Business confidence continues to climb in Q3 2010
Business sentiment remained positive and on an uptrend since Q3 2009, with the overall confidence index (CI) rising to 45.0 percent from 43.9 percent in Q2 2010 and from 18.4 percent in Q3 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
Respondents attributed their optimistic outlook to the following factors: steady growth of overseas Filipinos’ (OFs) remittances, smooth transition of power and favorable expectations on the new government that could boost investor confidence in the economy, better performance of exports and sustained investment inflows, and government spending on infrastructure, social services and environment protection that could spur business activity. The improvement in the overall outlook is consistent with the solid macroeconomic environment as evidenced by the narrowing of the country’s credit spreads, rising equity market index, appreciating peso and moderate inflation. The positive business sentiment likewise mirrored the improving business confidence in countries such as Canada, Hong Kong, India, Indonesia, Germany and Italy.
Businesses’ sanguine outlook was more pronounced in the quarter ahead (Q4 2010), reaching an all-time high of 59.2 percent since the nationwide survey started in Q4 2003.
Business optimism in both the National Capital Region (NCR) and Areas Outside NCR (AONCR) improved in Q3 2010 with NCR respondents notably more upbeat 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.
Businesses involved in international commodity trading (i.e., importers, exporters and those engaged in dual activities) continued to have a positive outlook. However, the optimism of exporters and dual-activity firms declined compared to a quarter ago in view of the respondents’ expectations that there will be no significant change in export demand, low volume of orders for some agricultural products during the lean months and the existing ban on tuna fishing on international waters. Looking ahead to the next quarter, importers and those engaged in dual activities were the most optimistic.
By employment size, all firms remained positive in their business outlook in the current and next quarters. The sentiments of large and small firms were more buoyant in Q3 2010 compared to the mood a quarter ago. The large firms had the most upbeat outlook.
Positive sentiments are reported across all sectors
Favorable business sentiment was observed across all sectors. The business morale of the industry sector was more buoyant while the optimism of the remaining three sectors (services, construction, and trade) was steady or slightly tempered relative to Q2 2010, due in part to the usual downtrend in business activities during the quarter.
Business confidence of the industry sector was also highest among the sectors. Higher volume of orders both from the domestic and international fronts and diversified markets provided the boost for a more positive outlook in Q3 2010 for the sector.
The sentiment of the services sector remained steady quarter-on-quarter. The significant improvement in the outlooks of the real estate and financial intermediation sub-sectors were counterbalanced by the muted optimism of the hotels and restaurants, transportation, and community, social and other personal services sub-sectors, owing, to some extent, to the seasonal slowdown in tourism-related activities during the quarter.
The outlooks of the wholesale and retail trade as well as the construction sectors were less favorable than they were a quarter ago, as a result largely of the expected deceleration in the business activities of the sectors.
Expectations for the next quarter (Q4 2010) were bullish across all sectors.
Buoyant outlook on own business operations is evident across all sectors
Respondents are confident that their own business operations would improve in Q3 2010. Their optimism stemmed from the broadly steady volume of total orders and business activity across all sectors in the current quarter. Firms in the services sector were the most upbeat, followed by those in the construction sector.
Credit access and financial conditions of firms continue to improve
Credit access continued to improve in Q3 2010 as more firms reported a significant increase in their access to credit compared to the situation during the previous quarter and the same quarter last year. Results of the Senior Loan Officers Survey indicating unchanged banks’ credit standards for the fifth consecutive quarter as well as the continued expansion of banks’ lending activities validate the improvement in the access to credit. Financial conditions likewise improved but remained tight.
Employment outlook is robust
Another indicator supporting the sustained confidence in the economy is the employment outlook index for the next quarter, which reached a record high of 24.0 percent. Except for the electricity, gas and water sub-sector, favorable employment prospects were anticipated in all of the sectors (specifically financial intermediation, miscellaneous business activities, and hotels and restaurants sub-sectors), as these companies gear up for expected strong demand in Q4 2010.
More firms indicate expansion plans
Consistent with the more positive outlook of the industry sector about their own operations, more firms indicated expansion plans for Q4 2010, with mining and quarrying sub-sector recording the highest year-on-year growth.
Competition, weak demand, and financial problems are seen as major risks
Competition, weak demand (leading to low sales volume), and financial problems were the key challenges to business activity in Q3 2010. These three business constraints were the same risks identified by the respondents since Q1 2009.
Higher inflation and interest rates as well as a stronger peso are expected in Q3 and Q4 2010.
Respondent firms expected inflation and interest rates to go up and the peso to appreciate in Q3 and Q4 2010. Fewer respondents anticipate inflation to go up and the peso to appreciate during the current quarter compared with the previous quarter’s survey results while more respondents expect interest rates to increase in Q3 2010 relative to Q2 2010.
The expected increase in inflation could stem from weather-related disturbances which could affect commodity prices and the pending petition for power rate hikes, but the impact of these factors could be mitigated by the expected appreciation of the peso. The anticipated appreciation of the peso in Q3 and Q4 2010 could arise 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 74.7 percent
The Q3 2010 BES was conducted during the period 1 July – 10 August 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 74.7 percent. For NCR, the response rate was 74.0 percent (from 75.3 percent last quarter); and for AONCR, the response rate was 75.2 percent (from 74.9 percent).
A breakdown of responses received by type of business showed that 12.3 percent were importers, 7.2 percent were exporters, and 13.8 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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