UBS trims RP growth forecast

Swiss banking giant UBS has downscaled its 2009 growth projection for the Philippines from 4.5 percent to 3.5 percent, citing the effects of global slowdown on the country’s exports.

Despite the slowdown, however, UBS said it was looking at two more 25-point rate hikes by the central bank before the year ends, mainly to contain inflation which remains elevated despite some evidence of easing.

According to UBS, its 2008 forecast remains unchanged but it downscaled its 2009 forecast from 4.5 percent to only 3.5 percent in terms of growth in the country’s gross domestic product.

UBS economist Edward Teather said the reason for this was the downward revision of UBS’ growth forecast for the US’ real GDP.

Teather said UBS downgraded its real growth forecast for the US to 0.3 percent in 2009 from the previous forecast of 1.2 percent. Consequently, there were also associated downgrades elsewhere, including UBS’ global growth forecast which was reduced to a recessionary 2.2 percent.

“Why so negative? Our growth projection for 2009 is below the government’s forecast range and that of the consensus,” Teather said. “However, the reason for our increased concern regarding growth is cyclical not structural.”

Although the proportion of the country’s exports to GDP ratio was not high by Asian standards, Teather said it was still meaningful and did represent an important transmission channel for income growth in good times and bad.

Teather pointed out that based on surveys, confidence levels have declined, indicating an overall tempering of spending tendencies despite the continued growth in remittances from overseas Filipinos.

“While remittance flows may well continue to grow, we consider the associated linkages to be potential conduits for confidence effects in an economy where other business and financial linkages to the global economy are less sizable than in, say, Singapore and HK,” Teather said.

Teather said UBS’ revision reflected the magnitude of the shock transmitted by these linkages.

Despite the projected slowdown, however, Teather said it would not be as bad as in 2001 when there was a similar global growth environment. At the time, the Philippine economy grew a real 1.8 percent.

“This time, while we do not wish to understate the severity of the global downturn, mitigating factors do exist,” Teather said.

For one, Teather explained that private and public sector balances and balance sheets were in a comparatively healthy position. Moreover, there had been moderation in the pace of increase in commodity prices after the dramatic increases of the last 18 months.

Teather said UBS now forecasts lower oil and other commodity prices in 2009 and this would provide relief for domestic real incomes.