Economic Analysis - Positive Economic Outlook To Bode Well For Revenue Streams - APR 2018

BMI View: The Taiwan economy ' s positive outlook is likely to result in a constant flow of income and corporate taxes, boding well for the government ' s revenue streams. In addition, the export sector is showing signs of resilience, which should be positive for fiscal revenues. As such, we believe that the government will be able to achieve its revenue objectives and we maintain our forecast for the budget deficit to come in at 1.0% of GDP in 2018.

Leading indicators such as export orders, industrial production, and the stock market suggest that Taiwan's economic outlook is likely to remain positive over the coming quarters, informing our forecast for real GDP to expand by 2.5% in 2018 (compared to an estimate of 2.7% in 2017). Steady economic growth is likely to be supportive of income tax revenues, with income taxes forming the largest component of the government's revenue stream. In addition, the export outlook is showing signs of resilience, with export orders expanding by 17.5% y-o-y in December and 11.6% y-o-y in November. This will also bode well for the government's fiscal position in the form of increased commodity taxes and customs duties. As such, we believe that the government will be able to more than meet its revenue objectives (with the government targeting revenue growth of 3.1% y-o-y compared to our forecast of 3.3%) and we maintain our forecast for the budget deficit in 2018 to come in at 1.0% of GDP.

Government Deficit To Remain Modest
Taiwan - Budget Balance, % Of GDP
BMI Calculation

Strong Growth To Support Corporate Profits And Personal Incomes

We note that business and income tax collections are the most likely to be affected by changes in the economic environment and that Taiwan's relatively strong economic performance in 2018 will likely be positive for company earnings. This was seen in the trailing 12 month earnings per share, which grew by 1.3% y-o-y in 2016 and 11.8% y-o-y in 2017 (nominal GDP expanded by 2.1% in 2016 and is estimated by have expanded by 3.3% in 2017). Strong company earnings are also likely to lead to higher wages, and thus, income tax revenues. According to data from the government, average total earnings have been on a gradual uptrend, rising by 2.9% y-o-y in November 2017 and 3.4% y-o-y in October. This will be positive for government revenues, and could provide the government with additional funds to increase spending on one-off measures aimed at providing support to certain segments of the population (most likely being the lower income groups or the elderly). Indeed, personal income taxes account for the largest proportion of government revenues (45.2% of total in 2017) and business taxes are the second largest (15.9%).

Income Taxes Form Bulk Of Revenues
Taiwan - Revenue Breakdown, % Of Total
BMI, National Statistics

Steady Export Demand To Provide Additional Tailwinds

Furthermore, we are seeing signs of export resilience and believe that the steady flow of trade will be supportive of both commodity taxes and customs duties. Commodity taxes account for 8.2% of total taxes and are a single stage excise tax levied on specific commodities manufactured domestically or imported from abroad. These include electrical appliances, oil and gas, vehicles, rubber tires, and flat glass. Electronics account for approximately a third of Taiwan exports and we expect electronic demand to remain moderately strong. Indeed, the PMI for new electronic orders remains in expansion, recording at 58.7 in December and 60.5 in November, which is likely to be supportive of commodity tax receipts. Lastly, we forecast global growth to remain steady with real GDP in 2018 expanding by 3.3% compared to an estimate of 3.2% in 2017. Taiwan's export-oriented growth model, with exports accounting for 60% of GDP, is largely dependent on global demand and we expect the steady flow of trade to be positive of customs duties collections (5.2%).