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IN TAIWAN, TIME TO INTERVENE (int'l edition)Recession is inevitable. Will aggressive stimulus help?Having sailed through the first year of Asia's crisis virtually unscathed, Taiwan's luck has finally run out. Exports are down 8% this year. Unemployment, while low, is on the rise. Blue-chip companies such as President Enterprises, China Airlines, and Formosa Plastics have reported steep drops in first-half earnings. Consumer confidence is falling sharply. Even the government concedes that Taiwan can no longer avoid Asia's recession. ''We are under the influence of a typhoon,'' says Chi Schive, vice-chairman of the cabinet-level Council for Economic Planning & Development. ''To avoid the impact is simply impossible.'' But Taipei vows to minimize the damage. Having watched neighboring countries as the International Monetary Fund crippled demand with stringent restraints on spending, Taiwan wants to pump billions of dollars into infrastructure projects. It is also resorting to intervention in the stock market, bailouts, attacks on short-selling, and limits on currency trading. While Japan has tried to spend its way out of recession, with little to show for it, Taiwan insists it's different. That's because Taipei has not spent much on infrastructure over the last few years as it tried to erase a chronic budget deficit. But now fiscal prudence is out the window. ''To maintain a stable growth rate is far more important than sticking to budget deficit reduction,'' says Schive. So officials are topping off the annual $15 billion public works budget with an additional $2 billion. In a $35 billion budget, that's considerable. Meanwhile, Premier Vincent C. Siew's cabinet is studying proposals--including from President Lee Teng-hui--to intervene to support Taiwan's stock market, similar to moves the government took during the 1996 standoff with China. Analysts believe that government-employee pension funds will be ordered to buy stocks if the market drops further. Says government spokesman C.J. Chen: ''If there is a very abnormal situation developing in the stock or exchange markets, then the government has to do something.'' FRIENDLY BAILOUTS. The government also wants to guard the Taiwan dollar. It has restricted short-selling and vows to enforce rules that keep out George Soros-like hedge funds. Bureaucrats are implementing informal controls. Volume in the currency market has dwindled, from an average of $500 million at the start of the year to $150 million. ''If you do a large trade, they give you a call and invite you for coffee and then ask you very politely to cut off your customer's credit line,'' says Peter Tsao, branch manager at ING Barings Securities (HK) in Taipei. ''The government has rendered the Taiwan dollar completely nontradeable.'' In these scary times, the government isn't beyond bailing out the politically connected. The ruling Kuomintang last month helped get emergency loans of $50 million to ailing steelmaker An Feng Group, which is controlled by a powerful southern clan. President Lee doesn't want to lose support in the runup to local elections in December. Should the KMT lose seats to the independence-minded Democratic Progressive Party, Beijing would be furious--and that could further rattle the economy. Not all is gloom and doom. Corporations have little debt. Capital controls have limited foreigners in the stock market to 3% of market cap, providing protection from hot-money flows. Yet 60% of the loans made by Taiwan's banks have gone into the property sector, which could sour fast in a recession. So a smaller version of Asia's bank crisis could play out in Taiwan. The safe haven is a lot less safe.
By Bruce Einhorn in Taipei RELATED ITEMS
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Updated Sept. 3, 1998 by bwwebmaster
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