S&P Global Ratings yesterday kept its forecast for Taiwan’s GDP growth this year at 2.8 percent, in contrast to last year’s 6.6 percent growth, as global inflation and geopolitical tensions hit export sectors while a recovery in domestic demand stalls.
“The projected growth is less than 50 percent of last year’s showing, but it remains impressive,” said Taiwan Ratings Corp (中華信評), the local arm of the international ratings agency, attributing Taiwan’s performance to strong global demand for electronic components.
Persistent high inflationary pressure due to energy and raw material price increases, and supply chain disruptions pose the biggest challenge for Taiwanese companies and is squeezing their profit margin, Taiwan Ratings said.
Photo: I-Hwa Cheng, Bloomberg
“We consider inflationary pressure to have negative implications for local manufacturers” because Taiwan relies heavily on imported oil to power its industrial sector, the company said.
Monetary tightening around the world and draconian COVID-19 control measures in China are two further challenges facing Taiwan, it said, adding that the nation’s trade ties with Ukraine and Russia are small.
Russia’s war against Ukraine and ensuing global supply chain bottlenecks could indirectly weigh on local companies and households’ discretionary spending due to trade flow restrictions, it said.
Taiwan’s export growth over the past couple of months and growing capital expenditure are showing signs of a slowdown, as economic uncertainties intensify, it said.
Domestically, an expected rebound in local consumer spending remained stalled and largely hinged on how inflation and COVID-19 case numbers develop, it said.
As demand and consumer confidence have not recovered to pre-COVID-19 pandemic levels, the ability to pass input costs to customers would be difficult, it said.
Taiwan Ratings raised its prediction for Taiwan’s consumer price gains to 3.2 percent this year, saying that it expects the central bank to increase the policy discount rate by 0.25 percentage points to 1.75 percent by the end of this year.
Such a rate hike would be of a magnitude seldom seen in the past few years and affect payment affordability, particularly for small and medium-sized enterprises with relatively weak credit ratings, it said.
Separately, Fitch Ratings said on Monday that the operating environment and credit profiles of local banks remained stable, despite interest rate hikes that affect property-related lending.
Property-related lending accounts for a significant share of loans, as mortgages and construction loans were 28 percent and 9 percent respectively of total loans in the first four months of this year, it said.
“We view property asset-quality resilience as key to the stability of banks’ credit profiles and ratings in the interest rate hike environment,” Fitch said, adding that it expects interest rates to increase by 62.5 basis points on average this year and 25 basis points next year.
This included rate hikes of 25 basis points in the second half of the year, Fitch added.
Regulatory tightening in property loans since December 2020 would tame loan growth over the next 18 months, it said.
The share of new property loans so far this year fell to 25 percent of total new loans, down from 49 percent and 58 percent last year and in 2020 respectively, after growth in construction loans and mortgages slowed, it said.
The bad-loan ratio related to mortgages would remain at the low level of about 0.08 percent reported in December last year, it said, adding that household debt-servicing ability has held firm over the past decade, due partly to the lengthening in average mortgage tenor.
Any weakening in household affordability due to interest rate hikes should be manageable in light of Taiwan’s steady economic growth, it said, adding that a further lengthening in mortgage tenor is unlikely given banks’ stricter lending policies amid rising interest rates.
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