Oct. 6--UNION Bank of Switzerland (UBS) raised its economic growth forecast for the Philippines despite the damage wrought by Typhoon Ondoy.

In a report, Edward Teather, UBS economist said the bank revised its forecast for Philippine gross domestic product (GDP) to a 1.3-percent growth from an earlier estimate of 0.8 percent.

The new forecast is near the high end of the government's target range of 0.8 percent to 1.8 percent.

An indicator of economic performance, GDP is the amount of final goods and services produced in the country.

Teather said the revision is "less than we would have done in the absence of the storm Ondoy."

"The human calamity caused by Ondoy could disturb the growth path of the economy. However, while disrupted economic activity along with damage to corporate and household balance sheets are both human and economic negatives, the rebuilding effort--probably led by the public sector--could provide a temporary lift for economic growth in coming quarters," he said.

Government estimates showed a 3-percent loss of the annual rice crop against its rice stocks equivalent to 8 percent to 10 percent of annual demand.

Despite its upbeat outlook, UBS said precautionary buying of basic goods and services could cause a lift to inflation notwithstanding government price controls.

"Nonetheless, the impact should be seen as temporary by the [Bangko Sentral ng Pilipinas], which will play down risks to long term inflation expectations and keep monetary policy settings easy for now," Teather said.

The BSP has maintained its overnight borrowing and lending rates at record lows of 4 percent and 6 percent, respectively, after a 200 basis points cut since December last year.

Given the continued growth in remittances and the implications of the storm for re-building efforts and remittance flows, UBS also revised its remittance growth forecast to 7 percent in 2009 and 5 percent in 2010.

Teather said the bank, however, raised its fiscal deficit forecast to 3.9 percent of GDP this year, or higher than the government's 3.2- percent ratio.

The deficit to GDP ratio is a key measure of how long the government can sustain revenue shortfalls.

The economist said the Philippines could sustain a wider budget deficit without pushing the debt-to-GDP ratio up in 2010 and beyond.

The debt-to-GDP ratio is a key measure of how manageable is a country's obligation relative to its annual economic output, with a declining ratio viewed favorable as this means the country would allot a smaller amount to pay off its debt.

Pundits had warned that lower economic growth, coupled with a higher budget deficit and rising borrowing costs, could accelerate the vulnerability of countries like the Philippines to debt stress.

They said the country's debt-to-GDP ratio might rise by 15 percent by 2015 in a scenario of a higher primary deficit to GDP; by 5.1 percent amid lower nominal GDP growth rate; by 3 percent on higher nominal interest rates on public debt; and by 12.7 percent on a combination of the three shocks.

UBS, however, said that "things may not be as bad as they look" because much of the decline in revenues was cyclical.

It said the Philippines can afford to run a deficit in order of 4 percent to 5 percent of GDP, adding that the government can mobilize excess savings for investment.

The investment bank said deteriorating public finances are not an outcome specific to the Philippines.

"The Philippines is not alone in recording declining revenues, although the decline in revenue to GDP on the last data point seems worse than seen in the rest of Asia. We suspect a common regional driver of weaker tax revenue, resulting from cyclically lower income and trade, accounts for at least half the decline in revenue to GDP," Teather said.

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