- Exporters and insurance companies are not fully hedged against FX risks.
- Most industries are export-oriented and sensitive to exchange rate fluctuations.
- Insurers’ sizable foreign asset holdings increase balance sheet risk.
- Higher export prices could dampen GDP growth; disinflation effects are expected.
- Our 2025 GDP and inflation projections remain unchanged; downside risks concentrated in 2026.
Taiwan’s recent currency appreciation has broad implications across macroeconomic and sectoral dimensions.
Sectoral impacts
Exporters and insurance companies are not fully hedged and are likely to incur FX translation losses. Large exporters typically hedge 50–80% of their FX exposure, while insurance companies usually maintain a hedge ratio of 60–80%. However, in 2024, hedge ratios trended toward the lower end of these ranges due to a strong US dollar and elevated hedging costs. According to the Financial Supervisory Commission, insurance companies incurred TWD 385.9 billion in FX hedging costs during the year. These costs, combined with weak hedge performance, resulted in total hedging losses of TWD 1.1 trillion. Media reports also indicate that the FX hedge ratio for life insurers was relatively low in 2024, at around 62–64%.
Taiwan’s manufacturing sector is generally export-oriented and sensitive to exchange rate fluctuations. Based on the 2021 input-output table, each unit of domestic production is associated with approximately 0.3 units of exports and 0.2 units of imported inputs. Without sufficient hedging, a 5% currency appreciation could reduce average profit margins by ~0.5 ppt across most industries. The impact would be more pronounced in sectors such as electronics, textiles, and furniture, where margins could shrink by 2 ppt. In contrast, industries like food processing and petroleum may benefit from lower input prices and improved margins.
Meanwhile, Taiwanese insurance companies – driven by persistently low domestic returns – hold significant foreign assets and are exposed to balance sheet risks. According to the international investment position (IIP) data, Taiwan’s external holdings of debt securities totaled USD 899 billion in 2024, with insurance firms holding the bulk of these assets. As of February 2025, life insurers’ foreign investments reached TWD 23.2 trillion, representing 70% of their total portfolios. With most of these assets denominated in US dollars and liabilities primarily in local currency, the recent appreciation increases the risk of currency mismatches on their balance sheets.
Macroeconomic impacts
At the macro level, a stronger currency may dampen GDP growth. To counteract margin erosion from currency gains, exporters may raise prices, potentially weakening their global competitiveness. Assuming a price elasticity of 0.2–0.5, a 5% increase in export prices could lead to a 1–2.5% decline in export volumes. This negative impact would likely ripple through the broader economy, weighing on investment, employment, and wages. Factoring in multiplier effects, overall GDP growth could fall by an estimated 0.5–1.3 ppt.
Meanwhile, currency appreciation tends to have a disinflationary effect. Importers of food and energy may pass cost savings on to consumers. Food and energy together account for 30% of Taiwan’s CPI basket (26% and 4%, respectively). Assuming a 20% pass-through rate, a 5% currency appreciation could lower headline CPI inflation by approximately 0.3 ppt.
Taiwan’s economy showed strong momentum in early 2025, with 1Q GDP growth reaching 5.4% YoY, well above expectations. This supports the current full-year growth forecast of 3.0%. Currency appreciation and US tariffs could weigh more heavily on the 2026 outlook, for which GDP growth is projected at 2.4%. On the inflation front, CPI averaged 2.2% YoY between January and April, broadly in line with the full-year forecast of 1.9%. Currency strength and a tariff-induced slowdown could pose downside risks to the 2026 inflation forecast of 1.7%. While the central bank has not signaled a pivot toward monetary easing, softer growth and disinflationary pressures could prompt earlier and deeper rate cuts in 2026.
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Ma Tieying 馬鐵英, CFA
Senior Economist - Japan, South Korea, & Taiwan 經濟學家 - 日本, 南韓及台灣
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[1] An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst.
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