DOES Taiwan have a debt problem? In normal times, the question would not even be asked. After all, Taiwan has a debt to gross domestic product (GDP) ratio well below troubled Western nations such as Greece, Italy and the United States. But these are not normal times, either globally or domestically.
With the January 2012 presidential elections looming, opposition politicians in Taiwan are taking advantage of the global financial crisis to point to the island’s growing debt burden under the ruling Kuomintang (KMT) government.
Policymakers in Taipei, of course, insist that the fundamentals of the economy are sound. On Aug 11, Executive Yuan spokesman Philip Yang sought to calm the near panic on the local stock market in the wake of fears of a fresh global crisis, by pointing to what he said was the underlying strength of the Taiwanese economy.
The island’s consumer confidence index in July, he noted, was the best it had been since 2001. The government expected private consumption to reach NT$8 trillion (S$332 billion) this year, the strongest in seven years. Officials were also forecasting NT$2.2 trillion in fresh private investment, the highest since 1966.
Turning to unemployment, Mr Yang pointed out that the nominal jobless rate averaged
4.45 per cent in the first six months of this year, a drop of 1.02 percentage points from a year earlier. As for exports, they were valued at S$219.7 billion in the first seven months of this year – the strongest level ever.
None of this, however, directly addressed the issues raised by the KMT’s critics, who repeatedly point to a surge in fiscal deficits and public borrowing during the Ma Ying-jeou presidency.
Government debt has grown by 72 per cent since 2002, with the fastest growth taking place during the three years in which President Ma has been in office. Current projections suggest that it will reach a record high of NT$5.137 trillion at the end of next year. Taiwan’s total outstanding government debt amounts to 40 per cent of the country’s average gross national product of the three preceding years. The statutory limit is 48 per cent.
Recently released statistics by the central bank showing narrowing current account surplus and a rising net outflow on the capital account have added fuel to the controversy. The overall surplus of S$5.9 billion for the second quarter was well down on the S$18.5 billion surplus registered in the same period last year.
Most of the decline was attributed to a contraction of the current account surplus, with a rapid increase in imports overwhelming export growth. A net outflow on the capital account was largely the result of an increase in portfolio investments overseas.
Soon after these figures were released, the Directorate-General of Budget, Accounting and Statistics revised downward its economic growth forecast for this year from 5.01 per cent to 4.81 per cent.
Such developments have left critics wondering whether rising debt and a decreasing ability to pay could eventually result in Taiwan facing the same fiscal problems as the US. The possibility that the government might eventually have to amend Taiwan’s Public Debt Act certainly suggests a troubling parallel.
A recent editorial in the opposition-leaning Taipei Times warned of “a bumpy road” ahead for the economy, with the likely further appreciation of the New Taiwan dollar against the greenback, fewer-than-expected Chinese tourists and the forced shutdown of petrochemical plants run by Formosa Plastics Group (FPG) plants for safety inspections. FPG accounts for 9 per cent of Taiwan’s GDP.
Last month, Mr Chen Jinji, a research fellow at the Taiwan Brain Trust, a local think-tank, told a press conference that the ever-worsening budget deficit was caused by unconscionable government spending, ill-advised tax cuts, a limited budget allocation for debt amortisation and a serious addiction to debt.
International debt rating agencies, however, remain unmoved. On Aug 25, Moody’s Investors Service announced it was maintaining its “Aa3” foreign and local currency sovereign rating. An accompanying report noted that the affordability of government debt remained anchored by Taiwan’s strong external position, high savings rate and closer integration with the economy of China.
Such assessments, however, have not stopped opposition politicians from using the issue. Presidential hopeful Tsai Ing-wen, chairman of the opposition Democratic Progressive Party, has pledged to cut the nation’s deficit by half within four years, and to balance revenue and expenditure within eight years if she is elected president.
Hints have also been dropped about how this might be done. Proposals include removing special tax breaks perceived to have largely benefited KMT-linked companies since the 1960s.
Conceivably, the continued erosion of Taiwan’s external surplus, when combined with rising fiscal deficits, could constrain future spending. For the moment, however, Taiwan’s debt “problem” probably has more to do with politics than economic reality.
Copyright © 2011 Singapore Press Holdings Ltd