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Business Sentiment Turns Bearish in Q3 2008 but is More Positive in Q4 2008


Business outlook is bearish

Results of the Business Expectations Survey (BES) indicated that the business outlook turned bearish in Q3 2008. The overall confidence index (CI) was at -12.9 percent, the first negative reading since Q3 2005. This indicated that respondents with a negative outlook outnumbered those with a positive outlook. This sentiment is consistent with the dip in business and consumer morale observed in many developed economies due to the less favorable global economic and financial conditions.

BSP Governor Amando M. Tetangco, Jr. said that the business confidence was weighed down by the following factors: 1) the surging prices of fuel and other raw materials; 2) rising domestic prices of food (especially rice) and services (transportation and communication); 3) global economic downturn, particularly in the US, the country’s major trading partner; 4) rising wages; and 5) local political noise.

Respondents, however, were broadly optimistic that business conditions would improve in Q4 2008, as the CI reverted to 16.6 percent. This quarter-ahead view was similar to the level posted last quarter.

Sentiment in both the NCR (National Capital Region) and AONCR (Areas Outside National Capital Region) tracked those in the national levels, as their CIs were negative in the current quarter and positive in the next quarter. Firms located in the major regions surveyed (Regions I, IV, VII and XI) also have a broadly negative outlook in Q3 2008 (with the exception of respondents from Region IV) but were more bullish in Q4 2008.

The weaker confidence in the current quarter was prevalent across all types of firms (i.e., importers, exporters and those engaged in dual roles). The weakest sentiment was posted by importers, while exporters and those engaged in both importing and exporting activities were relatively less pessimistic. Expectations, however, were more upbeat in Q4 2008 as all types of firms posted positive indices, following anticipation of easing world oil prices in the next quarter.

Dip in business optimism is evident across all sectors

The economic outlook of all sectors weakened in Q3 2008 as their CIs dipped to negative values.

The services sector was the least pessimistic in Q3 2008 with a CI of -2.8 percent. A positive outlook was noted in most of the services sub-sectors; however, the overall sentiment of the services sector was   weighed   down   by   the negative sentiment of the financial intermediation sub-sector with CI of -28.9 percent. This could be explained in part by concerns over the effects on the value of firms’ financial assets of global financial market stresses and the possibility of a credit squeeze.

The construction sector posted a negative index of -10.5 percent, as did the industry and wholesale and retail  trade  sectors, which  registered  indices of -11.9 percent  and -23.2 percent, respectively, in Q3 2008. Respondents from these two latter sectors cited the continued rise in input costs (i.e., fuel, raw materials, and wage rates) and lower consumer demand from abroad as the reasons behind their less enthusiastic outlook for the macroeconomy.

By Q4 2008, a turnaround in sentiment across sectors is evident as the CIs turned positive, in keeping with expectations of brisker demand during the last quarter of the year. Nevertheless, the next quarter outlook were lower relative to the levels recorded a year ago.

Sentiment on business operations is mixed

Firms expressed mixed sentiments on their own business operations in Q3 2008. Firms from the construction and services sectors were more confident about their current business operations compared to their counterparts from the industry and trade sectors.  This less enthusiastic sentiment of the industry and trade sectors may be partly explained by expectations of a decline in consumer demand due to uptrend in the prices of basic commodities.

Average capacity utilization of the industry sector in Q3 2008 of 77.6 percent was lower from its level in the previous quarter and relative to its level a year ago.

Credit access and financial conditions are anticipated to be tighter

The credit access index in Q3 2008 was at -1.6 percent, a reversal of last quarter’s 3.0 percent and last year’s 10.4 percent. The index—the lowest since Q2 2006 (at -3.5 percent)—indicated tighter access to credit.
The financial condition index—an indicator of internal liquidity—further dropped to -29.1 percent in Q3 2008 from -17.8 percent last quarter and -5.1 percent a year-ago, indicating that firms were less liquid during the current quarter.  The drop in the index was attributed to expectations of lower volume of sales due to the slowdown in domestic economic growth and higher operating costs brought about by the increase in the minimum wage and inflation rate.

Employment outlook is favorable with more industrial firms planning to expand

The employment outlook index in Q4 2008 remained positive at 8.3 percent but lower quarter-on-quarter and year-on-year. The positive index reflected the firms’ expectations of hiring new and additional employees in Q4 2008. In particular, about 25 percent of respondents from the industry sector indicated expansion plans in Q4 2008.

Business constraints

Competition, weak demand (leading to low sales volume), and high interest rates were the major constraints cited by firms which could limit their business opportunities in Q3 2008.

Expectations on selected economic indicators

Firms anticipated that the peso would weaken, that the inflation rate would accelerate, and that interest rates would increase in Q3 and Q4 2008.

Response rate

The Q3 2008 BES was conducted from 4 July to 11 August 2008.  A total of 1,249 firms nationwide were surveyed. Respondents were drawn from the Securities and Exchange Commission 2006 Top 7,000 Corporations as follows: 515 companies in NCR (41.2 percent) and 734 firms in AONCR (58.8 percent), covering all 17 regions nationwide. The overall survey response rate for this quarter was 74.3 percent compared to 71.4 percent last quarter. For NCR, the response rate was 73.0 percent (73.7 percent last quarter); and for AONCR, the response rate was 75.2 percent (from 69.8 percent). A breakdown of responses received by type of business showed that 11.7 percent were importers, 9.5 percent were exporters, and 15.8 percent were both importers and exporters. About 63 percent of the respondents were neither importers nor exporters or did not specify their firm type.

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