Taiwan: Economic trends around elections
An analysis of the past six elections spanning from 2000 to 2020 reveals various economic trends before and after elections
Group Research - Econs, Ma Tieying10 Nov 2023
  • GDP growth maintains a steady course throughout election cycles
  • Fiscal policy tends to become slightly expansionary
  • FDI flows remain stable
  • Inflation patterns warrant attention, with the potential for an energy price increase
  • Portfolio investments exhibit significant volatility around election periods
Article image
Photo credit: Unsplash
Read More

Elections on the horizon

Taiwan is gearing up for its presidential and legislative elections, scheduled for January 13, 2024. Currently, the presidential race features four candidates: Mr. Lai Ching-te, representing the Democratic Progressive Party (DPP); Mr. Hou Yu-ih, the candidate from the Kuomintang; Mr. Ko Wen-je, who stands as the nominee for the Taiwan People's Party; and the independent candidate Mr. Terry Gou, renowned as the founder and CEO of Foxconn. Recent polls indicate that Mr. Lai holds the lead, followed by Mr. Ko and Mr. Hou, with Mr. Gou trailing behind. Still, there is ongoing discussion among opposition parties about the possibility of forming a joint ticket to challenge the DPP.

Mr. Lai's economic platform revolves around maintaining policy continuity after eight years of DPP rule. He has emphasized the "Innovative Economy and Smart Nation" as his primary focus, which involves promoting the development of semiconductors, artificial intelligence, digital public services, fintech, green energy, and entrepreneurship ecosystems, among other initiatives. To address increasing geopolitical risks, he also advocates the development of strategic industries such as cybersecurity and national defense. Additionally, Mr. Lai envisions establishing industrial parks in the Indo-Pacific region and overseas innovation centers in the US, Europe, Japan, and the Indo-Pacific to help Taiwanese companies expand their global presence. He supports Taiwan's participation in trade agreements, such as the Taiwan-US 21st Century Trade Initiative Agreement, and advocates joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).

Mr. Ko also places a strong emphasis on policies that promote innovation and foster the growth of the AI industry. Mr. Hou, on the other hand, focuses more on policies aimed at raising wages and combating inflation. Notably, all three of these candidates, Ko, Hou, and Gou, support extending the use of nuclear energy as part of Taiwan's energy mix. Both Ko and Hou have mentioned the possibility of restarting negotiations with China under the Economic Cooperation Framework Agreement (ECFA).

Economic implications

An analysis of the past six elections spanning from 2000 to 2020 reveals various economic trends before and after elections:

GDP growth: Data shows that GDP growth remains relatively stable during election cycles. On average, GDP growth slowed by 0.3 percentage points (ppt) two quarters after elections in the 2000-2020 period. The most significant decelerations occurred in the aftermath of the 2008 and 2020 elections. It is noteworthy that these slowdowns were predominantly associated with external factors, such as the 2008 global financial crisis and the COVID-19 pandemic, rather than being directly linked to the elections.

Inflation: Inflation patterns are noteworthy, with an average 1 ppt increase in CPI inflation two quarters before elections and an additional 0.5 ppt rise two quarters after elections in the 2000-2020 period. Notable spikes in inflation were observed in 2004, 2008, and 2012. The 2004 inflation was partially attributed to elevated food prices resulting from typhoons and, in part, to a robust rebound in consumer demand following the SARS outbreak. In both 2008 and 2012, inflation was driven by the sharp surge in global oil prices, which surpassed the USD100/barrel mark. During the 2008 election, the ruling Kuomintang party, upon the election victory, implemented a series of energy price increases. These included a 12.7% rise in fuel prices in May, a 12.6% increase in electricity prices in July, and an additional 4.3% hike in fuel prices in July. Similarly, after the Kuomintang's re-election in 2012, the government raised fuel prices by 10.7% in April and executed a phased 29.5% increment in electricity prices commencing in May.

In the current scenario, Taiwan is confronted with a parallel pressure to increase energy prices. Global oil prices have maintained an average of USD80/barrel during the first ten months of this year. The state-owned CPC Corporation has been adjusting domestic fuel prices to accommodate an 80% fluctuation in global oil prices, resulting in manageable profit losses. However, the state-owned Taipower increased domestic electricity prices by a modest 11% in April of this year and is still grappling with substantial profit losses. Should oil prices remain elevated and exert pressure on Taipower, the possibility of a further electricity price increase in the year following the elections cannot be discounted. Every 10% increase in electricity prices has the potential to elevate CPI inflation by 0.1-0.2 ppt.

Fiscal policy: On average, government consumption expenditures and public investments experienced increases of 0.8 ppt and 2.4 ppt, respectively, in the two quarters following elections in the years spanning from 2000 to 2020. These increments represented a reversal of the preceding declines observed before elections. This phenomenon likely signifies the implementation of a supportive fiscal policy following the transition in government leadership.

Nevertheless, it is noteworthy that the impact on economic growth was relatively modest. On average, the post-election upturn in government consumption and public investment contributed merely 0.2 ppt to GDP growth throughout the assessment period.

FDI flows: According to the Balance of Payments data, net FDI flows, expressed as a percentage of GDP, exhibited minimal fluctuations before and after the election cycles between 2000 and 2020. Businesses appeared to be relatively unaffected in carrying out their long-term investment strategies, even in the face of uncertainties surrounding election outcomes, policy continuity, and geopolitical considerations.

Portfolio flows: Net portfolio investments exhibit significant volatility surrounding election periods. On average, as a percentage of GDP, there was a 0.9 ppt increase two quarters prior to elections, followed by a 1.3 ppt decline two quarters after elections. Notably, net portfolio inflows displayed pronounced fluctuations both before and after the 2008 and 2012 elections when the Kuomintang came into power. This volatility likely reflects the shifting risk sentiments associated with election outcomes, which hold significant implications for cross-strait relations.

In the present context, foreign equity inflows have registered negative figures for three consecutive months. Alongside concerns related to elevated interest rates and a global economic slowdown, investors are displaying a general sense of caution in the lead-up to the elections due to geopolitical uncertainties. Of note, Beijing conducted its largest-ever military exercise in the vicinity of Taiwan in August 2022, following a visit by US House Speaker Nancy Pelosi to Taipei. This year, Beijing initiated a trade barrier investigation into Taiwan's restrictions on 2,455 products imported from mainland China, and is deliberating potential termination of part or the entirety of the tariff preferential treatments afforded to Taiwan's exports to mainland China under the ECFA agreement. The outlook for portfolio flows and investor sentiment remains uncertain, contingent upon the upcoming election results and Beijing's response.


To read the full report, click here to Download the PDF

Ma Tieying 馬鐵英, CFA

Senior Economist - Japan, South Korea, & Taiwan 經濟學家 - 日本, 南韓及台灣
[email protected]


 
 
 

Subscribe here to receive our economics & macro strategy materials.
To unsubscribe, please click here.

Topic

Explore more

E & S Chartbook
GENERAL DISCLOSURE/ DISCLAIMER (For Macroeconomics, Currencies, Interest Rates)

GENERAL DISCLOSURE/ DISCLAIMER (For Macroeconomics, Currencies, Interest Rates)

The information herein is published by DBS Bank Ltd and/or DBS Bank (Hong Kong) Limited (each and/or collectively, the “Company”). It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. This research is prepared for general circulation.  Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies.  The information herein is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation.  The information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation.

[#for Distribution in Singapore] This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) which is Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 65-6878-8888 for matters arising from, or in connection with the report.

DBS Bank Ltd., 12 Marina Boulevard, Marina Bay Financial Centre Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E.

DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability. 18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.

DBS Bank (Hong Kong) Limited, a company incorporated in Hong Kong with limited liability.  11th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.

Virtual currencies are highly speculative digital "virtual commodities", and are not currencies. It is not a financial product approved by the Taiwan Financial Supervisory Commission, and the safeguards of the existing investor protection regime does not apply.  The prices of virtual currencies may fluctuate greatly, and the investment risk is high. Before engaging in such transactions, the investor should carefully assess the risks, and seek its own independent advice.