Riding Out the Subprime Frenzy

Economic News

22 Jul 2010
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Taiwan is confident it can ride out the worst effects of the US credit crisis and any slowing of the world's biggest economy, with its exposure to various markets providing a safety net.

On March 18, the cabinet-level Financial Supervisory Commission (FSC) issued a statement saying the impact of the US subprime crisis on Taiwan's financial sector had been limited, with losses totaling $810m. Of this, $653m had been lost by local banks and the remaining $157m by Taiwan-based insurers, the FSC said. According to the statement, this represented just 0.089% of total bank assets and 0.059% of the assets held by local insurers.

Taiwan banks and insurers had invested a total of $2.4bn in subprime-related products or securities and $690m in structured investment vehicles associated with subprime mortgages as of the end of January, the FSC said. This is a relatively low level of exposure.

While the report shows that subprime-related losses are increasing, with the commission's estimate of writedowns being $774m as of December, there is no real evidence of any sharp acceleration of this trend. This supports the FSC's position that strong oversight and careful management has restricted losses.

It is not just the FSC that believed the country's financial sector would ride out the storm. On March 18, Citigroup issued a report saying its outlook for Taiwan's banks remained positive, thanks in part to the strength of the wealth management sector.

"Wealth management fees remained firm year-to-date as demand for currency-linked products offset reduced demand for overseas mutual funds, which accounted for the lion's share of fees last year," Citigroup analyst Braford Ti said in a briefing to clients.

The same day, Sarah Hung, an analyst with Lehman Brothers, upgraded her client recommendation on Taiwanese financial stocks from neutral to positive, projecting a 7 to 13% increase in share values. This was in part due to the strong potential for improved ties with mainland China following the presidential election, she argued.

Due to its close ties with the US economy, Taiwan has been keeping a close watch on the credit crisis as it unfolded. In early August, the FSC released a statement saying it would closely monitor the latest developments of the subprime issue, "and whether the problem will have further impact on Taiwan's financial institutions".

In November, as the full effects of the subprime crisis were starting to be felt, Taiwan was given a warning that any resulting slowdown in the US economy would have a knock-on impact on Asia.

While saying that Asia's direct exposure to the subprime turmoil is limited, Peter Stein, an associate editor of the Wall Street Journal, told a seminar in Taipei that Taiwan was somewhat vulnerable.

"Taiwan remains more exposed than other economies to swings in US private consumption demand," Stein said.

Stein's warning was given some substance, with finance ministry figures released in mid February showing that Taiwanese exports to the US had dipped in the first month of the year.

"Taiwan's exports to the US declined by 1% in January, mainly because of a slowdown in demand as a result of the subprime crisis in the US market," according to Hsu Ray-lin, a deputy statistician with the ministry.

However, this downturn was easily countered by strong export growth, with overseas sales of goods and services rising by 11.9% year-on-year, with growing demand in emerging markets hopefully offsetting the decline in the US market, Hsu said on February 13.

And it is to one emerging market in particular that Taiwan is looking to sustain its economic growth, namely mainland China.

Su Song-chin, the president of the Taiwan Stock Exchange (TSE), told the media on February 29 that there was a surge in companies planning initial public offerings (IPOs) this year.

"We have seen lots of Taiwan manufacturers operating in China coming back to Taiwan for IPOs this year, a sharp contrast from last year, when many of them sought to raise funds in Hong Kong or Singapore," he said. "We are raising the IPO target for the TSE to 40 in 2008 from 30 originally."

Taiwan's exports to China jumped by 14.6% in January, with the figure set to rise further in the months following the presidential election on March 22, as both candidates are in favour of stronger economic ties with the mainland.

Though there is no question that a recession in the US would have an adverse effect on the Taiwanese economy, there is a pervading sense of optimism that Taiwan can look to new emerging markets to offset its losses.

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