Water Shortages, Not COVID, Could Derail Taiwan’s Economy
- By Caroline Grady
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Taiwan’s currency and stock market have come under pressure from an unprecedented spike in new COVID cases. The island is now under a ‘soft lockdown’ leaving mobility restrictions as a threat to the country’s recovery. But we expect the current weakness to be short lived. A 14% of GDP C/A surplus, fairly robust domestic momentum and dominance in semiconductors leave the economy and markets. Foreign equity inflows have resumed after an initial sharp outflow and wider tech sentiment has improved.
New COVID cases have hit an unprecedented high in Taiwan. Before mid-May, Taiwan’s daily high had been just 27 cases (in March 2020), and it had recorded only 12 COVID deaths. But from just 1290 total cases through May 14 this more than doubled in just one week (Chart 1).
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Summary
- Taiwan’s earlier success in containing COVID has crumbled with new cases soaring.
- New mobility restrictions combined with very slow vaccine rollout leaves downside risks to the recovery.
- Exceptionally strong fundamentals, including the large C/A surplus and strong growth momentum should limit the economic hit.
- More worrying is the ongoing water shortages and recent electricity blackout.
Taiwan’s currency and stock market have come under pressure from an unprecedented spike in new COVID cases. The island is now under a ‘soft lockdown’ leaving mobility restrictions as a threat to the country’s recovery. But we expect the current weakness to be short lived. A 14% of GDP C/A surplus, fairly robust domestic momentum and dominance in semiconductors leave the economy and markets. Foreign equity inflows have resumed after an initial sharp outflow and wider tech sentiment has improved.
New COVID cases have hit an unprecedented high in Taiwan. Before mid-May, Taiwan’s daily high had been just 27 cases (in March 2020), and it had recorded only 12 COVID deaths. But from just 1290 total cases through May 14 this more than doubled in just one week (Chart 1).
A relaxation of quarantine requirements for airline staff and mixing within a designated quarantine hotel are largely thought to have caused the outbreak. Consequently, cinemas, sports centres and entertainment venues are now closed, as are schools. Authorities may yet impose a full lockdown if new daily cases remain above 100 for two weeks. Taiwan’s stringency index has spiked to 56, from 25 through most of the past year and an earlier peak of 31.5.
Another worry is the very slow vaccine rollout in Taiwan. Administered doses are by far the lowest across Asia at just 1.18 per 100 people, or around 280,000 in total. Around 410,000 AstraZeneca vaccines arrived in Taiwan this week (via the COVAX) which will allow rollout to accelerate. But Taiwan’s vaccine doses will remain far below the world average of currently 20.41 per 100 people and China at 32.42 (Chart 3).
Bumper exports and Taiwan’s earlier success in containing COVID limit the downside risks to the recovery. April exports gained an above-consensus 38.7% YoY, with electronics again the main driver. We see the recent restrictions having no near-term impact on exports, but more worrying is the recent electricity blackout and ongoing water shortages. Should these become acute, water-intensive semiconductor production could slow, with significant downside for Taiwan’s IP and exports, and exacerbate the ongoing global shortage of chips.
Global Tech Weakness Adds to Currency Woes
Recent weakness in global tech stocks is also driving Taiwan’s stockmarket and currency weakness given a weight of around 30% for TSMC. Policymakers globally are maintaining the stance that the recent spike in inflation is transitory and that rate hikes remain some way off. But with US inflation above 4%, risk appetite is choppy. Taiwanese equities saw $3.4bn in outflows during the week ending 14 May, and although flows have now turned positive until the current COVID outbreak is under control, it is difficult to see a sustained improvement in equity sentiment.
Caroline Grady is Head of Emerging Markets Research at Macro Hive. Formerly, she was a Senior EM Economist at Deutsche Bank and a Leader Writer at the Financial Times.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)