MANILA, Oct. 29, 2009 (Xinhua News Agency) -- Investment bank UBS (NYSE:UBS) has upgraded its growth outlook for the Philippines for next year alongside a modest global recovery and benign inflation prospects.
UBS also sees a long-term bearish trend for the U.S. dollar, which in turn could fuel a peso appreciation against the greenback to about 44:1 by end-2011.
In a briefing on Thursday, visiting UBS global economist Paul Donovan cautioned against overoptimism on the global economic rebound, noting that small businesses in Western economies were still facing tough economic conditions and that banks were still lending below normal levels.
If he were to characterize the pace of global recovery, Donovan said it's like the swoosh in the Nike (NYSE:NKE) trademark - the world is seeing a recovery but it may not be as good as the financial markets are hoping for.
"But from the perspective of Asian economies, the good news is things are getting better," Donovan said.
Supported by pent-up demand, the inventory cycle as well as relaxed fiscal and monetary policy, UBS has raised its growth 2010 forecasts for the five largest economies of Southeast Asia, including the Philippines.
The Philippines' gross domestic product (GDP) is now seen growing by 5 percent next year from this year's projected growth of 1.3 percent. The forecast for 2010 was jacked from the earlier expectation of 4.6 percent.
But the pace of growth next year is seen likely slower than the 7 percent GDP growth forecast for Singapore, 6 percent for Malaysia, 6 percent for Thailand and 6 percent for Indonesia.
With a relatively buoyant outlook, Donovan said central banks in some emerging markets would likely start raising interest rates by next year, maybe even ahead of the modest monetary tightening by the U.S. Federal Reserve, European Central Bank and Bank of England. These major Western central banks were projected to shift to a cycle of monetary tightening by the second half of next year.
In the case of the Bangko Sentral ng Pilipinas, UBS is projecting a 50-basis point increase in the key policy rates by the second quarter of 2010.
Asked whether the 2010 presidential elections in the Philippines would likely dampen investor sentiment on the country, Donovan said: "Risk aversion is going to decline among international investors over the next one to two years so they will be more interested in higher risk assets so that generally means, there will be less concern on political risks."
But if one emerging market is perceived to be burdened with greater political risk over another, not necessarily referring to the Philippines, Donovan said investors may favor one market over the other.
In the next three to six months, Donovan said the U.S. dollar would likely strengthen a bit - by about 5-10 percent - because financial markets may be disappointed with the pace of global recovery and thus reconsider the greenback as a "safe haven."
But he said the macroeconomic fundamentals that were weakening the U.S. dollar, including the continuing current account deficits, would likely last for the next five years at least.
An orderly depreciation of the U.S. dollar and a consequent appreciation of Asian currencies, Donovan, would not necessarily hurt economic prospects in the Philippines.
He noted that because the currencies of regional peers, with which the country is competing with in terms of exports, were also following the same uptrend, local currency appreciation won't necessarily weigh down competitiveness.
Neither is it that bad in terms of households depending on overseas Filipino remittances, Donovan said, because of the diversified source of these flows. For households with remittances coming from the Middle East and other Asian countries, he said the foreign exchange impact won't be too significant.
