Taiwan's economy skids to a halt

Plunging demand for high tech products has hit hard in Taiwan's export-driven economy

By staff and wires

TAIPEI, Taiwan -- A sudden and dramatic decline in Taiwan's economy has prompted the central bank to trim key interest rates by a quarter percent.

Official figures showed gross domestic product (GDP) shrank 2.35 percent in the second quarter from year-ago levels, the first such decline in 26 years, as the slowdown in the global technology sector bites hard.

Analysts said the data added to pressure on the government to undertake painful structural reforms and open its economy further to political rival China.

"It sometimes takes a major economic shock to bring about structural reform" Hongkong and Shanghai Banking Corp economist Mike Newton told the Reuters news service.

The Directorate General of Budget, Accounting and Statistics said economic growth in 2001 would show a 0.37 percent decline from last year, the worst figure since the island began keeping records in 1962.

The agency has slashed its outlook for the remainder of the year, forecasting GDP will skid 2.45 percent in the third quarter.

About face

The move is an abrupt about face from agency's earlier estimate of 5.15 percent growth.

The central bank trimmed its discount rate to 3.25 percent, its accommodation with collateral rate to 3.625 percent and its accommodation without collateral rate to 5.5 percent, effective on Monday. All three were already at historic lows.

As exports, especially those in the once-thriving electronics industry, account for 40-45 percent of Taiwan's economy, analysts viewed the decision with skepticism.

"They (the central bank) want to show the people they are trying to do something, but cutting interest rates will have little effect on the economy as the problems are largely external," Reuters quoted Daniel Chen, chief economist at the Industrial Bank of Taiwan, as saying.

The central bank has cut key rates a total of 1.50 percentage points since December.

But the cuts have done little to revive the economy as banks are reluctant to lend amid record high non-performing loan ratios and as companies' cash flow problems have been exacerbated by the global economic slowdown.

In anticipation of poor second quarter GDP figures, stocks retreated from a five-week high on Friday, closing down 1.04 percent at 4,638.36.

Weaker currency

The Taiwan dollar also eased back from a six-week high hit on Thursday as local media leaked news of the worse-than-expected economic data during trading hours.

While government officials refused to use the word recession, members of the government committee that reviews the island's economy did.

"Of course, we are in recession," said Yu Tzong-shian, an economist and board member.

"However, we have great hopes for the economic advisory committee recommendations and for further commercial openings to China."

Yu was referring to the blue-ribbon committee whose recommendations President Chen Shui-bian says will carry the weight of government policy.

The committee will make its final report at the end of August and is considering wide ranging structural changes to Taiwan's ailing economy.

Fewer restrictions

They include a possible major relaxation of restrictions on Taiwan companies doing business in China.

Beijing considers Taiwan an integral part of China and has vowed to unify with the island, by force if necessary.

The committee is also considering revising tax codes, reducing government holdings in financial institutions to increase their efficiency and implementing more flexible labor working hours and wages.

The committee was established as Taiwan's government under President Chen struggled to cure the economic ills afflicting the island amid a global ecomomic downturn and an exodus of Taiwan companies flocking to China to take advantage of cheap labor and land.

Reuters contributed to this report.