ECONOMICALLY SPEAKING, TAIWAN is doing rather better than most of its Asian peers at the moment. Data released last week showed the Taiwanese economy grew by 3.5% in the first quarter, its fastest pace in a year.
It doesn’t sound stunning in the context of the double-digit growth the Asian tiger economies used to churn out with regularity. But to put it in context: that number bested Taiwan’s high-income country peer group, notably kicking Singapore and South Korea into touch by more than a full percentage point.
You don’t get to read too much about Taiwan in the financial press. I suppose that might have to do with its nebulous diplomatic position, but it’s also because its capital markets have always been rather, well, dull.
The Republic of China, as it is formally known, is not a participant in the United Nations, having been expelled from that organisation in 1971 when the People’s Republic of China sat in its place. The PRC regards the ROC as a renegade province. Fear of a Chinese invasion of Taiwan used to be a regular topic of dinner party conversation over here in Asia but no one has talked about it for ages. Or maybe I just go to the wrong dinner parties.
As far as debt capital markets are concerned, the country has registered on my radar over the past decade for the steady stream of bank loans, most notably in wafer fabrication and LCD screen production. Not exactly racy stuff.
TAIWANESE COMPANIES COULD have ventured out into the region’s offshore debt capital markets, but with loan bankers falling over themselves to lend to the next big tech company, there didn’t seem to be any need to move up the curve or to diversify the funding base.
A recent exception was the country’s giant refiner Formosa Plastics, which just a few weeks back pulled out a US$1bn 10-year on the back of strong rarity value for offshore Taiwan debt. Investors covered the deal five times, even though the notes had a complex guarantee structure based on Taiwanese corporate law, whereby guarantees must reflect the underlying percentage of company ownership.
Surely that kind of demand must have got some senior management at the big Taiwanese companies thinking about tapping offshore capital. Business for Taiwanese manufacturers, although apparently a hostage of fortune to the whims of the Western economies, is on a roll as the mobile phone and gadget revolution powers ahead.
It is no surprise that in the quarter when Apple became the world’s biggest company by market value, its biggest supplier – Taiwan – registered as a standout in GDP growth amongst the developed economies.
Given this compelling story, I find it rather odd that there haven’t been rather more of these deals. Indeed, a company of Formosa’s heft shouldn’t have needed guarantees from four related parties at all. After all, it brings in almost a quarter of Taiwan’s GDP. Perhaps it’s a measure of Taiwan’s outsider status in the capital markets that a guarantee was offered to get the deal away.
I’m just speculating but it might be that (dinner party conversation aside) the question marks over Taiwan’s international legal status mean that future issuers will also need to offer some kind of sweetener to provide comfort.
Nevertheless, if I were the Taiwanese financial authorities I would scrap the current guarantee structure. Equity ownership isn’t the be-all and end-all when it comes to debt repayment. Solid corporate governance and a decent set of ratios, together with the prospect of regular earnings, are far more important when it comes to buying an entity’s debt.
Making something the rich world regards as indispensable … allows you to best your regional competition
ACCORDING TO THE World Bank, developing East and Asia Pacific last registered double-digital economic growth in 2007 when the figure for the region (which includes Taiwan) came in at just over 12%. After the round of monetary stimulus in 2008 prompted by the financial crisis where growth collapsed to below 8%, growth came back in 2010, tantalizingly just short of 10%.
I doubt we will ever see that growth number from the region’s developing countries again. There will be some individual countries registering sensational growth as massive projects come on line, such as Papua New Guinea which is this year forecast to register 15% growth thanks to a gas plant getting up and running.
According to the Economic and Social Commission for Asia and the Pacific, a think tank of the United Nations, the region needs to unlock fiscal space and remove domestic constraints. So collect more tax and deregulate? I doubt somehow that will get you to the heady double-digit growth days.
But as Taiwan has discovered, making something the rich world regards as indispensable – the mobile phone – and creating a short product lifecycle allow you to best your regional competition.
The iPhone boom has been wonderful for Taiwan. The island’s companies should now be building on that GDP growth story by seizing their opportunity in the international markets.
