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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.

In a briefing on Thursday, 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 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”

Supported by pent-up demand & a sharpened inventory cycle as well as relaxed fiscal  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% in 2010, up marginally on an earlier forecast of 4.6% & considerably better when compared to this year’s projected 1.3 percent.

However, Fillipino growth next year will  likely remain slower than the growth forecast for neigbouring countries; Singapore – 7%, Malaysia 6%, Thailand & Indonesia, both with 6% forecast GDP increases.

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 areprojected to shift to a cycle of monetary tightening by the second half of next year.

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.”

In the cousrse of the next three to six months, Donovan said the US dollar would likely strengthen a little (5%-10%) asfinancial markets may be disappointed with the pace of global recovery and thus reconsider the greenback as a short term “safe haven.”

Donovan also said the macroeconomic fundamentals that have weakened the US dollar, including the continuing current account deficits, would likely last foranother five years. Orderly depreciation of the US dollar and a consequent appreciation of Asian currencies, will not necessarily hurt economic prospects in the Philippines.

Donovan also noted, as the currencies of the Phillipines regional peers, with which the country is competing with in terms of exports, are also following the same uptrend, local currency appreciation won’t necessarily weigh down competitiveness.