Business confidence rises to near high in Q2 2010
Business sentiment was more buoyant in the second quarter of 2010, with the overall confidence index (CI) rising to 43.9 percent from 39.1 percent in Q1 2010 and -2.6 percent in Q2 2009. 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
The current quarter CI approximated pre-2008 crisis levels when business optimism reached its peak during the period Q4 2006 - Q4 2007. The improved business outlook is consistent with the expected broad-based, solid economic growth this year which draws support from the recovery in export revenues, moderate inflation, steady growth of overseas Filipinos’ (OFs) remittances and stable peso. Businesses also attributed their bullish outlook to the anticipated higher consumer spending attendant to the May national elections. The favorable business sentiment likewise mirrored the improving business confidence in countries such as Hong Kong, Indonesia, Singapore, Germany, Italy, and the United States.
Business optimism in both the National Capital Region (NCR) and Areas Outside NCR (AONCR) continued to improve in Q2 2010 relative to the outlook prevailing a quarter ago. NCR respondents were notably more positive in their business outlook than respondents based in AONCR, indicating that economic conditions and prospects remained more favorable in NCR compared to that in AONCR.
Following the continued gradual recovery in global trade and improved external demand for Philippine goods, respondents involved in exporting and dual international trading were the most bullish in their outlook in Q2 and Q3 2010, with the CIs reaching all-time high levels since the nationwide survey commenced in Q1 2007.
All firms, regardless of the size of operations, remained positive in their business outlook in the current and next quarters. Large firms were the most optimistic followed by the medium and small firms.
Optimism remains across sectors
Reflecting the improved overall business sentiment on the macroeconomy, businesses across sectors continued to have a more favorable outlook in Q2 2010.
The services sector had the most favorable outlook, pulled up largely by the heightened optimism of the financial intermediation sub-sector which benefited from key reforms that helped ensure steady asset expansion, improving overall asset quality and ample liquidity and solvency of the domestic banking system. Contributing also to the improved sentiment of the services sector were the buoyant outlook of the renting and business activities as well as hotels and restaurants sub-sector.
The sentiment of the industry sector continued to improve, with mining and quarrying, and manufacturing exhibiting greater optimism. Improving metal prices and the robust growth in exports, particularly the rebound in the country’s top dollar earner – electronics, provided the impetus for a more positive outlook in Q2 2010.
Similarly, the level of optimism of the wholesale and retail trade sector remained high, buoyed by respondents’ expectations of higher consumer spending in the domestic market due partly to the opening of the school year in June and election-related spending that spurred business activity in the sector. Meanwhile, the business outlook of the construction sector remained upbeat and stable.
Expectations for the next quarter tracked those in the current quarter with all sectoral indices moving on an uptrend year-on-year. Consistent with the usual downtrend in the business cycle during the rainy season, all sectors’ outlook for Q3 2010 declined quarter-on-quarter.
Positive sentiment on own business operations continues
Businesses’ outlook about their own operations showed a mixed pattern across sectors. The industry and services sectors indicated a more positive outlook, partly explained by the expected increase in the total orders and improved business activity. Meanwhile, the optimism of the other two sectors, although remaining positive, declined quarter-on-quarter. The expected pile-up of inventory due to sluggish activity in the wholesale and retail trade sector in the previous quarter slightly pulled down the sentiment of wholesalers and retailers.
Credit access and financial conditions of firms are more favorable
Credit access continued to be favorable in Q2 2010 as more firms reported a significant increase in their access to credit compared with their quarter- and year-ago levels. Financial conditions likewise improved but remained tight as the index remained in the negative territory at -5.0 percent. These survey results could possibly be due to the combined effects of continued easing of banks’ credit standards and tightening conditions of the firms’ loan contracts.
Employment expectations show a high level of optimism in the next quarter
The employment outlook index at 19.9 percent, although lower from its quarter-ago level, indicated that hiring of additional employees is expected to continue in Q3 2010. Favorable employment prospects were anticipated in the services sector (specifically renting and business activities, and financial intermediation sub-sectors).
More firms have plans for expansion
Consistent with the more positive outlook of the industry sector about their own operations, more firms indicated expansion plans for Q3 2010. Expansion plans were noted across all sub-sectors, with the mining and quarrying sub-sector recording the highest year-on-year growth.
Competition, weak demand and financial problems limit business activity
Competition, weak demand (leading to low sales volume), and financial problems were the key challenges to business activity in Q2 2010. These three business constraints were the same factors identified by the respondents since Q1 2009.
Higher inflation and interest rates as well as a stronger peso are expected in Q2 and Q3 2010
Respondent firms expected inflation and interest rates to go up and the peso to appreciate in Q2 and Q3 2010. However, fewer respondents during the quarter expected that inflation and interest rates would go up compared with the previous quarter’s survey results. In contrast, more firms expected the peso to appreciate compared with their quarter- and year-ago levels.
The anticipated appreciation of the peso in Q2 and Q3 2010 could stem from sustained foreign exchange inflows arising from the improved performance of exports, steady OF remittances, and foreign direct and portfolio investments.
The survey response rate is 75.1 percent
The Q2 2010 BES was conducted during the period 5 April – 7 May 2010. There were 1,632 firms surveyed nationwide. Respondents were drawn from the Securities and Exchange Commission’s Top 7,000 Corporations, as follows: 603 companies in NCR (36.9 percent) and 1,029 firms in AONCR (63.1 percent), covering all 17 regions nationwide. The survey response rate for this quarter was 75.1 percent. For NCR, the response rate was 75.3 percent (from 77.6 percent last quarter); and for AONCR, the response rate was 74.9 percent (from 70.4 percent).
A breakdown of responses received by type of business showed that 12.0 percent were importers, 7.2 percent were exporters, and 13.6 percent were both importers and exporters. About two-thirds of the respondents were neither importers nor exporters or those that did not specify their firm type.
1 A positive CI indicates a favorable view.
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