Taiwan Holds Rate for Sixth Meeting as Economy Starts to Rebound

Taiwan kept interest rates unchanged for the sixth straight meeting amid signs the island’s growth is gathering pace and inflation has stabilized.

The central bank held the discount rate on 10-day loans to banks at 1.875 percent, it said in a statement in Taipei today. The decision was predicted by all 23 economists in a Bloomberg News survey. The monetary authority has refrained from adjusting borrowing costs since June 2011.

Taiwan follows Asian nations including South Korea and India in refraining from cutting rates as data from China and the U.S. show the global economy may be rebounding. The island last month raised its growth estimates for 2012 and 2013 as inflation slowed from a four-year peak in August.

“Taiwan’s economy is recovering, it’s past the point of a rate cut,” Sylvia Chiu, an economist at SinoPac Financial Holdings Co. in Taipei, said before the decision. “Although rises in consumer prices had been quite rapid, they have subsided.”

The Taiwan dollar closed little changed at NT$29.102 against its U.S. counterpart before the rate decision. It is among the best performers this year of the 11 most-widely traded currencies tracked by Bloomberg, having gained more than 4 percent. The benchmark Taiex Index advanced 0.4 percent.

Exports, which make up about 60 percent of gross domestic product, have fallen for eight months in 2012, and the statistics bureau estimates shipments will contract 2.16 percent this year. Still, overseas sales climbed 0.9 percent in November from a year earlier as demand from China improved.

The slowdown in the Chinese economy appears to have bottomed out, the World Bank said today. Taiwan’s largest trading partner has set its initial target for economic growth at 7.5 percent for a second year, two bank executives and a regulatory official said this month, asking not to be named as they weren’t authorized to disclose the details.

Closer ties between China and Taiwan through trade and investment relations, as well as a currency clearance agreement, can boost the island’s domestic consumption, according to Wai Ho Leong, a Singapore-based regional economist at Barclays Plc.

“The main catalyst for domestic demand is the evolution of cross-strait ties,” Leong said in a note. These are “awakening the exportable services engines of the economy -- in tourism- related services and real estate -- creating new job and investment opportunities.”

Taiwan’s unemployment rate held at 4.3 percent in October, the highest in more than a year. President Ma Ying-jeou’s approval rating is at a record-low 13 percent, according to a November poll by Taiwan cable news network TVBS.

The island’s monetary authority imposed selective credit controls on luxury housing from June, and has scaled back open- market operations to pump money into the market. The outstanding amount of certificates of deposits have dropped to NT$6.6 trillion ($227 billion) from this year’s peak of NT$7 trillion in March. The central bank auctions 30-, 91-, and 182-day bills every day to control liquidity in the financial system.

The economy may expand 1.13 percent this year and 3.15 percent next year, the government said last month. Inflation is forecast at 1.93 percent in 2012 and 1.27 percent in 2013.

Inflation slowed for a third month in November, with the consumer price index climbing 1.59 percent from a year earlier, the slowest pace in seven months. A planned electricity price increase has been postponed to next year.

“Inflation has eased but at the same time we haven’t seen the economy really improve,” said Tobby Lin, a fixed-income trader at Yuanta Securities Co. in Taipei. “It doesn’t seem like the right time for the central bank to increase or lower rates.”

The results were predictable. The Bells laid off huge numbers of workers. They cut back investment, choosing instead to milk the existing plant as much as possible. Modernization plans largely froze, except as required to continue to provide basic service. When the Internet boom came, demand for second lines for dial-up users forced some new investment. A little bit was also spent rolling out DSL, although, being newer than the price caps, it was always at unregulated rates. When the boom ended in 2001, investment fell off the cliff. Other than wireless, most “investment” was in buying up each other, as Bell Atlantic morphed into Verizon and Southwestern Bell became the faux “AT&T”.

Since then, the Bells have put next to nothing into their regulated wireline networks, which are often over 80% depreciated. Sure, Verizon spent some billions on FiOS, but that was a fraction of the money they were originally going to spend on fiber to the home. Indeed their AFOR plans were actually predicated on promises of wiring their territories for fiber. Not for closed FiOS, either, but regulated common carrier fiber, open to competitive video, voice and data services. That was never built. AT&T’s U-Verse is a late-life kicker for the ancient copper plant, putting DSLAMs closer to subscribers in order to bump the speed up to something capable of carrying switched digital video. But it’s chump change compared to the extra profits, above and beyond what rate of return would have allowed, that they all made from AFOR. The original title of Bruce Kushnick’s book, The $200 Billion Broadband Scandal, is now out of date – it’s now up to $340 billion.

But while AFOR led to higher quarterly profits in the short term, the lack of investment is now catching up with them. The switching systems that deliver telephone service are mostly over 20 years old, ancient for computerized gear. Several racks consuming many kilowatts of power are required for this old gear to do what fits today into a small server enclosure that only needs a few hundred watts.

The copper plant is largely 50+ years old; some is still buried in century-old wooden conduits or hung on rotting poles. Pulling fiber through deteriorated conduit is extremely difficult; that may be why Verizon avoided putting FiOS in some older cities. Given the limited maintenance performed in the past 20 years, the network is deteriorating rapidly. No wonder Verizon is willing to surrender wireline to cable – after two decades of minimal maintenance, it’s just too far gone.

That’s why it may really be the end of the line for the Bells. The lack of investment since price caps replaced rate of return may finally be catching up with them. Technical transitions like VoIP are relatively minor. They’re a distraction, basically business as usual. But when the physical plant is in decay, customers are leaving, and the only answer they can come up with is even more deregulation, they’re facing real trouble.

Not that their public financial disclosures make any of this obvious, or that the end has arrive yet. AT&T and Verizon are still making money on “wireline” overall, while just their regulated state subsidiaries claim to be losing money. Some of this is accounting sleight of hand, as expenses may stay in the state subsidiary while revenues go to unregulated ones. FiOS revenues, for instance, are largely kept off of the state books. This lack of transparency makes rational regulation even more difficult.

This would be a smaller issue if there were more alternatives. But “facilities-based competition” for wireline service was never really possible outside of a few core business districts; the economics are just too dismal. The Bells and the cable companies are really the only ones who have any chance of reaching the vast majority of homes and workplaces with any kind of reasonable broadband service. Wireless is great for rural areas and mobility but it has very limited capacity, and cell sites themselves usually depend on some kind of wireline connection (nowadays usually fiber optic). The Bells were, after all, utilities –businesses vital to the economy. They just don’t want to be any more.

Deregulating them to become profit-maximizers has backfired. Something will need to be done. The last decade’s telecom policy in the United States has failed. Wireline competition has degenerated into a cozy duopoly, and that is now at risk of becoming a true monopoly once again, only this time minus the regulation. The last thing we need is more deregulation, more magic pixie dust, more short-term thinking. Policy needs to set the incentives straight, allow competition where possible, regulate what’s not competitive, and get investment going where it’s needed. It should be the end of the line for antiquated networks and failed policies, not for good service at reasonable rates.