Taiwan's Economy, Markets Seen Relatively Unscathed By Deadly Quake
Tuesday, September 21, 1999 04:46 AM ET
TAIPEI -(Dow Jones)- The most powerful earthquake to hit Taiwan in decades took a devastating human toll, but the impact on the island's economic growth could be surprisingly limited, analysts said. Taiwan's financial markets should also survive the earthquake relatively unscathed.
Taiwan's strongest quake in decades jolted the island early Tuesday, killing at least 1,123 people, wrecking a 12-story hotel in Taipei and destroying more than 1,000 homes islandwide, the government said. Some 3,500 people were injured, the Associated Press reported.
While it is too early to make an accurate estimate of damage, the quake's epicenter was located in a mountainous region that relies on agricultural and tourism to sustain the local economy, said economists.
It may take up to a week for production to resume fully, "but if the damage is confined to the Nantou and Taichung area, the impact on the macro economy will be limited," said Dong Tao, a regional economist with CS First Boston based in Hong Kong.
CS First Boston estimated economic growth this year could be shaved 0.2 to 0.4 percentage point because of the earthquake, while growth in 2000 won't be effected. Taiwan has forecast economic growth to reach 5.7% this year and 6% next.
Economists warned any economic analysis of the quake was very preliminary as details are still lacking, but the island's basic infrastructure appears to have survived intact.
"It appears damage is much less than originally feared ... initial reports show the ports, airports, highways and refineries are still operating normally,"said Graham Courtney, a regional economist for Warburg Dillon Read in Tokyo.
Production capacity shouldn't be out for a long period of time and some government support can be expected to help in the rebuilding process, said Courtney.
While the bellwether stock index is expected to fall 100 to 200 points initially Wednesday, the bearish impact from the earthquake may only last for a couple of days, analysts said.
"If you have a strategy like international investors and you're bullish on Taiwan, you'd take the opportunity to buy (after the initial plunge)," said Peter Chiang, senior fund manager, UOB Asset Management in Singapore.
Likewise, the central bank is seen providing strong support for the Taiwan dollar.
The New Taiwan dollar isn't expected to see huge volatility given the usual tight central-bank control, said Daniel Lian, Asian strategist at Barclays Capital in Hong Kong.
The central bank often says it will respect market forces, in principle, but will intervene to stabilize a market distorted by abnormal factors.
The government closed financial markets Tuesday as the extent of the damage became clear, it has yet to indicate if they will open Wednesday.
With Taiwan markets closed, futures trading on the Singapore International Monetary Exchange, which is dominated by Taiwan investors, was the proxy for investor sentiment on the disaster.
The MSCI Taiwan futures closed down 13.3 points at 339.9, rebounding from the session low of 330.5, which was close to its 7% down limit.
Simex tends to be "more right than wrong," said Jeff Coggshall, a senior analyst at ABN-AMRO Asia Ltd. in Taipei, who expects the market to dive sharply when it opens.
"At the end of the day, something this major does have an incremental negative effect," said Coggshall. "It does destroy some wealth."
Charles Kuo, an assistant manager with Refco on the floor of the Singapore International Monetary Exchange, said he expects the main index to fall initially Wednesday, but expects some rebound as the market stabilizes during the session.
While individual companies could be hit hard when the stock market opens, analysts see Taiwan's fundamentals as still strong and the government ready to offer support to its financial markets.
Monday, Perng Fai-nan, the governor of Taiwan's central bank, said the central bank has been "adding ammunition" to defend the local dollar if the currency market were to become volatile.
While Perng was most likely referring to instability from China relations or domestic politics, the central bank sees stabilizing the local currency as one of its prime responsibilities.
Taiwan's foreign exchange reserves in August topped US$100 billion for the first time in more than four years.
The central bank has been intervening almost daily over the past several months to smooth volatility in both directions in the Taiwan dollar.
In addition, late last week, Taiwan's cabinet approved a 500 billion New Taiwan dollars (US$15.73 billion) National Stock Stabilization Fund that can be used to prop up stocks in a national emergency. About NT$300 billion of the fund can be used now to buy shares, the remaining NT$200 billion still needs lawmaker approval.
Meanwhile, analysts say technology companies, particularly the semiconductor firms, could take a beating Wednesday as the power outage resulting from the temblor would slow chip production, especially as the peak season for electronic firms gets underway in the fourth quarter.
As of Tuesday afternoon, power was still out at Taiwan Semiconductor Manufacturing Co. (TSM), the world's largest chip foundry, and leading blue-chip chipmaker United Microelectronics Corp.
Meanwhile, construction-related companies could receive a boost in anticipation of the post-quake infrastructure work, particularly the steel companies, analysts say. Already the Taichung port is looking into reconstruction work costing NT$5 billion on five damaged berths.
Peter Chau, deputy managing director, of TAL-CEF Global Asset Management in Hong Kong, recommends that investors who want to stay put in Taiwan because of the island's sound fundamentals put their money in infrastructure and construction shares.
But as the stock market shakes off the earthquake's short term effects, what is left, analysts say, is still a weak market.
"The market is on balance still relatively weak" from the "excessive" margin selling and uncertainty over presidential politics, said Peter Kurz, director with Merrill Lynch in Taiwan.
Indeed, the main index is down 6% for the third quarter.
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