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 (張忠謀) optimistic forecasts, United Microelectronics Corp (UMC) chief executive Sun Shih-wei (孫世偉), 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.
Source: Taipei Times - Editorials 2011/08/08
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