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Businesses Are More Confident in Q1 2010

02.25.2010

Business confidence is more upbeat in Q1 2010

Emerging from the challenging economic conditions in 2009, businesses expect economic activity to continue to pick up in the current and succeeding quarters amid clearer signs of global economic recovery.  Business sentiment turned more optimistic, with the business confidence index (CI) for Q1 2010 rising sharply to 39.1 percent, the highest level in two years, while the next quarter (Q2 2010) index stood at 52.6 percent, the second highest level reached since the survey started in 2001. The confidence index is computed as the percentage of firms that answered in the affirmative less the percentage of firms that answered in the negative with respect to their views on a given indicator. 1 

Moderate inflation, the steady stream of overseas Filipinos (OFs) remittances, and election-related spending are some of the factors that buoyed respondents’ expectations of higher spending that will spur business activity. Furthermore, firms expected that continued foreign investment inflows will help provide funds for economic expansion.  This favorable business outlook mirrors the improving business confidence in countries such as Hong Kong, Singapore, Australia, Europe, and the United States.
 
Business morale in both NCR and AONCR is more buoyant for Q1 2010 relative to the outlook prevailing a quarter ago. NCR respondents continued to be relatively more optimistic in their business outlook than respondents based in AONCR.

Respondents involved in international commodity trading (i.e., importers, exporters and those engaged in dual activities) were more sanguine in their business outlook following indications of improving external demand for Philippine goods from key markets in Asia, Europe and the United States.  Businesses expect export growth to accelerate in the first two quarters of 2010.

All firms, regardless of the size of operations, reported stronger business confidence indicating that the economic recovery will benefit the business sector as a whole.

Optimism improves across sectors

Business sentiment across sectors continued to improve in Q1 2010.  The construction sector exhibited heightened optimism, benefiting from government infrastructure projects and big construction activities in the real estate market.  Similarly, the level of optimism of the services sector remained high, with the financial sub-sector’s positive outlook approximating pre-crisis levels.  Timely assistance to ensure the availability of ample liquidity during the global financial crisis and effective supervision of banks contributed to the resilience of the domestic banking system.  These factors helped to ensure that asset quality is high, that asset growth continues, and that capital is adequate to sustain the industry’s growth momentum.  The favorable outlook of the services sector was also largely lifted by the significant improvement in business outlook of the renting and business activities sub-sectors due partly to respondents’ expectations of strong demand for housing in the low- to medium-market segments, the increase in advertising spending of candidates for the forthcoming May 2010 elections, and the consistent growth of business process outsourcing (BPO) activities in the country.
 
The industry sector is also expecting a rebound, with the mining and agriculture sub-sectors having the most optimistic outlook.  The sentiments of the wholesale and retail trade sectors were also more favorable quarter-on-quarter and year-on-year, due to expectations of recovery of exports and increased consumer demand due to election-related spending.

Looking ahead to the next quarter, businesses were also more upbeat in their outlook. The services sector was the most optimistic, followed by the wholesale and retail trade sector.

Optimism on business operations is higher across all sectors

Consistent with the improved economic outlook, businesses across all sectors are more optimistic about their own business operations, reflecting the confluence of more favorable domestic and global conditions due in part to economic stimulus packages introduced in 2009.  The continued increase in the volume of business activity and total orders reflected the more positive outlook of firms on their own business operations.  The average capacity utilization in Q1 2010 rose to 72.0 percent from last quarter’s 69.8 percent.

Monetary easing measures help improve credit access and financial conditions of firms

Credit access continued to improve in Q1 2010, with more firms reporting a marked improvement in their access to credit.  Financial conditions likewise improved but remained tight as the index continued to be in the negative territory.  These showed that monetary policy easing measures that started in December 2008 were able to address the liquidity requirements of the economy and provided sufficient credit to businesses for their operations.

Employment expectations are favorable

Another indicator supporting expectations of an economic recovery is the employment outlook index for the next quarter which reached an all-time high of 22.0 percent.  The employment outlook was particularly favorable for the construction and services sectors, (e.g., the financial intermediation, renting and business activities, real estate and hotel and restaurant sub-sectors) as these companies gear up for heightened demand during the summer season and the May political exercise. 

Fewer firms have plans for expansion

As firms in the industry sector still have excess capacity, fewer firms (19.9 percent) indicated expansion plans for Q1 2010 compared to the last quarter’s survey  (23.7 percent).

Competition, weak demand and financial problems limit business activity

Respondents indicated that competition, weak demand (leading to low sales volume), and financial problems were the key challenges to business activity in Q1 2010. These three business constraints were the same factors identified by the respondents since the  Q1 2009 survey round.

Higher inflation and interest rates as well as a stronger peso are expected in  Q1 and Q2 2010

Respondent firms expected inflation and interest rates to go up and the peso to appreciate in Q1 and Q2 2010.  The expected increase in inflation could stem from the possible shortfall in the supply of agricultural products due to El Niño weather conditions and the impending power rate adjustments.  These factors could be tempered, however, by the expected appreciation of the peso.  Expectations of higher inflation could exert upward pressure on the interest rates.

Meanwhile, the appreciation of the peso in Q1 and Q2 2010 are anticipated given the expected recovery in exports and sustained inflows from OF remittances.

The survey response rate is 73.0 percent

The Q1 2010 BES was conducted during the period 5 January – 12 February 2010. There were 1,664 firms surveyed nationwide. Respondents were drawn from the Securities and Exchange Commission’s Top 7,000 Corporations, as follows:  603 companies in NCR (36.2 percent) and 1,061 firms in AONCR (63.8 percent), covering all 17 regions nationwide. The survey response rate for this quarter was 73.0 percent, with the response rates for NCR and AONCR at 77.6 percent and 70.4 percent, respectively. 

A breakdown of responses received by type of business showed that 13.3 percent were importers, 7.3 percent were exporters, and 14.4 percent were both importers and exporters. Sixty-five percent of the respondents were neither importers nor exporters or those that did not specify their firm type.

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1  A positive CI indicates a favorable view.

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