Taiwan, Republic of China

SEB MERCHANT BANKI NG – COUNTRY RI SK ANALYSI S December 8, 2007

important your attention is drawn to the statement on the back cover of this report which affects your rights.
Analyst: Rolf Danielsen. Tel : +46 8 763 83 92. E-mail : rolf.danielsen@seb.se

Growth has unexpectedly shot up to more than 5% in 2007 but is likely to fall back as global demand
slows next year. An up-coming referendum over UN membership could raise tensions with Beijing.

Country Risk Analysis
FnIInwing strnnger than exµected grnwth in 2007, risk nI a 2008 sInwdnwn is
rising. Nol onIy vas 6,9° grovll in O3 a veIcome surprise, bul even more
unexpecled vas lle facl llal llis refIecled soIid conlribulions from privale
consumplion and inveslmenls. Taivan's economic performance over lle Iasl decade
las been uneven and IiIeIy beIov polenliaI. Tle counlry veallered lle Asian crisis
quile veII, bul refIecling lle dominance of ligl-leclnoIogy producls in Taivan's
exporl seclor il vas caugll in lle US recession of 2001, vlicl foIIoved lle coIIapse
of lle Nasdaq and lle IT bubbIe of lle 1990s. A rapid recovery vas accompanied by
a credil financed consumer boom boosled by recIIess credil card Iending by lle
counlry's over-banIed financiaI seclor. Wlen llal ended in 2005, lle economy
lurned inlo a nev sIovdovn, aIbeil Iess
severe llan in 2001, and lle foIIoving lvo
years lle economy survived on booming
vorId lrade and lle speclacuIar grovll of
MainIand Clina, vlicl lad become a
major lrading parlner, ecIipsing Taivan's
exporl slares of lle US and LU combined.
Afler lle credil card debacIe, domeslic
demand remained veaI up lo lle recenl
unexpecled spurl. Hopes are for improved
senlimenls lo conlinue Iesl grovll faIIs
slarpIy in Iine vill lle expecled decIine in exporl marIels. Tlal is, lovever,
loslage lo an easing of presenl poIilicaI uncerlainlies crealed by an up-coming
referendum combined vill IegisIalive and presidenliaI eIeclions earIy 2008.
GDP(%chng)
2
0
0
7
;

5
,
1
%
-4%
-2%
0%
2%
4%
6%
8%
2000 2002 2004 2006
Source: OEF

Ongning cnnsnIidatinn restricts IiscaI µnIicy, but mnnetary µnIicy cnuId be eased.
To bring dovn ils debl slanding al some 40-45°/GDI, lle governmenl is
delermined lo baIance lle budgel by 2011. In 2006, lle budgel over-performed
reIalive lo largels and llis year lle improvemenl is IiIeIy lo conlinue lo ensure lle
deficil remains beIov 1,5° of GDI. Tlal, lovever, Ieaves onIy a smaII margin lo
pump prime lle economy, slouId lle need arise in coming years. Monelary poIicy,
by conlrasl, may lave been unnecessariIy ligll in recenl years againsl a bacIground
of sIoving privale inveslmenls and a sveIIing surpIus on lle baIance of paymenls,
vlicl las raised reserves lo $260 biII, equivaIenl lo 13 monlls of imporls or 70° of
GDI. A recenl boul of infIalion, lovever, vill leadIine CII rising slarpIy lo 5,3°
in Oclober and core infIalion lo 2,3°, couId lie lle lands of lle cenlraI banI in 2008,
SEB Merchant Banking Country Risk Analysis December 8, 2007
unIess anaIysls prove rigll llal lle price liIes are caused by lemporary faclors,
incIuding inlernalionaI energy-prices and ligl food prices refeIecling adverse
vealler condilions for agricuIlure.

StructuraI µnIicies ÷ a revivaI in the waiting? Since 2000, Taivan's poIilicaI
inslilulions lave been deadIocIed in a poIarizalion belveen lle Iresidency and lle
IarIiamenl eacl inslilulion represenling lle
lvo main opposing parlies. Lven llougl Iey
disagreemenl las been on foreign poIicy
mallers, in parlicuIar lle reIalionslip lo
MainIand Clina, lle debale over domeslic
issues las been slymied, incIuding lle
IiberaIizalion of an erslvliIe leaviIy slale-
dominaled economy. Tlis las prevenled
progress on IiberaIizing lle manufacluring
seclor, vlere lle governmenl mainlains an
imporlanl slaIe, and on reforming lle
financiaI seclor vlere profilabiIily suffers as a
resuIl of cul-llroal compelilion belveen loo many banIs due lo lle inabiIily of
poIilicians lo agree lo banI mergers. In addilion, many of lle smaII banIs appIy
inadequale Iending slandards, a conlribuling faclor lo lle credil card boom and
foIIoving crisis a fev years ago. Again, lopes are llal a nev parIiamenl and a nev
presidenl vouId breaI lle deadIocI.
Consumer Prices
ar 12 months
Source: Reuters EcoWin
2002 2004 2006
%

a
n
n
u
a
l

c
h
a
n
g
e
-2
-1
0
1
2
3
4
5
6

PnIiticaI risks and the China Iactnr. Tle compIicaled reIalionslip belveen lle
IeopIes' RepubIic of Clina and lle RepubIic of Clina, llal is Clina and Taivan in
more coIIoquiaI lerms, Iooms over lle credil raling of boll counlries. In principIe,
boll governmenls agree llal unificalion couId al some slage become a reaIily as a
voIunlary arrangemenl, bul lle premises and lle limeframe for llal lo lappen vary
videIy belveen Beijing and Taipei. In Clina's conslilulion lle geograplicaI area of
Taivan is regarded as a parl of lle sovereign, lemporariIy oulside Beijing's
adminislralive conlroI. Tlal is aIso in accordance vill Taivan's conslilulion, vlicl
recognizes onIy one sovereign of lle enlire Clina, incIuding lle isIand Taivan.
Hovever, in Taivan, fev peopIe see any prospecls for unificalion before lle
MainIand adopls a poIilicaI syslem more aIin lo llal of Taivan in ils recenl lislory
of muIli-parly democracy since lle overllrov of aullorilarian Kuominlang (KMT)
ruIe up lo lle Iale 1980s. An imporlanl parl of Taivan's poIily, incIuding lle
presidenl and lis parly, DII, and a groving majorily of lle popuIalion, according lo
poIIs, apparenlIy see lle Conslilulion as an anomaIy, and vouId favor a clange lo
refIecl reaIilies on lle ground if llal couId be accompIisled villoul risIing a serious
confIicl vill Beijing.

The Iast Iactnr, that is the µnµuIatinn, aµµears tn be grnwing in imµnrtance. WliIe
survey poIIs slov llal lle Iargesl parl of lle popuIalion (48°) sliII idenlify
llemseIves as boll “Taivanese and Clinese¨, lle proporlion idenlifying llemseIves
as onIy “Taivanese¨ las been groving rapidIy lo 45° vill llose idenlifying
llemseIves as “Clinese¨ dvindIing lo 5°. Tlal is commensurale vill lle
proporlion of lle popuIalion llal came as refuges over from lle mainIand in 1948,
and vlo for 40 years ruIed lle counlry llrougl diclalorslip. Tlal 15 years of
democracy slouId raise lle asserliveness of lle originaI majorily popuIalion, mosl of
vlom speaI dislincliveIy oller Clinese Ianguages llan mandarin -- imposed on
Taivan during aullorilarian KMT ruIe, vas probabIy inevilabIe.

2

SEB Merchant Banking Country Risk Analysis December 8, 2007
The questinn nI identity may be cnming tn a head. Tle nexl presidenliaI eIeclions
in Marcl 2008 viII be combined vill a referendum over Taivan's inlernalionaI
slalus reIaled lo ils excIusion from lle UN. Afler faiIing lvice Iasl summer lo appIy
for UN memberslip, as lle officiaI Iellers vere relurned from Nev YorI villoul
response, Iresidenl Clen, decided lo pul lle queslion lo lle eIeclorale in a
referendum. Tlis vas, for good reason, regarded as an eIeclion slunl by many
observers, as Mr. Clen's personaI popuIarily lad dropped from more llan 70° lo
20° in lle maller of a fev years, in parl because of corruplion suspicions againsl
limseIf and lis famiIy. Hovever, lle eIeclorale seized upon lle issue vill fervor
and lle presidenl's DII parly lad no probIem gallering lle needed 800,000
signalures for a referendum lo be arranged. (In facl lley gallered aboul 3 miIIion.)

The µnµuIarity nI the issue was subsequentIy recnnIirmed by Iarge suµµnrtive
demnnstratinns, raIIying snme 500,000 µenµIe in Taiµei in Iast Seµtember. Seeing
lle enllusiasm of lle eIeclorale, lle opposilion, KMT, lad IillIe cloice bul lo join,
bul vill a smaII dislinclion: Tley decided lo arrange a paraIIeI referendum llal lle
counlry slouId appIy for memberslip under ils officiaI name, RepubIic of Clina, nol
under lle nev name “Taivan¨ as proposed by lle Iresidenl -- lle difference being
llal lle Ialler is lle more objeclionabIe lo Beijing. “Taivan¨ vouId be a de jure nev
counlry lo lle UN, vliIe lle organizalion aIready las once expeIIed lle “RepubIic of
Clina¨ from lle UN in 1971 as lle IeopIes' RepubIic of Clina joined. RegardIess of
lle resuIl, Taivan is unIiIeIy lo come any cIoser lo UN memberslip, and lle
queslion is more of a symboIic llan praclicaI nalure. Observers reporl of increasing
popuIar fruslralion over lle counlry's inabiIily lo allain lle inlernalionaI respecl il
slouId deserve in regard of ils economic, scienlific and recenl poIilicaI aclievemenls
under democracy.

China's nbjectinns are hard tn understand Irnm a µracticaI µnint nI view. Tle lvo
counlries' economies enjoy cIose economic IinIs vill Clina-lrade supporling some 1
miIIion jobs in Taivan and Taivanese inveslmenls in Clina supporling probabIy as
mucl as 100 miII. Iobs by some eslimales.
Ollervise, lle lvo counlries lave no
adminislralive IinIages or poIilicaI
coIIaboralion, bul aIso no oller cIaims againsl
eacl oller. Il las been suggesled llal lle
Taivan issue, lovever, is aII llal sliII cemenls
lle unily of lle Clinese Communisl Iarly, and
llal Taivan as sucl las become an eIemenl of
lle inlernaI pover slruggIe in Beijing.
Hovever, cIaims llal lle communisl parly
vouId be unabIe lo conlroI ils domeslic
popuIalion, slouId il Iel Taivan sIip oul of ils lands, seem somevlal far-felcled
againsl lle bacIground of slricl governmenl nevs media conlroI in lle MainIand.
WliIe Beijing las reasserled ils posilion on Taivan's pIanned referendum as a slep
llal vouId lrigger Clina's ovn anli-secession Iav of 2005, IegaIIy binding lle
governmenl lo acl vill aII avaiIabIe means, Beijing las recenlIy pIayed sofl on lle
issue, nol lo provoIe even slronger supporl in Taivan for lle poIilicaI agenda of lle
silling presidenl, even llougl le is conslilulionaIIy barred from running for a llird
conseculive lerm.
FDI outflow
Foreign Direct Investment
Mainland Investment
Source: Reuters EcoWin
99 00 01 02 03 04 05
U
S
D

(
b
i
l
l
i
o
n
s
)
0
1
2
3
4
5
6
7
8
9
10
11

The US Iinds itseII in a simiIar quandary. Waslinglon's slaIe in lle silualion is
reIaled lo ils inleresl in Asian slabiIily and ils impIicil guaranlee of Taivan's securily
provided Taipei does nol provoIe Beijing inlo miIilary aclions. US officiaIs lave
3

SEB Merchant Banking Country Risk Analysis December 8, 2007
recenlIy sougll lo slrongIy dissuade Taivan from loIding lle pIanned referendum,
bul may aIso lave lo move cauliousIy nol lo provoIe a bacIIasl. Over 71° of
respondenls lo a recenl poII said lley beIieved lle US “lad no rigll lo inlerfere¨ in
vleller Taivan leId a referendum on lle UN issue.

Sn what cnuId haµµen? Tlere seems lo be a ligl IiIeIilood llal a referendum (or
lvo) viII be leId in nexl Marcl in paraIIeI vill lle reguIar presidenliaI eIeclions
vill a resuIl llal couId seriousIy irrilale Beijing. Tle Taivanese popuIalion, by
conlrasl, appears surprisingIy reIaxed llal nolling bad viII lappen. Barring an aII
oul var, lle slaIes for Clina are probabIy in boll poIilicaI and economic lerms as
ligl as Taivan's. A miIilary aclion, even if nol mel vill US miIilary resislance,
migll lave serious consequences for Beijing in lerms of economic Ioss and
inlernalionaI credibiIily and aIso polenliaI llreals lo communisl parly ruIe. Tle US,
on ils side, migll Iose in credibiIily and inlernalionaI slanding vere il lo sland idIe
by vlen an aIIy is being punisled for expressing ils viII in free, democralic
eIeclions. Boll lle US and Clina, lovever, couId laIe soIace in lle facl llal boll of
lle opposing presidenliaI candidales are of a compIeleIy differenl slalure llan lle
oulgoing presidenl. Tle apparenl fronl-runner, IranI Hsiel of DII, is considered a
canny cenler-orienled poIilician. Wloever vins, lovever, vouId be conslilulionaIIy
bound lo impIemenl any majorily referendum resuIl, provided al Ieasl 50°
parlicipalion.
--´--
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Key ratios 2007
GDP/capita ($) 16666
GDP (change) 5%
Inflation 2%
Trade balance/GDP 7%
Reserves/imports (months) 13
Budget balance/GDP -1%
Government debt/GDP 25%
Graph: The pentagon shows Taiwan's strengths as of
a typical developed country akin to Hong Kong, but
with one unusual exception, high event risk related to
the political relationship to China.
ExternaI ratings:
Iilcl: A+
S&I: AA-/neg.
Peers:
HongKong
Clina
Korea
0
2
4
6
8
10
12
14
16
18
Resilience
Liquidity
Information
Absence of
event risk
Macro balance
Taiwan Average EM
Hong Kong

4

SEB Merchant Banking Country Risk Analysis December 8, 2007
Key data: 2002 2003 2004 2005 2006 2007 2008 2009
GDP (bill. US$) 298 306 331 355 364 383 419 453
GDP (change) 4,6% 3,5% 6,2% 4,1% 4,7% 4,4% 4,2% 4,2%
GDP/capita (US$) 13244 13545 14612 15566 15903 16666 18169 19564
Investments/GDP 18,7% 18,4% 20,7% 19,9% 19,2% 19,7% 19,9% 20,1%
Budget balance/GDP -4,2% -2,7% -2,8% -1,4% -1,6% -1,4% -1,3% -1,2%
Govt debt/GDP 33,7% 32,9% 29,9% 29,0% 27,6% 25,4% 24,6% 24,1%
CPI inflation (%) -0,2% -0,3% 1,6% 2,3% 0,6% 1,6% 2,3% 1,7%
Money demand (%) 15,4% 13,3% 16,4% 4,5% 3,8% 5,1% 3,9% 5,0%
Stock prices (index) 5247 5144 6033 6090 6842
Interest rates 2% 1% 1% 1% 2% 2% 2% 3%
Exch. Rate ($) 34,6 34,4 33,4 32,2 32,5 32,8 32,0 31,4
Trade/GDP (%) 83% 90% 105% 107% 116% 120% 124% 130%
Oil price (Brent $) 25,0 28,9 38,3 54,4 65,4 71,9 78,4 70,5
mill. US $
Export of goods 135 225 150 484 182 342 198 772 223 880 243 651 271 001 304 851
Imports of goods 111 011 125 637 166 187 180 644 200 426 217 503 248 990 282 194
Other: 1 398 4 387 2 323 -2 109 1 207 -803 -1 077 -2 808
Curr. account 25 612 29 234 18 478 16 019 24 661 25 344 20 934 19 850
(% of GDP) 8,6% 9,6% 5,6% 4,5% 6,8% 6,6% 5,0% 4,4%
FDI -3 441 -5 229 -5 247 -4 403 25 -1 392 -3 000 -4 200
Loan repayments -31 225 -40 755 -60 512 -67 551 -74 708 -72 810 -72 135 -72 135
Net other capital flows 43 501 53 642 94 489 76 041 58 350 53 630 59 958 63 058
Balance of payments 34 447 36 892 47 208 20 106 8 328 4 772 5 757 6 573
Reserves 148 740 185 632 232 840 252 946 261 274 266 046 271 803 278 376
Total debt 41 290 55 088 78 609 84 775 86 841 83 611 83 284 83 284
o/w short term debt 31 335 41 747 60 589 68 468 74 918 71 415 71 034 71 034
Sources: Oxford Economic Forecasting
Rating history
Fitch (eoy) A+ A+ A+ A+ A+
Moody's (eoy) Aa3 Aa3 Aa3 Aa3 Aa3
S&P (eoy) AA AA- AA- AA- AA-
Type of government: Parliamentary democracy
Next elections Legislative and Presidential elections, January 12 and March 22, 2008
Other:
Latest PC deal None
Latest IMF arrangements Not an IMF member
Exchange rate
Source: Reuters EcoWin
00 01 02 03 04 05 06 07
U
S
D
/
T
W
D
30,0
32,5
35,0
Stock exchange,
Source: Reuters EcoWi n
00 02 04 06
I
n
d
e
x
2000
4000
6000
8000
F o r e i g n R e s e r v e s
S o u r c e : R e u te r s E c o W i n
0 0 0 2 0 4 0 6
U
S
D

(
b
i
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l
i
o
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s
)
0
5 0
1 0 0
1 5 0
2 0 0
2 5 0
3 0 0
I n d u s t r i a l p r o d u c t i
S o u r c e : R e u t e r s E c o W i n
0 0 0 2 0 4 0 6
2
0
0
1
=
1
0
0
9 0
1 1 0
1 3 0
1 5 0

5

SEB Merchant Banking Country Risk Analysis December 8, 2007

Imµnrtant! Tlis slalemenl affecls your riglls.


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AII researcl (reporls, sludies and pubIicalions) is produced for inslilulionaI inveslors onIy. AII researcl
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6