Reuters
Wednesday, September 22, 1999; 9:05 a.m. EDT

TAIPEI, Sept 22—Taiwan is bracing for economic fall-out from Tuesday's earthquake, but the picture that emerged on Wednesday suggested the island's fortress economy should escape serious long-term damage.

The official 1999 growth forecast of 5.74 percent would suffer, but economists surveyed by Reuters said a surging electronics cycle and heavy reconstruction spending should limit the damage.

On average, the economists expected the disaster to shave 0.3 percentage point from gross domestic product growth.

"The earthquake does not necessarily dampen GDP growth," said Jean Kao, economist at International Investment Trust.

"Reconstruction after the quake should contribute a lot to GDP formation."

The Reuters poll said GDP now was expected to grow 5.58 percent in 1999, down from an earlier Reuters forecast of 5.87 percent.

The death toll from the quake surpassed 1,800 on Wednesday with some 2,700 people still believed trapped under rubble, but assessments showed damage to Taiwan's industrial production base appeared to be limited.

Losses were more likely to arise from blackouts and delays caused by aftershocks than to damaged production lines.

Analysts were still struggling to get a handle on the cost to the island's crucial electronics sector. The quake cut off power and water to Taiwan's semiconductor heartland—the Hsinchu Science Park in the north of the island.

The vast majority of Taiwan chipmakers are based at Hsinchu and, while some have independent power supplies, analysts said persistent aftershocks would deter a resumption of production for at least two weeks because of the extreme precision required.

Companies with facilities in Taichung near the quake's epicentre were expected to suffer most. Analysts said Siliconware Precision Industries and Macronix International Corp have warned of problems.

Taiwan Semiconductor Manufacturing Co, which held a 31 percent share of the global foundry market in 1998, said its September wafer output would drop 10 percent.

POWER IS A PROBLEM

The loss of power is the greatest hurdle; authorities warned that supplies would remain unstable for at least two weeks.

Some analysts estimated lost production would cut September revenues by about 20 percent and cost at least US$350 million.

Others said Taiwan's exports would fall US$1 billion in September, and Fubon Insurance said total damage to Hsinchu Park would cost in the region of T$10 billion (US$313 million).

But while the quake has been devastating, its medium-term economic impact should be limited. The same strong fundamentals that helped Taiwan dodge the worst of Asia's financial crisis will support the market past a three-month horizon.

"Taipei has been resilient," said Robert Rountree, head of research at Prudential Bache Securities in Hong Kong.

"There's been an upswing in the electronics cycle and there's been a recovery in exports, most of which are electronics. For as long as that cycle moves up, markets like Taipei will continue to outperform."

Production cuts caused by the quake will support recent price gains for benchmark 64-megabit dynamic random-access memory chips, or DRAM, to US$20 from less than $5 six months ago and about $15 in recent weeks.

Wafer prices were expected to rise about 10 percent with annual yearend price increases brought forward to October, raising the cost of most electronics products before Christmas.

CIBC World Markets said that, fundamentally, the electronics demand cycle remains intact, capacity is in short supply, and pricing trends remain favourable.

"We expect that there will be little effect on the fundamental and long-term businesses of semiconductor suppliers," CIBC said.

Taiwan supplies 10 percent of global semiconductor supply, and about 70 percent of global capacity for made-to-order foundry chips. Such chips are high value components used in virtually all electronic devices and make up about eight percent of global electronics output.

Semiconductor stocks were expected to lead declines on the Taipei stock market when it opened, but authorities decided to delay a resumption of stock trading until Monday because of widespread power outages.

Analysts had cautioned of panic selling with damage estimates still uncertain, but some said any initial weakness should be viewed as a buying opportunity.

"While investor sentiment could negatively affect these stocks in the near term, we believe that any significant related correction, in the five—10 percent range, would justify accumulation of the affected stocks," said CIBC World Markets.

Sectors expected to benefit from the disaster included cement, steel, plastics and some transportation companies. Their gains, however, were unlikely to have much overall impact on the main index, which is weighted about 36 percent in electronics.

Insurance companies were the other sector expected to suffer market damage. The industry typically expects a bill equivalent to about 30 percent of total economic losses, which government leaders said could top T$100 billion (US$3.16 billion).