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Business Sentiment Turns Bullish in Q3 2009


Business sentiment turns sharply higher

Business sentiment continued to improve in Q3 2009 as the overall confidence index (CI) reverted to positive territory. This is the first time since Q3 2008 that optimists outnumbered pessimists. The CI, at 18.4 percent, jumped sharply by 31.3 index points year-on-year and by 21.0 index points quarter-on-quarter. The buoyant outlook carried on to Q4 2009, with the CI at 33.7 percent, higher by 20.0 index points quarter-on-quarter and by 17.1 index points year-on-year. This upbeat trend in business sentiment sustained the positive development observed in the last quarter’s survey results. The favorable sentiment was also consistent with the emerging outlook of improving global economic conditions based on readings suggesting stabilization and/or recovery in key economic indicators.

The improvement in domestic macroeconomic fundamentals (i.e., subdued price pressures/declining inflation, easing interest rates, rising overseas Filipinos’ remittances, and the relatively stable peso) helped lift business sentiment. Moreover, the expected seasonal pick-up in consumer demand in the last quarter of the year may have contributed to the optimistic outlook for Q4 2009.

Respondents from both the National Capital Region (NCR) and the Areas Outside the NCR (AONCR) registered more upbeat outlook for the third quarter.  However, NCR respondents were more bullish on the economy than their counterparts from the AONCR in Q3 and Q4 2009. Firms located in the AONCR have a generally positive outlook in Q3 2009, with the exception of respondents from Region I. The outlook of respondents from Region I was weighed down by the pessimism of firms in the services sector, mainly due to the seasonal slowdown in tourism-related business activities (i.e., hotels and restaurants and transportation businesses) during the rainy season. In terms of the quarter-ahead outlook, all regional respondents have a favorable view of the macroeconomy for the next quarter.

All types of businesses (i.e., importers, exporters and those engaged in dual activities) expected more favorable economic conditions in Q3 2009 as their confidence indices turned positive. This favorable outlook of businesses continued for Q4 2009 as their indices were higher than in Q3 2009.

The outlook of all firms by employment size likewise improved year-on-year and quarter-on-quarter. The CIs across firms were all positive for the last two quarters of the year. Large-sized firms were the most optimistic in Q3 2009, while medium-sized firms were the most bullish in Q4 2009.

More buoyant business sentiment is evident across all sectors

All sectors were bullish about the macroeconomy in Q3 2009, with the indices climbing year-on-year and quarter-on-quarter.

The construction sector had the most favorable business outlook, with CI at 37.3 percent. The services sector was likewise upbeat in Q3 2009, with a CI at 20.2 percent, an increase by 23.0 index points and 19.2 index points year-on-year and quarter-on-quarter, respectively. This improved optimism reflected the positive views of all sub-sectors, particularly financial intermediation and community and social services. Notably, the financial intermediation sub-sector recorded the highest year-on-year and quarter-on-quarter increase among sub-sectors. This trend could be attributed to the resilience of the Philippine banking system amid the global financial strains.
The CIs of the industry sector (at 18.8 percent) as well as of the wholesale and retail trade sectors (at 12.8 percent) were also higher quarter-on-quarter and year-on-year, and this could signal more buoyant consumer demand starting in the current quarter.
Looking ahead to the next quarter, all sectors continued to post positive indices for Q4 2009. The services sector was most optimistic with a CI at 41.0 percent. Among the services sub-sectors, financial intermediation posted the most improved CI. Closely behind was the hotels and restaurants sub-sector, which expected brisker business during the Yuletide season.  

More firms were bullish about their business operations

Respondents were also bullish that their operations would continue to be favorable in Q3 2009 as indices were higher relative to levels recorded a year ago and during the last quarter. Firms in the construction sector were the most optimistic, followed closely by firms in the services sector.

Despite the improving outlook of firms on their own operations, the average capacity utilization in Q3 2009 slightly declined to 68.9 percent compared to last quarter’s 69.2 percent.

Expectations regarding credit access and financial conditions improve

The credit access index (CAI) continued to improve in Q3 2009 at -0.8 percent from -7.2 percent in Q2 2009. The current CAI indicated that the number of firms that expected tighter access to credit was almost equal to the number of firms that expected otherwise.

The financial condition index, which is an indicator of internal liquidity, likewise improved at -17.4 percent from -26.8 percent in Q2 2009. This implied that fewer number of respondents expected liquidity problems in Q3 2009 compared to the previous twelve-month period and the preceding quarter.

Employment outlook turns positive and the number of industrial firms with expansion plans increases

The employment outlook index for Q4 2009 turned positive at 9.4 percent, after being negative for the past three quarters. The employment outlook continued to be favorable for the construction and services sectors (specifically hotels and restaurants, real estate, renting and business activities and financial intermediation sub-sectors), consistent with their positive macroeconomic outlook in Q3 2009.

Meanwhile, 17.4 percent of industrial firms (from 16.0 percent in the last quarter survey) indicated that they have expansion plans for Q4 2009.

Competition remains a major risk to business

Competition, weak demand, and financial problems were considered by the respondents as the key risks to business activity in Q3 2009.

Expectations on key economic indicators likewise improve

Firms anticipated that the peso will weaken, that inflation will rise, and that interest rates will decline in Q3 2009. However, there were fewer respondents with expectations of a weakening peso and rising inflation compared to those in the previous year and in the preceding quarter. Notably, the CI for inflation at 4.4 percent in Q3 2009 was lower by year-on-year and quarter-on-quarter. Likewise, the number of respondents that indicated that the peso would depreciate in the current quarter (CI at -4.2 percent), decreased relative to the previous year and quarter. For Q4 2009, firms anticipated that the peso will appreciate, and that inflation and interest rates will increase.

Survey response rate at 76.2 percent

The Q3 2009 BES was conducted during the period 1 July-14 August 2009. There were 1,389 firms surveyed nationwide. Respondents were drawn from the Securities and Exchange Commission 2008 Top 7,000 Corporations as follows: 514 companies in NCR (37.0 percent) and 875 firms in AONCR (63.0 percent), covering all 17 regions nationwide. The survey response rate for this quarter was 76.2 percent, lower than last quarter’s 77.6 percent. For NCR, the response rate was 73.2 percent (from 80.4 percent last quarter); and for AONCR, the response rate was 78.1 percent (from 76.0 percent). A breakdown of responses received by type of business showed that 10.4 percent were importers, 7.8 percent were exporters, and 14.7 percent were both importers and exporters. Sixty-seven percent of the respondents were neither importers nor exporters or did not specify their firm type.

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