Political Risk Analysis - Improving Political Outlook Positive For Growth - JUNE 2017


BMI View: Taiwan ' s ruling DPP appears to have gained its policy footing and has started passing bills and implementing legislation aimed at improving the economy's growth outlook. With the opposition KMT remaining relatively weak due to infighting and an upcoming leadership competition, the KMT is unlikely to be able to actively stall the passage of DPP-sponsored bills through the parliament. We believe that this bodes well for Taiwan ' s real GDP growth, which we forecast to pick up to 2.0% in 2017. We have upgraded our short-term political risk score to 77.3 from 74.6 previously, to reflect the improvement in the policy environment.

The consistent proposal of bills aimed at improving both Taiwan's economic development and business environment since the beginning of 2017 suggests that the ruling Democratic Progressive Party (DPP) has found its policy footing. Having been elected to power for the first time in 2016, the DPP has struggled to gain experience in governance, but we believe that the government is starting to make headway in efforts to propose and implement policies. With the opposition Kuomintang (KMT) remaining considerably weak due to factional infighting and an upcoming leadership race, we believe that the KMT would not be able to mount a strong opposition to the DPP's proposed bills. This would be positive for policy implementation and speed up the passage of bills aimed at developing infrastructure and restructuring the pension system through the DPP-controlled chamber. We thus forecast real GDP growth to pick up to 2.0% in 2017, from the 1.4% in 2016, and view the government's actions as positive for policy continuity and implementation. As such, we have upgraded our short-term political risk score to 77.3 from 74.6 (out of 100) previously, to reflect this.

DPP Has The Majority
Taiwan - Breakdown Of Legislative Seats
Source: BMI, Central Election Commission

DPP: Getting Its Act Together

We had previously noted that the untested DPP would require a period of time to familiarise itself with the workings of the government following its parliamentary and presidential victories in 2016 (see ' DPP Wins, Will Face Many Challenges ' , January 18 2016). In recent months, we are seeing evidence that the ruling party has made progress on the policy formulation front and is seeking to implement policies aimed at shifting Taiwan's dependence away from its overreliance on exports.

The Cabinet's approval of the Forward-looking Infrastructure Construction Project (an eight-year long infrastructure programme aimed at improving the economy's physical and digital connectivity) is a positive step and indicates that the government is committed to ensuring the economy's long-term development prospects (see ' Infrastructure Investment Package Unlikely To Widen Fiscal Deficit ' , March 28). Infrastructure investments will also provide a degree of support to growth. Following the Cabinet's approval, the bill has been passed to parliament for legislative approval, and we believe that it is likely to be passed as the DPP has a majority in the legislative assembly.

Domestic Political Outlook Starting To Improve
Taiwan - Short-Term Political Risk Index, Out Of 100
BMI

Pension Restructuring Efforts Making Some Headway

We had stated that the government would face considerable headwinds in its efforts to restructure the system, which has been becoming increasingly unsustainable due to the high payout levels (see ' Efforts To Restructure Pension System To Face Headwinds ' , January 11). However, the government has remained resolute despite protests from public servants, teachers, and military personnel (who will bear the brunt of the proposed pension cuts). Indeed, President Tsai Ing-wen has noted that this is a crucial time for pension reform and that attempts to use violence to hold up the pace of reform is intolerable and that those who resort to such tactics will be held accountable.

Restructuring Of Pension System Would Be Positive For Fiscal Deficit
Taiwan - Budget Balance, % Of GDP
BMI Calculation

As such, the DPP has made considerable progress on its pledge to reform Taiwan's pension system, with a series of draft bills on how to restructure the system from the Examination and Executive Yuan having been submitted to parliament in late March. While we expect the proposed bills to face opposition from the DPP (which has stated that it agrees with the Executive Yuan's bills but not the Examination Yuan's), we believe that progress on pension restructuring will continue to make more progress under the DPP as compared to under the previous KMT administration (2008-2016). This will be positive for the government's fiscal position in the long-run as Taiwan's ageing population continues to place a strain on the government's finances.

Proposed Changes To Labour Law Positive For Business Environment

The government is also starting to take steps to improve Taiwan's business environment, and we believe that the draft bill aimed at improving the working environment for foreigners will be positive for both Taiwan's economy as well as alleviate possible talent shortages due to its rapidly ageing population. The Cabinet approved a draft bill aimed at easing regulations pertaining to visas, work permits, taxes and residency for foreign white-collar workers in Taiwan in late April. One of the major changes in the regulations, as laid out in the draft Act for the Recruitment and Employment of Foreign Professional Talent, removes the requirement for foreign white-collar workers with permanent residence to remain in Taiwan for at least 183 days per year to maintain their status.

Foreigners A Way Of Alleviating The Old Age Burden
Taiwan - Total Fertility Rate & Pensionable Population, % Of Working Age Population
National Sources/BMI

A new category of work permit called the Employment Gold Card will be introduced for certain categories of foreign professionals. The 'four-in-one card' will include a work permit, residence visa, alien residency permit and re-entry permit which will be valid for at least three years, according to the draft bill. Certain categories of foreign professionals will also be taxed on only half of their income in excess of TWD2mn for the first three years of employment. This would increase the attractiveness of Taiwan as an investment destination and lead to an inflow of foreign talent, which would benefit economic growth.

KMT: Still Struggling To Get Its Act Together

Our relatively positive outlook on the DPP's ability to pass and implement its proposed legislation is partly due to the considerably weak state of the opposition. The KMT has been unable to rebound from its defeat in the 2016 parliamentary elections, where it lost power for the first time since democratic rule was introduced in Taiwan in the 1990s. Instead, it continues to be weakened by infighting and the lack of a credible leadership following the resignation of former chairman Hung Hsiu-chu in January 2016, who stepped down to take responsibility for the party's defeat in the elections.

Furthermore, the chairmanship elections in May are unlikely to lead to a significant improvement in the state of the KMT. There are six candidates (including Hung, Vice Chairman and former Taipei mayor Hau Lung-bin, and former Vice President Wu Den-yih) and it is likely that a second round will be required due to the number of contestants. According to the KMT charter, one candidate has to garner at least 50 percent of the votes to win the chairmanship; otherwise, the top two candidates will engage in a run-off. We believe that the winner of the KMT chairman elections will face an uphill task in attempting to restore the party's fortunes as the party remains plagued by infighting and financial woes after its assets were frozen by the government in a probe into the KMT's allegedly ill-gotten assets. The pro-Beijing party is also seen as being out of touch with the public, who are wary of closer ties with China as most prefer the status quo of de facto independence. In light of these factors, we believe that the KMT is unlikely to be able to mount a coordinated opposition to the DPP's proposals, enabling bills to pass through parliament more smoothly.