Taiwan's GDP growth predicted to inch a tad higher to 1.8%

Export demand is on the mend.

According to DBS, Taiwan's fourth quarter GDP report will be released this week. DBS' initial estimate is for GDP growth to rise slightly to 1.8% YoY in 4Q from 1.7% in 3Q, which will take full year growth to 1.9% in 2013.

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Given the better-than-expected results in December industrial production and the upward revisions to 4Q exports, there is a good chance that the GDP figures will surprise on the upside (at about 2.0%).

Export demand is coming back, thanks to the improvement in global macro conditions and the upturn in electronics industry. With leading indicators (e.g., export orders, capital goods imports) continuing to pick up as of Dec13, GDP growth should also maintain the improvement trend ahead, at least in 1Q14. Our growth forecast of 3.3% for the whole year of 2014 is well on track.

The disappointment in trade and growth data over the past few months depressed sentiment in the Taiwan market. With signs of economic recovery becoming increasingly visible, confidence should also improve. Foreign inflows into the equity market have already rebounded, increasing by USD 1.5bn in Jan 1st-24th.

On the TWD, a drag in recent weeks came from the depreciation of the JPY and the KRW, as a result of over-expectations about monetary easing by the BOJ and the BOK.

The expectations about BOJ easing in 1H14 are now subsiding, as the central bank stayed on hold last week and expressed complacency about the growth and inflation outlook. The BOK also kept rates unchanged in a unanimous decision earlier this month, and showed greater confidence about the recovery outlook in Korea.

For now, the focus in the FX market is on the Fed’s decision at the FOMC meeting this week. Given Taiwan’s strong external balance and low reliance on USD financing, we believe that the potential impact on the TWD from further Fed tapering will be limited on the relative basis.