TONS of potential, that would be a sick car.

98 is a great year as it is the last year of the AEB block, which has bigger intake ports than the newer drive by wire 1.8t's. It's a saught after head in the vw world, so you already have that going for you.

That being said there is no need to put a newer 1.8t in it, it would just be an overall hassle.

Chipped with basic boltons (turbo back exhaust, intake, diverter valve) you could probably make 200hp. If you did a moderate sized turbo like a gt28 or small t3/t4 then you could make 280 to who knows. gt35 you are looking at 350ish up.

Not extremely familiar with those cars, but thats what I got for you.

Id love to see you build it up.