Episode 2: Taiwan’s Economy Post Coronavirus
Can Taiwan take advantage of its success in mitigating the coronavirus pandemic to better weather the coming economic storm threatening most of the world’s economies, or will the failure to solve its per-existing economic conditions mean an even more severe economic hit? We hear from two Taiwan newspaper columnists writing on the economy; Managing Director, Bellwether International Group (Hong Kong), Christina Y. Liu (劉憶如); she is joined byfinancial market analyst, Peter Kurz (谷月涵).
Nicholas Gould: 0:02
With me in the studio talking about Taiwan’s economic prospects coming out of the coronavirus, I have two guests; First professor of economics from Taiwan National University, Liu Yi Ru. Professor Liu is a former Minister of Finance. Also, she was the head of the Council of Economic Planning and Development, and before that she was a lawmaker. Today, in addition to teaching, Professor Liu writes a newspaper column. Our second guest is also a newspaper columnist, longtime Taiwan financial-market analyst Peter Kurz. Peter is known to his many loyal readers by his Chinese name Gu Yue Han. If you heard the previous episode of Taiwan Matters podcast, You know how Taiwan has been getting an unprecedented amount of international praise for its handling of the coronavirus. It’s been a source of national pride how the country responded early and effectively to the pandemic. The result is Taiwan has been spared the worst, both in terms of human costs and to the economy. But as the glow from the initial success begins to fade, there are signs Taiwan will not be able to avoid the dire economic reality facing the rest of the world. On International Workers Day (May 1st), labor groups here raised the alarm of rapidly growing numbers of furloughed workers. The IMF and other agencies have been revising down their forecasts for Taiwan’s GDP. The question is, can Taiwan, weather the coming economic storm and maybe even come out stronger or will, the failure to address its preexisting economic problems make the coming year that much more painful? We hear first from Professor Liu Yi Ru on her take on Taiwan’s economic prospects.
Christina Y. Liu: 2:22
I think if you look at the situation currently, it seems that Taiwan is performing quite OK because our activities basically are still ongoing. But after the Covid- 19 situation has past, we still have to come back to the fundamentals which is what’s the engine for the economic growth of Taiwan in the past? We know that exports comprises most of the component, especially exports to China and Hong Kong, and so we have to evaluate that when China’s economy got hit, so badly, that will, of course, effect Taiwan’s situation. And other than that, of course, there’s the demand side, especially the service sector in Taiwan, got hit also, and that will show later on.
Nicholas Gould: 3:13
Peter, speaking about where Taiwan’s markets are. There seemed to be some good news for Taiwan as a few months before Covid-19 with the China – US Trade war, where Taiwan was seeing a lot of repatriation of production lines, companies reinvesting in Taiwan that seemed to have boost the economy a little bit. Do you see that as continuing?
Peter Kurz: 3:37
Well, yes. Nick, you mentioned that Taiwan actually has had a positive background going into all this. In fact, the trade war, which really began early, 2018. And if you look back at the time, the view at at that point was that Taiwan would probably be be the most negatively impacted by this trade war because so much of Taiwan’s GDP is invested in China for manufacturing exports. And, most of those exports going to the United States. As it turned out, if you look at least at the stock markets as an indicator, Taiwan has been among the best performing in the region. And this is because the fact is that those companies that required manufactured goods still rely on the Taiwanese to provide the goods to maintain the supply chain and continue to provide all the quality control. Overall they continue to maintain those supports. Because Taiwan companies, they re-allocated their productive assets elsewhere in the region, not just coming back to Taiwan, but elsewhere in Southeast Asia. Add to that, there are other instances of companies that had overbuilt in China and the trade war actually was a good opportunity for them to reduce their capacity, lay off staff, without taking on the political hit that otherwise could have come, and focus their operations on smaller quantity of higher value, higher margin goods. Bicycle makers is a very good example of that. So we actually came into this Covid-19 pandemic in a relatively good position, meaning that, of course, the first impact of that pandemic was the supply shock, the shutdown of the Chinese economy but the Taiwanese had already begun diversified their way away from that dependency. So they are in a relatively better position going forward. We know that Taiwan industry is mostly focused on electronics. That sector, which includes communication products and computing products in particular. And, of course, we expect that there could be even more demand for such products going forward as we try to rely more on E-commerce, remote communications, remote business meetings and so forth. So that looks like from that standpoint, things could be relatively better for Taiwan.
Nicholas Gould: 6:08
Do you agree, Professor Liu? I mean, do you see this repatriation move as being enough to buoy Taiwan?
Christina Y. Liu: 6:14
I wouldn’t say enough, but if we are not that aggressive, okay. But if you have a more humble attitude than we can say, at least we are lucky. So I do agree with you. Just say that actually, Taiwan is quite lucky because we have got something that after the Covid-19 people will need – this high tech stuff. So at least that’s very comforting. Another thing I do agree with what Peter just said, is that Taiwan is quite lucky in the sense that because this trade war between US and China just happened right before, So it’s exactly because this happened to so many companies that they moved from China back to Taiwan or to other places. And so in that sense we were able to avoid a lot of the worst of the situation. And also, I think, this year in January, because of Taiwan’s presidential election, China, they forbid their people to visit Taiwan, that is to limit tourists, and that also helped because as a result we don’t have that many visitors from China in February. Not when comparing with the tourist numbers before, because otherwise it’s Chinese New Year. We can imagine how many visitors would have been coming from China. So when you put all these together, I think that we should say Taiwanese are particularly Lucky in this case.` And, as to the question is it enough or not, that’s another matter. Because every country is suffering and so relatively Taiwan, it’s already very lucky.
Nicholas Gould: 7:47
The government recently announced that it’s going to inject about 60 billion NT dollars as a stimulus bill to help companies. How do you see that working out? Is it sufficient? Do you think that’s going to help to keep things relatively stable?
Christina Y. Liu: 8:04
I think two things. One is that whatever the amount is it has to be put in the right place, so It depends on how the government spends that money. I think that matters a lot. Otherwise it could be totally a waste. Okay, so that’s a prerequisite – to put the money into the right place.
Nicholas Gould: 8:28
And where do you think is the right place. Is it in companies, or is it giving it to people?
Christina Y. Liu: 8:32
Any fiscal policy to be effective is when you give the money out to were it will be spent. And so recently, for example the government has been giving you coupons. If you spend a certain amount of money, then the government gives you the coupons, so you can use those coupons. I think that that’s not the right place, because people wouldn’t spend any money in the first place anyway. And so direct subsidy is definitely a better way to do it. The first step is that they should put the money into the right place. And the second part is that whenever the government spends money, Taiwan or any other country, they have to also how much they have to spend. Because most of the countries in the world, they already running deficits, so even if you spend money now, you have to pay it back later on. You can go through the problem now, but you will have a very big, even bigger problem in the future, that’s not good either. And so from that point of view, Taiwan is doing okay, too, because relative to say, the United States, of course, they are spending a lot of money now. But they already had government debt relative to the GDP ratio already passed 100%. So that’s a lot, and relatively Taiwan is about 40%. So it’s not too bad. And of course, at the highest will be Japan. They are running like more than 200% of government debt. So Taiwan, in terms of that this government has ability to spend money. Actually, I think yes. If they can put the money into the right place then I think, a more aggressive fiscal policy is good at this moment.
Nicholas Gould: 10:13
Where would you like to see the money going? For people say, who are losing their jobs because of lower productivity,
Christina Y. Liu: 10:20
Right. If we talk about individuals, then that would be relatively less wealthy people. And if you talk about the company, then that will be more of the (SME) small, medium firms relative to big companies.
Nicholas Gould: 10:34
Do you think it’s inevitable, Peter, that small and medium sized companies are going to take a hit just as the rest of the world seems to be going into a recession?
Peter Kurz: 10:42
Well, yes. I mean, it’s always gonna be the smaller players who are going be most vulnerable to any downturn. But I would say Taiwan in the aggregate is again well positioned. If you look at corporate balance sheets of US companies, European, Japanese, even Chinese companies they have over the past decade during this period of multiple QE, low interest rates, and high availability of liquidity have borrowed considerable amounts of money and in the case of the US, used a lot of that- I estimate maybe about 20% of that- for share buybacks. And so they have been deteriorating their balance sheets for some time . Now, they actually need that equity buffer, that cash buffer, to tide them through these tight times. Taiwanese companies are historically very conservative, very risk averse. It is no different now that they have very low debt to equity ratios. Total debt to GDP ratio in Taiwan is something on the order of roughly 20% . In the U. S it is closer to 50%. And as the economy in the coming year or two goes down or even goes negative companies will be forced to retrench. Cut operations, reduced staffing, and pay back some of this debt. This could be an opportunity for Taiwan companies to actually gain market share because they won’t be in that same position. And we saw something similar take place right after the global financial crisis in 2008. Again particularly in the high tech industry. Many of these companies are not just manufacturers, but they’re also supply chain managers, so they’re really running the whole logistics. If they’re able to continue to maintain that supply chain during times of tightness, maintain liquidity then they will be in demand, they’ll be picking up more orders from customers in the long run. And very often those relationships will be maintained going forward.
Nicholas Gould: 12:51
One of the issues that Taiwan has had for a long time, speaking about trying to take advantage of opportunities overseas to increase market share, is the fact that Taiwan doesn’t have its own brand names. So Taiwan has increased its international reputation -its profile has risen. It seems like a great opportunity if there were some Taiwan brands to be able to take advantage of that. Do you see maybe this is the moment where Taiwan can can get its brands out in the world?
Christina Y. Liu: 13:21
Theoretically. I don’t see that anyone is taking that advantage at this moment, though. I think it is true that Taiwan as a national has gained a lot of international recognition right at this moment. But for industries, for companies, to really have their own brands, they still have to have really good products, which are recognized and accepted by the world. I think that still takes some time.
Peter Kurz: 13:52
I might add to that. It’s a question I’ve been mulling over my mind for the last 30 years: Why is Taiwan’s such a big manufacturer of so many key products and yet never really successfully developed its own international brand. But I ascribe it to a couple of reasons. One; I think you need to have a big home market to be able to have a globally successful brand. There may be exceptions. Maybe a company like Samsung. But in my mind, Samsung was able to emerge out of South Korea at the sacrifice of so many other companies that tried to go that same route. And Samsung really went for broke, and they almost did, and the others did go broke. But they managed to break out of that mold. Taiwanese companies as I have said don’t take those huge bets. They’re not willing to pump out the sort of advertising dollars as Samsung did. And, make the investment in R and D that Samsung did. So not having that home market- and this brings up the political issue of Taiwan’s relations with China as well, because China could be that home market for Taiwan. But they have chosen not to take advantage of that. Therefore you are relegated to the contract business of back room sort of manufacturer. But they’ve made a good business out of it.
Nicholas Gould: 15:18
Another issue that comes up all the time is Taiwan opening up to foreign investment. It seems to me to be still a lot of internationalization that Taiwan could be doing. Do you see any changes happening on that front?
Christina Y. Liu: 16:11
Not right now. Not not only that, I don’t see more openness for the past four months-I see a more “close to home” concept. For instance. I think it’s reasonable. It’s understandable to restrict foreigners to come to Taiwan during this time period. I think that’s something that everybody can understand and accept. But starting from April the government allows Taiwanese people to send facemasks to their relatives overseas. But the restriction is really severe because the quota is 30 pieces every two months, and also only to your children, so it I think it’s not constructive. Actually, it’s not enough and also when you mentioned about Taiwan, even we focus on saying we should really boost our foreign direct investment. But until last year, we were ranked the last in the world for accepting FDI from overseas. We really should focus and rethink why is that? What’s the reason why that officially we say we will welcome foreigners to come to Taiwan, but how come they don’t come? We all know that Taiwan is a very friendly place. Most of the foreigners, whenever they visit Taiwan, they love the people in Taiwan. But how come they don’t come over to invest? This is something that I hope, the Taiwan government can have more open attitude about this.
Nicholas Gould: 17:46
Do you see that happening in this current government? It seems that there’s still a very provincial attitude.
Christina Y. Liu: 17:54
It’s a very sensitive issue. I’ll let Peter answer that
Peter Kurz: 18:00
Again, another interesting question that I have mulled over over the years, I’ve always been an advocate of more aggressively opening and liberalizing all markets: financial markets, goods markets, investment and that will generate jobs, new technology and link Taiwan’s own success to that of other companies and countries around the world. It hasn’t happened, though. After the Asian financial crisis in 1997 you saw Taiwan and Korea taking two very different approaches. First of all, Taiwan wasn’t as negatively impacted back then, in part because as I mentioned the very conservative balance sheets that they have here, and in part because at the time the tech bubble in the U. S was continuing to power on, and that helped pull Taiwan through. But of course, Korea was particularly badly impacted due again to over leveraged balance sheets. But they responded to that by radically opening up their economy. In part that was forced on them by the IMF. The IMF is actually a critical link here because Taiwan is not a member of the IMF. So, first of all, there was no external force to pry open Taiwan’s markets, and secondly, it’s because Taiwan doesn’t have that backstop of international financier coming in and helping to re-liquefy the economy in the event of financial or currency crisis means that the Taiwan government’s regulations have to be particularly overprotective, over regulation, really, to prevent these crises from happening to begin with. Whether it’s for that reason or not, I don’t know, but the Korean economy has been growing at a faster pace ever since that time. So you can argue, maybe that’s the right way to go. But it ain’t gonna happen here.
Nicholas Gould: 19:49
Does that disappoint you? Professor Liu?
Christina Y. Liu: 19:52
I totally agree with Peter, and of course that’s a disappointment for all of us. But it’s just been that way for quite some time already. I would echo Peter by saying that comparing Taiwan with Korea’s development. You really see a different pattern that reflects two different mentalities towards openness. That’s really different. I can further comment about this by giving some numbers; The Year of 2003, six years after the 1997 financial crisis, that was the year that Korea out performed Taiwan for GDP and ever since then we are about 80% of Korea’s GDP, so that’s really something you see as a trend. And as I just said- Taiwan should really reconsider, when we say that we want to open the economy to foreigners, are we really going towards that direction? Saying is one thing doing is another.
Nicholas Gould: 21:01
Peter, you were mentioning how Taiwan’s economy is too small to really generate global brands. What about Taiwan companies actually moving off shore?
Peter Kurz: 21:17
I think the cultural, and geographic gaps are just too far for Taiwan companies to be able to succeed in doing that. And again, they’ve tried and they have bought companies in the USA. Even, you know, gone Greenfield. They bought existing brands, and in all instances that I know of have failed to make it. Taiwanese are really good at just the manufacturing and not really good at the Marketing, advertising and Channel Management.
Nicholas Gould: 21:46
Looking ahead at the next say six months, what are you going to be looking for, Professor Liu to gauge how things are going? What are you hoping to see and what are you gonna watch out for?
Christina Y. Liu: 21:58
One thing is that ever since what happened with Covid-19 we observe the situation that no matter where it is in this world, that whenever people have a problem, actually, it’s a global problem. And, so one thing I’m hoping for is that even though the situation is getting better in Asia, especially in Taiwan, but we really hope that the world can go back to the peace it had before. That’s one thing. The second thing is, for this supply chain which got interrupted so badly, we just hope things cool down and people can step by step gradually start picking back up again. And of course, I hope that the companies in Taiwan they can try to think more where or how they should relocate and become more globalized, so as to avoid something like this happening in the future by being more diversified. I think that that’s very important for Taiwan.
Nicholas Gould: 23:02
Peter, what kind of things are you gonna be looking for to see if how the economy is going to fare in the next year?
Peter Kurz: 23:09
Well, again, we’re manufacturers here, so you need to have buyers of the manufactured goods. There’s no question the unemployment numbers in the US are staggering, and that’s being reflected in Europe. Probably, you’re going to see not to the same extent but similar directional trends elsewhere in the world as well. And that’s going to reduce overall demand. We don’t know to what extent. We don’t know for how long. One could look at the stock markets, which is supposedly a forecaster of future economic trends, and say, well, things don’t look too bad here because markets have recovered. But this is a typical pattern in any market crash, in any recessionary environment, where you have sharp pullbacks and then its natural to have a sort of rebound. In particular, we’ve seen lots of money being pumped into the system by the Fed, the US central government and central governments around the world and central banks around the world. But when everyone’s locked up in their homes, they can’t go out and spend that money. And so the money tends to flow into financial instruments as a sort of temporary holding pattern. Ironically, once the economy does begin to start operating again, and people actually start going out to buy thing.. I’ll give you an anecdote. I have a credit card in a U. S. Bank for paying for online news services or I have some things in storage. I have monthly billing. It’s been zero balance for the last three months. I’m just wondering if all these companies decided to give me a three month holiday on my payments or if come May or June suddenly I’ll get all the bills coming all at one time? Likely the latter. Then suddenly all this money that’s been building up gets put to use. Companies have to deal with holes in their balance sheet or make payments that they have to make. So that’s going to create, I think, an inevitable subsequent or secondary downturn in markets. That’s when I think people will start turning more negative in their outlook as well. That’s what I’m looking for in the short term , quite frankly, a little more bad news than we’re seeing right now.
Nicholas Gould: 25:31
If you were going to give a grade to Taiwan government for its handling of the economy, what would the Grade B
Peter Kurz: 25:38
Well, you know, the handling of the economy right now is almost entirely dependent on their handling of Covid-19, the pandemic. And on that front, you have to give an A rating. I think they did do a very good job. I don’t think anyone can deny that the Taiwan government has done a stellar job.
Nicholas Gould: 25:57
And Professor Liu, do you give the current government and A also?
Christina Y. Liu: 26:11
We’ll wait and see. I hope. I sure hope so.