A success story of the economic tsunami, Taiwan is mending an old feud while taking baby steps into new territory — Islamic financial markets, writes RADHIKA MADANA MOHAN

Taiwan fared better than expected in this global economic downturn. The reason: a vast global demand for Taiwan’s exports of new high-tech products such as computer parts and LCDs. Nevertheless, the nation has to repair the puncture in its economy.

On the road to recovery
During the first quarter of this year, Taiwan suffered severely, as the island state depended heavily on exports to the US and European Union. Responding to the depression, the government amended its fiscal and monetary policies.

“Taipei China cut policy interest rates by 238 basis points between September 2008 and February 2009. Broad money supply rates grew by 7.0% on average in 2009. And fiscal spending by the government has also has been significant, so consumption has remained fairly firm,” said Akiko Terada-Hagiwara, an Asian Development Bank economist.

Burying the hatchet
Since the civil war six decades ago, Taiwan-China relation had long soured. In the recent past, however, both governments ventured to be more pragmatic in their bilateral ties and work on their mutual economic potentials. The governments are negotiating a trade accord called Economic Cooperation Framework Agreement (ECFA), hoping to have it signed by this summer.

The agreement is expected to stimulate both economies’ growth, said the president of Taiwan’s World Economics Society, Dr Bert J Lim. “Some 30,000 small- and medium-sized (Taiwanese) businesses have invested in mainland China. This agreement may open new opportunities for these manufacturers and provide larger markets for their products,” he added.

Diversifying
The Taiwanese economy stems largely from its heavy reliance on external trade. Because of this dependence, Taiwan’s economy is susceptible to external shocks such as the economic tsunami. The drop in trade demand from North America and the European Union has led Taiwan to broaden its economic focus.

This time, the nation is turning its attention to China, Asean and Middle East. More than 44 % of Taiwan’s goods amounting US$9.7 billion went to China in April this year. These numbers are expected to significantly increase.

However, expanding on exportable products remains a development challenge, said Hagiwara. “The economy’s strength is at the high end, but in a narrow set of exportable products, such as LCD and computer parts. And if demand for these products declines, the whole economy suffers. The economy has to broaden the exportable product range as well as to tap into domestic demand by expanding into non-trade sectors,” he added.

Islamic ventures
With the Islamic financial industry picking up steam worldwide and the growing Muslim population in Taiwan, the island state is keen to tap into this market. As it is a fairly new player, many economic experts are unable to comment at this stage. Yet, Taiwan is not entirely the new kid on the block. It has long been economically linked to Malaysia and Indonesia. In Malaysia alone, Taiwan has more than US$25 billion invested.

Even more, Taiwan has had pervious relations with Saudi Arabia, assisting the nation in constructing its highways, seaport and airport. Taiwan’s inability to produce energy puts the nation at a high dependency level in importing crude oil and natural gas. “Saudi Arabia happens to be one of our (Taiwan) major importers. We (Taiwan) also know that Saudi Arabia has been a major buyer of our electronic equipment. It’s like a barter exchange — our electronics in exchange for their energy supply. I believe it’s a fair deal,” said a representative of the Taiwan Economic and Cultural Office in Malaysia, Victor C Y Tseng.

“So, we have the foundation there (Saudi Arabia). We have a very competitive edge in electronics. If we can combine our strong points with Saudi Arabia’s, we can be leaders in the world.”

In 2007, the Taiwanese Stock Exchange Corporation (TSEC) established an exchange-traded fund (ETP) with the Abu Dhabi Securities Market and a year later, with the Dubai International Financial Exchange. Tseng hopes this would lead to more ETF opportunities between the two regions.

Last November, the state worked with the Financial Times to establish the Taiwan Shariah Index which compromises 68 stocks, including its major industries: electronics, telecommunication, petrochemical and plastics.

The island is in the preliminary stages of exploring the possibilities of Islamic banking, stressed Tseng. “After investigating, we found it (Islamic banking) to be complex, because Taiwan has a lengthy legislative process, especially any law involving bookkeeping, accounting and the like. So we are still in the process of reviewing.”

Eager to learn, the past two years the island has had financial and Takaful experts from Malaysia educating the locals on the Islamic financial system. It’s a step said Tseng. “We are still at the very beginning; we’re not ready to jump in just yet because we sill need to do our homework.”

Looking ahead
The International Monetary Fund (IMF) predicts 6.5% growth in Taiwan’s economy this year, while the Taiwanese government anticipates that it will be 4.72%. In March, Taiwan’s industrial production index and export orders recorded historical highs, a good sign say many economists. The Taiwanese government’s quick response in launching a four-year infrastructure program to accelerate public investment is expected to support the recovery process in the coming quarters.

“In facing the financial crisis, the government expedited public spending to improve the job and investment situation. The area of focus has been mainly on transportation including the airport, train and highway system,” Hagiwara said.

A major concern is the rising price of oil which largely impacts the manufacturing and shipping industries. Taiwanese exporters and ports face pressing competition from China and traditional competitors such as South Korea. As a result, mainly through government-controlled oil supplier CPC Corporation, the government closely monitors the price fluctuation.

“The government has adjusted the formula so that the retail prices are more in line with changes in the international oil price,” Kil Dosanjh, senior economist at the Economist Intelligence Unit said.

The spillover from China’s economic surge may have spurred economic activity on the island state, gradually improving Taiwan’s economic outlook; however, risks remain. Taiwan’s “growing dependence on China is both an opportunity and a concern. Taiwan will continue to seek to broaden political relations with many countries, but its ability to do across the strait will depend on China’s view,” Dosanjh warned.