Taiwan is amongst the most exposed to US tariffs on Chinese goods.
Taiwanese banks’ loan growth is set to slow from 4.0% in 2018 to 3.2% in 2019 as the negative impact of deepening trade tensions between the US and China threatens borrowing demand from export-oriented manufacturers, according to Fitch Solutions.
The country’s heavy dependence on the Chinese economy leaves it particularly vulnerable to the ongoing tit-for-tat tariff war especially after President Donald Trump’s earlier promise to slap additional tariffs on the remainder of Chinese imports is likely to materialise. More than 2% of Taiwan’s GDP will be affected by US tariffs on Chinese goods via supply chains, according to data from asset management firm Schroders.
The new tariff round is expected to hammer domestic manufacturers who form a key part of the consumer goods supply chain. In fact, sentiment has already soured after the Nikkei Taiwan purchasing managers index (PMI) dropped into contractionary territory with a reading of 48.7 in October.
“This informs our outlook for exports and investment activity to be negatively impacted as manufacturers pare back their production capacity in anticipation of weaker order volumes, which would reduce loan demand, choosing instead to clear existing inventory,” Fitch Solutions said in a statement.
Despite deteriorating macroeconomic conditions, the asset quality of Taiwanese banks are expected to hold steady as system-wide non-performing loan (NPL) ratio clocked in at 0.28% in the first half of 2018. Lenders have also been beefing up buffers should a growing number of loans sour given weak economic projections. Loan loss provisions as a share of NPLs grew from 471.1% in H1 2017 to 529.6% in H1 2018.
The government’s infrastructure masterplan and the ‘five plus two’ industry innovation project is also poised to prop up dismal lending prospects as banks appear on track to break $6.5b (TWD200b) lending target by end-2018 after having already extended $ 6.46b (TWD199.4b) in loans during the first eight months of 2018.
“On the whole, we believe that the fundamentals of Taiwanese banks remain strong, and this should allow them to weather negative shocks to economy and the financial system,” concluded Fitch Solutions.
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