Elections on the horizon

Taiwan is gearing up for its presidential and legislative elections, scheduled for January 13, 2024. Currently, the presidential race features four candidates: Mr. Lai Ching-te, representing the Democratic Progressive Party (DPP); Mr. Hou Yu-ih, the candidate from the Kuomintang; Mr. Ko Wen-je, who stands as the nominee for the Taiwan People's Party; and the independent candidate Mr. Terry Gou, renowned as the founder and CEO of Foxconn. Recent polls indicate that Mr. Lai holds the lead, followed by Mr. Ko and Mr. Hou, with Mr. Gou trailing behind. Still, there is ongoing discussion among opposition parties about the possibility of forming a joint ticket to challenge the DPP.

Mr. Lai's economic platform revolves around maintaining policy continuity after eight years of DPP rule. He has emphasized the "Innovative Economy and Smart Nation" as his primary focus, which involves promoting the development of semiconductors, artificial intelligence, digital public services, fintech, green energy, and entrepreneurship ecosystems, among other initiatives. To address increasing geopolitical risks, he also advocates the development of strategic industries such as cybersecurity and national defense. Additionally, Mr. Lai envisions establishing industrial parks in the Indo-Pacific region and overseas innovation centers in the US, Europe, Japan, and the Indo-Pacific to help Taiwanese companies expand their global presence. He supports Taiwan's participation in trade agreements, such as the Taiwan-US 21st Century Trade Initiative Agreement, and advocates joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).

Mr. Ko also places a strong emphasis on policies that promote innovation and foster the growth of the AI industry. Mr. Hou, on the other hand, focuses more on policies aimed at raising wages and combating inflation. Notably, all three of these candidates, Ko, Hou, and Gou, support extending the use of nuclear energy as part of Taiwan's energy mix. Both Ko and Hou have mentioned the possibility of restarting negotiations with China under the Economic Cooperation Framework Agreement (ECFA).

Economic implications

An analysis of the past six elections spanning from 2000 to 2020 reveals various economic trends before and after elections:

GDP growth: Data shows that GDP growth remains relatively stable during election cycles. On average, GDP growth slowed by 0.3 percentage points (ppt) two quarters after elections in the 2000-2020 period. The most significant decelerations occurred in the aftermath of the 2008 and 2020 elections. It is noteworthy that these slowdowns were predominantly associated with external factors, such as the 2008 global financial crisis and the COVID-19 pandemic, rather than being directly linked to the elections.

Inflation: Inflation patterns are noteworthy, with an average 1 ppt increase in CPI inflation two quarters before elections and an additional 0.5 ppt rise two quarters after elections in the 2000-2020 period. Notable spikes in inflation were observed in 2004, 2008, and 2012. The 2004 inflation was partially attributed to elevated food prices resulting from typhoons and, in part, to a robust rebound in consumer demand following the SARS outbreak. In both 2008 and 2012, inflation was driven by the sharp surge in global oil prices, which surpassed the USD100/barrel mark. During the 2008 election, the ruling Kuomintang party, upon the election victory, implemented a series of energy price increases. These included a 12.7% rise in fuel prices in May, a 12.6% increase in electricity prices in July, and an additional 4.3% hike in fuel prices in July. Similarly, after the Kuomintang's re-election in 2012, the government raised fuel prices by 10.7% in April and executed a phased 29.5% increment in electricity prices commencing in May.

In the current scenario, Taiwan is confronted with a parallel pressure to increase energy prices. Global oil prices have maintained an average of USD80/barrel during the first ten months of this year. The state-owned CPC Corporation has been adjusting domestic fuel prices to accommodate an 80% fluctuation in global oil prices, resulting in manageable profit losses. However, the state-owned Taipower increased domestic electricity prices by a modest 11% in April of this year and is still grappling with substantial profit losses. Should oil prices remain elevated and exert pressure on Taipower, the possibility of a further electricity price increase in the year following the elections cannot be discounted. Every 10% increase in electricity prices has the potential to elevate CPI inflation by 0.1-0.2 ppt.

Fiscal policy: On average, government consumption expenditures and public investments experienced increases of 0.8 ppt and 2.4 ppt, respectively, in the two quarters following elections in the years spanning from 2000 to 2020. These increments represented a reversal of the preceding declines observed before elections. This phenomenon likely signifies the implementation of a supportive fiscal policy following the transition in government leadership.

Nevertheless, it is noteworthy that the impact on economic growth was relatively modest. On average, the post-election upturn in government consumption and public investment contributed merely 0.2 ppt to GDP growth throughout the assessment period.

FDI flows: According to the Balance of Payments data, net FDI flows, expressed as a percentage of GDP, exhibited minimal fluctuations before and after the election cycles between 2000 and 2020. Businesses appeared to be relatively unaffected in carrying out their long-term investment strategies, even in the face of uncertainties surrounding election outcomes, policy continuity, and geopolitical considerations.

Portfolio flows: Net portfolio investments exhibit significant volatility surrounding election periods. On average, as a percentage of GDP, there was a 0.9 ppt increase two quarters prior to elections, followed by a 1.3 ppt decline two quarters after elections. Notably, net portfolio inflows displayed pronounced fluctuations both before and after the 2008 and 2012 elections when the Kuomintang came into power. This volatility likely reflects the shifting risk sentiments associated with election outcomes, which hold significant implications for cross-strait relations.

In the present context, foreign equity inflows have registered negative figures for three consecutive months. Alongside concerns related to elevated interest rates and a global economic slowdown, investors are displaying a general sense of caution in the lead-up to the elections due to geopolitical uncertainties. Of note, Beijing conducted its largest-ever military exercise in the vicinity of Taiwan in August 2022, following a visit by US House Speaker Nancy Pelosi to Taipei. This year, Beijing initiated a trade barrier investigation into Taiwan's restrictions on 2,455 products imported from mainland China, and is deliberating potential termination of part or the entirety of the tariff preferential treatments afforded to Taiwan's exports to mainland China under the ECFA agreement. The outlook for portfolio flows and investor sentiment remains uncertain, contingent upon the upcoming election results and Beijing's response.

To read the full report, click here to Download the PDF. 

Ma Tieying 馬鐵英, CFA

Senior Economist - Japan, South Korea, & Taiwan 經濟學家 - 日本, 南韓及台灣

[email protected]