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Philippines turns the fiscal corner - says UBS

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Recognizing the fiscal progress in the Philippines, UBS Investment Research upgrades its Peso and GDP forecasts for the Philippines for 2005 and 2006.

"We believe the Philippines has turned the fiscal corner on the back of the reforms being initiated by the government," says UBS in its Philippines Economic Update just released by UBS Investment Research. "The Bangko Sentral ng Pilipinas (BSP, central bank), is also likely to continue to delay raising policy rates despite rising inflation, having an objective that is oriented towards pro-economic growth with a stable exchange rate," it added.

On the fiscal side, progress has been made on a number of fronts. The National Government deficit has been contained within government targets and was inside its target for 2004; the power rate increase granted to the National Power Corporation in September last year is an important step in fiscal consolidation; and the prospective approval of a 2% rise in VAT, if approved by the Senate also bodes well for fiscal stability. All these measures, buttressed by the withdrawal of VAT exemptions, privatizations and direct investment into the mining industry have vastly improved the credit outlook.

In light of its more positive outlook on the Philippines, UBS upgraded its base case scenario for the Philippine economy and made some key changes to its forecasts. UBS revised its 2005 and 2006 forecasts for the PHP/USD to 55.0 (from 57.0) and 54.0 (from 56.0), respectively, as it factored in an improvement in the tax/fiscal situation. It also changed its policy rates projection from a 200bp hike to a 75bp hike in 2005.

UBS also raised its 2005 and 2006 real GDP growth forecasts to 5% (from 4.5%) and 6% (from 5%) on a more upbeat view of foreign direct investments in the mining sector.

The upturn in the economy driven by strong consumption on the expenditure side and strong manufacturing on the output side contributed to a robust economic performance last year, with real GDP growth in excess of 6% - and in line with official forecasts. In light of the slowdown in global growth UBS thinks it is unlikely that this performance will be repeated in 2005. However, UBS believes that the Philippines has turned the fiscal corner, in large part, as a result of the government's reform programme.

Manila,10 March 2005


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