Boston, MA -- (SBWIRE) -- 02/08/2013 -- Our growth forecasts for 2012 and 2013 stand at 0.9% and 2.5% respectively, which remains below the government's recently revised forecast of 1.1% and 2.5%, as well as a Bloomberg consensus of 1.4% and 3.8%.

While we expect the recent rebound in Taiwan's economic activity to continue through Q412, we are less sanguine on the country's growth prospects going into 2013. Trade and investment activity are likely to remain subdued, as we hold a downcast take on most of the island's major source markets.

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As the global economy continues to labour on, we believe that grounds still remain for the central bank to enact further policy easing. The central bank has already embarked on some measure of monetary easing by slashing the overnight lending rate eight times in just one week in mid-July. Consequently, we expect one 12.5 basis points interest rate cut going forward.

We highlight that unless the government stems an ongoing deterioration in the business environment, Taiwan will continue to be plagued by a dearth of foreign direct investment (FDI), which would in turn impede its structural growth prospects.

The country appears to be on track towards a fourth phase of opening up the economy to greater Chinese investment. While we believe that this is likely to engender considerable economic benefits for the island in the long run, a deepening political divide and fervent opposition from the opposition camp is likely to curtail the possibility of any immediate material benefit in the shorter term.

A watered-down proposal of the capital gains tax on stock transactions was passed by legislation in July and is slated to take effect in January 2013. We maintain that the tax is unlikely to adversely affect investor sentiment towards the local bourse, nor our fundamental liking of Taiwanese equities.

Major Forecast Changes

We have downgraded our real GDP growth forecasts for 2012 from 1.6% to 0.9%, with changes in our estimates for private consumption, investment, export and imports behind the revision headline growth. Our 2013 forecasts have also be tuned down from a previous projection of 4.2% to 2.5%.

Taking into consideration the expected near-term rebound in economic momentum, and with inflation still relatively elevated by the central bank's standards, we no longer expect the monetary authorities to ease policy for the rest of 2012, leaving the benchmark discount rate at 1.875%.

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