Taiwan makes snap rate cut as exports collapse
Reuters - Thursday, January 8
By Lee Chyen Yee
TAIPEI, Jan 7 - Taiwan resorted to an emergency interest rate cut of 50 basis points on Wednesday after data showed exports sinking at a record pace as the global financial crisis savaged demand in China, the island's biggest market.
Exports sank 42 percent in December as electronics shipments marked the biggest fall on record. Exports to China including Hong Kong tumbled a record 54 percent.
The central bank said last month's export slump was having a severe impact on the economy. It reduced the benchmark interest rate to 1.5 percent from 2 percent in the sixth cut since a global credit squeeze tore through the U.S. banking system in September.
Demand in Taiwan is also crumbling. Imports fell 44.6 percent, allowing the island to post a trade surplus in December.
Imports of consumer goods fell by an annual 12 percent in December, sparking worries that Taiwan might see temporary deflation this year.
"Our exports fall has been widening and that is seriously affecting economic activity," the central bank said in a statement.
"The continued lowering of interest rates will help boost domestic consumption," it said. "It will also help lessen borrowing costs for individuals and companies and will help lift sentiment for private consumption and investments."
The benchmark discount rate of 1.5 percent takes effect on Thursday and is the lowest since September 2004, when the rate was at a record low of 1.375 percent.
"Exports are Taiwan's key economic driver and if exports are bad, then it will reduce investments, and force companies to cut their workforce," Chuang Rehong, economist at Sinopac Holdings.
Goldman Sachs forecast Taiwan's economy would shrink 3 percent this year, after growing an estimated 1.5 percent in 2008 in a note that said its leading indicator of the global industrial cycle showed foreign demand would keep crumbling.
Taiwan's electronics exports fell by an annual 43.4 percent. Taiwan makes 80 percent of the world's laptop computers and more than 40 percent of the world's flat-panel displays.
It is home to the world's two biggest contract chip makers; Taiwan Semiconductor Manufacturing Co Ltd <2330.TW> <TSM.N> and United Microelectronics Corp <2303.TW> <UMC.N>.
"Until the release of the data, there was talk of last minute Christmas or Chinese New Year demand but this has dashed any such hopes for Asia as a whole," said Tony Phoo, economist at Standard Chartered Bank in Taipei. He predicted more rate cuts.
The central bank said it would not cut interest rates to zero.
"Taiwan rates will not go to zero. It will always cost something to borrow money," Central Bank Governor Perng Fai-nan told a news conference.
"There are no zero discount rates in the world right now. Some discount rates are very low, but not zero."
The United States, Taiwan's second-biggest customer after China, has resorted to near zero interest rates after mortgage defaults and bank failures pushed the economy into recession.
Japan and the euro zone also tumbled into recession last year, wrecking demand for exports from Asia.
Malaysia's exports suffered their biggest fall in more than 6-1/2 years in November due to lower sales of electronics and commodities.
South Korean exports shrank 17.4 percent in December, while Japan's tumbled at a record pace in November. Chinese exports shrank for that month for the first time in more than seven years, the latest available data shows.
"The point for Taiwan is that it's suffering from a double whammy of both falling Chinese demand and falling developed market demand and it was Chinese demand that helped keep exports above water in 2008," Joseph Lau, an economist at Credit Suisse.
Taiwan's dramatic exports fall could point to further falls in Chinese exports since some of the island's shipments to China are ultimately re-exported to developed markets.
"The past month's data has been really bad. It shows the world economy is producing some very serious northern winds for the Asian region," said Jan Lambregts, economist at Rabobank International.
FOR RELATED STORIES, PLEASE CLICK ON [ID:nSP420660]) (Additional reporting by Jeanny Kao, Baker Li, Ralph Jennings, Rachel Lee and Kevin Plumberg in Hong Kong; Writing by Dayan Candappa; Editing by Andy Bruce)
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