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Taiwan Academics Warn of Greater Market Volatility to Come

August 8, 2011

Taiwan’s equities and currency markets may see wilder swings this week as the US’ credit rating downgrade and the EU’s deteriorating debt crisis deepen concerns about the nation’s export-reliant economy, academics said yesterday.

The TAIEX, which plunged 9.15 percent last week over worries about the global economic recovery, may need some time to digest Standard & Poor’s (S&P) downgrade of the US’ sovereign credit rating from “AAA” to “AA+” on Friday.

The New Taiwan dollar closed down at an almost four-month low against the US dollar on Friday after the local bourse dived 5.58 percent, its steepest slump since the 2008 global financial crisis.

“Factors that are unfavorable for the nation’s economic growth have recently become more evident,” Polaris Research Institute (寶華綜合經濟研究院) president Liang Kuo-yuan (梁國源) said by telephone.

The economy will likely slow faster than expected in the second half of the year, even if GDP growth manages to stay above 5 percent, Liang said.

The US and Europe, the world’s major markets for consumer electronics, will fare worse than expected given their economic performance in the first half of the year, Liang said, adding that their high unemployment rates would continue to curtail consumer spending.

“The equities market will remain unnerved in the near term, with the TAIEX taking its cues from Wall Street,” he said.

The Dow Jones Industrial Average inched up 0.5 percent on -Friday before S&P’s announcement of its US credit downgrade. For the week, the Dow Jones index was down 5.75 percent and the S&P 500 dropped 7.19 percent.

Last month, the Directorate-General of Budget, Accounting and Statistics trimmed its forecast for GDP growth to 5.01 percent this year from 5.06 percent estimated in May, even though the economy was stronger in the second quarter.

“That forecast implies a steeper slowdown in the second half when GDP growth may not exceed the 4 percent mark if external factors deteriorate further,” Liang said.

The uncertain economic outlook would likely weaken the local currency as institutional investors cut holdings, even though the US currency is losing its status as a safe haven, said Wu Chung-shu (吳中書), president of the Chung-Hua -Institution for Economic Research (中華經濟研究院).

The NT dollar may hover around NT$29 against the greenback for the rest of this year, after it approached NT$28.5 in the first half, as domestic economic growth momentum softens, Wu said.

However, Andy Wu (吳火生), chairman of Taishin Securities Investment Advisory Co (台新投信), was more optimistic. He said the US credit downgrade would have a more limited impact on the TAIEX than was widely expected.

“US government bonds at an ‘AA+’ rating remain safe,” Wu said. “Panic [stock] selling is unwarranted.”

 

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