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EDITORIAL: US
rating¡¦s effect on Taiwan
Standard & Poor¡¦s (S&P) disputed downgrade of the US¡¦ sovereign credit rating to
an unprecedented ¡§AA+¡¨ came as no surprise, but it still sent shockwaves because
the move crushed the confidence of holders of US debt and raised the risk of a
double-dip recession, given the persistent weakness in the US dollar and
cautious private consumption on rising borrowing costs.
Ahead of S&P¡¦s announcement, mounting concern about the US debt crisis wiped
NT$1.21 trillion (US$41.8 billion) off local stocks by market value, with the
benchmark TAIEX plummeting 5.58 percent on Friday. Stock prices are expected to
be under heavy pressure this week as investors survey the scene and likely still
harbor doubts about the US¡¦ economic prospects.
However, for Taiwanese high-tech manufacturers and exporters, the downgrade
dashed their last hopes that the recovery of the world¡¦s biggest economy could
be sustainable. The worries of another down cycle have become more real. Now
that the US recovery seems to be evolving into a long-term structural problem
and it is increasingly likely that the US Federal Reserve will adopt new
quantitative easing measures to stimulate growth, consumer fears of no growth at
all could stall spending on electronics from PCs to TVs.
Taiwanese companies will bear the brunt of a US economic recovery that is losing
steam. At the very least, the third-quarter outlook will be below seasonal
levels, affecting some technology heavyweights such as Taiwan Semiconductor
Manufacturing Co (TSMC). The world¡¦s top contract chipmaker expected the
slowdown to be short-lived, forecasting that customers would level off excessive
inventory within a quarter.
Compared with TSMC chairman Morris Chang¡¦s (±i©¾¿Ñ) optimistic forecasts, United
Microelectronics Corp (UMC) chief executive Sun Shih-wei (®]¥@°¶), usually
considered a pessimist, may look like the practical one. Sun told investors last
week that he was cautious about his company¡¦s outlook because uncertainty about
the economic recovery in the US and Europe was on the rise.
¡§It may take several months and even several quarters to see a pickup ...
Consumer demand is a bigger worry. This time, it is not just the problem of
inventory digestion,¡¨ Sun said.
In terms of revenue, about half of the chips made by TSMC and UMC were exported
to the US, according to the firms¡¦ financial statements. Chips are one of the
key export items that support Taiwan¡¦s economic growth, with local chipmakers
generating NT$1 trillion a year in revenues.
Another major export, LCD panels, are also experiencing a cutback in orders.
Perpetual weakness in the US economy has disappointed LCD panel makers, led by
Chimei Innolux Corp and AU Optronics Corp. The prospects of a turnaround in the
second half of this year have become virtually impossible. Prolonged weak demand
for TVs in North America has kept the two companies in the red for at least
three straight quarters, despite the US economy having officially recovered in
2009 from the financial crisis the year earlier.
As the nation¡¦s two crucial export drivers lose growth momentum, the question
now is whether Taiwan will be able to attain an annual GDP growth of 5.01
percent.
Government agencies held high-level emergency meetings to evaluate the impact of
the US debt crisis and its rippling effects over the weekend. However, no
immediate decisions were made. It will be an uphill battle for financial and
economic officials to prevent the economy from slowing down again, but one thing
is for certain, and that is that the government needs to take quick and
effective measures to minimize the impact on Taiwan, including measures to
prevent the New Taiwan dollar from overshooting.
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