations with China, and while cross-Strait relations have
thawed in recent years, we believe that the status quo will largely prevail.
Chapter 2: Economic Outlook...................... 15
SWOT Analysis......... 15
BMI Economic Risk Ratings......... 16
Economic Activity.........17
Growth To Bounce Back In 2010
After suffering its first full-year contraction since 2001 last year, recent economic data point to a dramatic reversal for
Taiwanese growth in 2010 ' which we forecast coming in at 4.7%.
table: ECONOMIC ACTIVITY..........17
Monetary Policy............19
Monetary Policy Rate Staying Low
Despite the remarkable recovery that Taiwan's economy is currently enjoying, we remain of the view that Taiwan's central
bank will keep its broader policy rate on hold at 1.25% until well into H210.
TA BLE: MONETA RY POLICY........... 19
Balance Of Payments ...20
Strong Export Growth To Continue
A rapid recovery in exports spurred Taiwan onto a US$29.9bn trade surplus in 2009. We estimate that this will translate
into an impressive US$37.1bn 2009 current account surplus, equal to 10.0% of GDP.
TAble : CURRENT ACCOUNT......... 21
Exchange Rate Policy ...22
Intervention To Moderate TW D Gains Through 2010
We believe that Taiwan's mammoth current account surplus will ensure an appreciative bias for the Taiwanese dollar
in 2010.
TAble : EXCHANGE RAT E............... 23
Chapter 3: 10-Year Forecast. 25
The Taiwanese Economy To 2019.......25
The Mainland Factor
We think the odds are good that Taiwan will be able to revive growth over the coming years, a view predicated on
improving relations with the mainland, the island's robust endowment of human capital and entrepreneurial zest.
table: Long-Term Macroeco nomic Forecasts................ 25
Chapter 4: Special Report..... 29
Political Risk In The Next Decade.......29
Taiwan Business Forecast Report Q2 2010 Page 2/5

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What To Expect In 2010-2019
Table: Countries Facing Major Leadership Succession In 2010-2019................... 30
Table: Countries At Risk Of Major Political Upheaval 32
Table: Countries At Risk Of Interstate Conflict Or Heightened Bilateral Tension............... 36
Table: Cou ntries Facing Secess ionist Or Au tonomy Moveme nts, Insurge ncies , Or Civil Wars ... 39
Table: Pivo tal States................ 41
Chapter 5: Business Environment............... 43
SWOT Analysis......... 43
BMI Business Environment Risk Ratings............ 42
Business Environment Outlook...........45
TA BLE: BMI BUSINESS & OPERATI ONAL RISK RATIN GS........... 45
TA BLE: BMI LEGAL FRAMEWORK RATIN GS........ 46
Institutions....................47
Infrastructure ...............48
TA BLE: LABOUR FORCE QUALITY.. 49
Market Orientation .......50
TA BLE: ASIA, ANNUAL FDI INFLOWS.................... 51
TA BLE: BMI TRADE RATIN GS......... 52
Operational Risk ...........54
Chapter 6: Key Sectors.......... 55
Petrochemicals ............55
Table: Taiwan's Petrochem icals Sector, 2007-2014 ('000 tpa, unless otherwise stated)......57
Consumer Electronics..59
Table: Consumer Electro nics Overv iew....61
Chapter 7: BMI Global Assumptions........... 63
Global Outlook .............63
Forecasts Moving Up
TA BLE: GLOBAL ASSUMPTIONS.... 63
table: DEVELOPED STAT ES, Real GDP Gro wth Forecast.. 64
table: EMERGING MARKETS....... 65
TA BLE: GLOBAL & REGIONAL REAL GDP GROWT H.................... 66
Taiwan Business Forecast Report Q2 2010 Page 3/5

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