TaiwanTreasure at

Tough Times

Nicholas Kwan

Regional Head of Research, Asia

Nicholas.Kwan@standardchartered.com

2

Sub-par performance expected

(10)

(5)

0

5

10

15

Dec-03 Dec-04 Dec-05 Dec-06 Dec-07

PCE GOV FCF Stks Net Export

TW: Real GDP % y/y

3

Source: Bloomberg

De-coupling or Re-coupling?

(5)

0

5

10

15

20

Dec-87 Dec-90 Dec-93 Dec-96 Dec-99 Dec-02 Dec-05 Dec-08

(2.0)

0.0

2.0

4.0

6.0

8.0

TW Real GDP (PCE) % y/y US Real GDP % y/y (RHS)

0

5

10

15

20

25

30

35

40

T-12

T-10 T-8 T-6 T-4 T-2

TT+

2T+

4T+

6T+

8T+

10T+

12T+

14T+

16T+

18T+

20T+

22T+

24

Sep-97 Jan-00 Jul-02

May-04 Jan-06 Sep-07

Trends in Leading Composite Scoring Indicators Index during past down-cylces

4

Downward inventory adjustment

Source: Bloomberg

(250)

(200)

(150)

(100)

(50)

0

50

100

150

200

250

2001 2002 2003 2004 2005 2006 2007 1-7 '08 2009

(4.0)

(2.0)

0.0

2.0

4.0

6.0

8.0

Services

Construction

Electricity, Gas & Water

Manufacturing

Mining & Quarrying

Real GDP % y/y (RHS)

TW: New Jobs Added (Average, '000)

20000

21000

22000

23000

24000

25000

26000

27000

28000

29000

30000

31000

Dec-92 Dec-95 Dec-98 Dec-01 Dec-04 Dec-07 Dec-10

2.0

3.0

4.0

5.0

6.0

7.0

DG Odrs - Inventory USDmn (Cons) (LHS)

US Existing Home Sales, Units mn 18m Fwd

5

Source: Ministry of Finance, Taiwan

Room for fiscal stimulus

(8.0)

(7.0)

(6.0)

(5.0)

(4.0)

(3.0)

(2.0)

(1.0)

0.0

1.0

2.0

2001 2002 2003 2004 2005 2006 2007 2008F 2009F

0

10

20

30

40

50

60

70

80

90

100Gen. Govt Debt, % of GDP Fiscal Deficit, % GDP (LHS)

6

Sources: DGBAS, Bloomberg

Inflationary risk diminishes

TW: CPI Components

Food 250.54

Clothing 47.46

Housing 307.94

Tpt/Comm 126.25

Medical Care 37.37

Education/ Entertainment 161.11

Misc 69.33

Sum 1000 (2.0)

(1.0)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Dec-03 Dec-04 Dec-05 Dec-06 Dec-07

Others Housing Food Transport TW: CPI % y/y

7

Source: Bloomberg

Monetary policy to be accommodative

80

82

84

86

88

90

92

94

96

98

100

Dec-00 Dec-02 Dec-04 Dec-06 Dec-08

2.0

1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0SCB TWD NEER TW Core CPI % y/y 12m MA CPI % y/y

(20)

(10)

0

10

20

30

40

50

60

70

80

90

Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09

29

30

31

32

33

34

35

Crude Oil % YoY 6m MA TWD Curncy

8

Source: Bloomberg

Monetary policy to ease

100

150

200

250

300

350

400

450

500

550

Dec-96 Dec-99 Dec-02 Dec-05 Dec-08

(3.0)

(2.5)

(2.0)

(1.5)

(1.0)

(0.5)

0.0

0.5

1.0

1.5

2.0Reuters CRB Index

TW Rediscount Rate %, 6m Chng

t-12m

(20)

(10)

0

10

20

30

40

50

60

70

80

Dec-96 Dec-99 Dec-02 Dec-05 Dec-08

(3.0)

(2.5)

(2.0)

(1.5)

(1.0)

(0.5)

0.0

0.5

1.0

1.5

2.0Dated Brent Spot, t-12, 3m Fwd

TW Rediscount Rate %, 6m Chng

t-12m

9

Source: Bloomberg

Liquidity remains flush!

0

500000

1000000

1500000

2000000

2500000

3000000

3500000

4000000

4500000

Dec-00 Dec-02 Dec-04 Dec-06 Dec-08

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

NCD O/S NTON

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08

HKD

SGD

KRW

TWD - spread b/w 1m-interbank and O/N rate, %

10

Source: Bloomberg

Foreign capital outflow

TWSE (Net Foreign Inflow), TWD 100mn

2003 2004 2005 2006 2007 2008

Jan 233 958 -18 379 190 -344Feb -124 302 1145 660 381 983Mar 248 105 -297 -71 -1010 -184Apr 315 -162 -247 1701 781 -294May 738 -721 1266 -301 437 138Jun 726 55 1308 -370 1820 -1162Jul 748 -101 349 -289 -93 -1096Aug 842 575 -87 736 -1714 -232Sep 549 328 -106 788 636 -908Oct 1155 470 -308 581 526 -1141Nov -150 1145 1797 1134 -1500Dec 199 174 2387 726 250

Sum 5479 3129 7187 5674 703 -4240

11

Stronger position to weather downturn

Sources: CEIC, Bloomberg

(20)

(15)

(10)

(5)

0

5

10

15

20

25

30

Dec-94 Dec-97 Dec-00 Dec-03 Dec-06 Dec-09

(10)

(5)

0

5

10

15

Real M1A % y/y (LHS) RGDP (PCE+GV+FCF) % y/y

12

Stronger position to weather downturn

13

TW: Stronger position to weather downturn

0 250 500 750 1000 1250 1500 1750 2000

Mainland China

Japan

Russia

Taiwan

India

S Korea

Singapore

Hong Kong

Malaysia

Thailand

Indonesia

PhilippineForeign Exchange Reserve, USD bn

* latest availableSource: Wikipedia

14

Source: SCB Global Research

112

-29

145

271

444480

390

276

118

(100)

0

100

200

300

400

500

600

700

2000 2001 2002 2003 2004 2005 2006 2007 2008

70

80

90

100

110

120

130

New Mortgage Loans, TWD Bn

Cathay Px Index

Stronger position to weather downturn

60

80

100

120

140

160

180

Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08

HK

MA

KW

TW

Residential Property Price Index (2000p)

15

Looking further beyond…

L-T growth prospect improves Public sector to jump start massive infrastructure projects

– Earmarked by President Ma Y J during his election campaign and worth a total of TWD3.9trn

Government seen embarking on series of reforms to bolster long-term growth prospect and competitiveness

– Including reduction of key corporate, individual, inheritance and gift tax rates

Government showing strong ambition to becoming key regional business and financial hub

– Strong position to tap growing mainland China that would help strengthen presence in Greater China wealth management industry as well as key fund raising centre

KMT enjoys strong support in government and given strong public endorsement on cross-straits policy

– Including tourism, direct air and shipping, lifting of investment limits, etc

16

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This document is issued by Standard Chartered Bank (SCB). While all reasonable care has been taken in preparing this document, no responsibility or liability is accepted for errors of fact or for any opinion expressed herein. Opinions, projections and estimates are subject to change without notice. This document is for information purposes only. It does not constitute any offer, recommendation or solicitation to any person to enter into any transaction or adopt any hedging, trading or investment strategy, nor does it constitute any prediction of likely future movements in rates or prices or any representation that any such future movements will not exceed those shown in any illustration. The contents of this document are not made with regard to the specific investment objectives, financial situation or the particular needs of any particular person. Any investments discussed may not be suitable for all investors. Past performance is not necessarily indicative of future performance; the value, price or income from investments may fall as well as rise. SCB, and/or a connected company, may have a position in any of the instruments or currencies mentioned in this document. You are advised to make your own independent judgment with respect to any matter contained herein. In the U.K., SCB conducts designated investment business only with Eligible Counterparties and Professional Clients and this document is directed only at such persons. Other persons should not rely on this document. In Singapore, securities research documents are only issued and intended for persons whose business involves the acquisition and the disposal of, or the holding of, capital markets products and accredited investors. Copyright: Standard Chartered Bank 2008. Copyright in all materials, text, articles and information contained herein is the property of, and may only be reproduced with permission of an authorised signatory of, Standard Chartered Bank. Copyright in materials created by third parties and the rights under copyright of such parties is hereby acknowledged. Copyright in all other materials not belonging to third parties and copyright in these materials as a compilation vests and shall remain at all times copyright of Standard Chartered Bank and should not be reproduced or used except for business purposes on behalf of Standard Chartered Bank or save with the express prior written consent of an authorised signatory of Standard Chartered Bank. All rights reserved. © Standard Chartered Bank 2008