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Business Outlook Rises to a New High in Q4 2010

11.18.2010

Business confidence highest in Q4 2010

Business sentiment in Q4 2010 was more buoyant, with the overall confidence index (CI) reaching 50.6 percent, the highest reading since the start of the survey 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.  This compared favorably with the 45.0 percent CI in Q3 2010 and  22.0 percent CI in Q4 2009. 

Based on respondents’ replies, the all-time high business outlook for the current quarter was driven by: (a) expectations of sustained improvements in the economy on the back of strong domestic demand fuelled partly by the steady stream of overseas Filipinos’ (OFs) remittances and higher capital inflows; (b) the seasonal factor of stronger business sentiment during the Christmas and harvest seasons; and (c) continued strong confidence in the new government. The positive business sentiment likewise mirrored the improving business confidence in countries such as Canada, Hong Kong, India, Germany, Italy and New Zealand.

Businesses were less optimistic for the next quarter (Q1 2011) in view of the expected slowdown of business activity after the Christmas season. The next quarter CI fell to 51.0 percent from 59.2 percent in   Q3 2010.

Business sentiment in both the National Capital Region (NCR) and Areas Outside NCR (AONCR) remained bullish in Q4 2010, with both their CIs registering record-high levels of confidence since the start of the nationwide survey in Q4 2003. 

Businesses involved in international commodity trading (i.e., importers, exporters and those engaged in dual activities) have a positive but less favorable outlook relative to the previous quarter’s survey results due to expectations of low export demand on account of the slow economic recovery of international markets from the global financial crisis. The strengthening of the peso also contributed to the lower confidence of respondents in the exports business, but the same factor provided support to the more sanguine outlook of importers given that a stronger peso reduces the cost of imports in peso terms.

By employment size, all firms (small, medium and large-sized firms) indicated more buoyant outlook in Q4 2010 compared to their outlook a quarter ago.

Mixed business sentiments are reported across all sectors

Businesses displayed mixed sentiments across sectors in Q4 2010. The services sector had the most favorable business outlook because of improved optimism of all the sub-sectors (financial intermediation, hotels and restaurants, real estate, renting and business activities), except for the community and social services sub-sector.  The buoyant outlook of the financial intermediation sub-sector reflected the resiliency of the domestic banking system, which is reflected in its solid asset growth, improving loan and asset quality, continuing good returns on equity and adequate capitalization.  The anticipated pick-up in business opportunities during the Christmas season propped up the business outlook of the other three sub-sectors (hotels and restaurants, real estate and renting activities, and business activities).
 
Similarly, the business confidence of the wholesale and retail trade sector was also more favorable quarter-on-quarter and year-on-year. 

Despite the significant improvement in the outlook of the electricity, gas and water and mining sub-sectors, the sentiment of the industry sector as a whole declined partly due to the lower optimism of the manufacturing and agriculture, fishery and forestry sub-sectors. 

Meanwhile, the positive outlook of the construction sector was broadly steady. 

For the next quarter (Q1 2011), business expectations were most optimistic in the construction sector, buoyed by the planned implementation of big-ticket infrastructure projects under the public-private partnership (PPP) scheme.

Meanwhile, the economic outlook of the other sectors was less favorable compared to a quarter ago.

Businesses’ outlook about their own operations improves

Led by the services sector, businesses’ outlook about their own operations improved across all sectors year-on-year, partly due to the increase in the total volume of business activity and total orders in the current quarter.
 
Firms’ access to credit remains favorable and financial conditions improve

Expectations about access to credit remained favorable in Q4 2010 as more firms continue to report easier access to credit relative to those who said otherwise. Results of the Senior Loan Officers Survey indicating unchanged banks’ credit standards for the sixth consecutive quarter validate businesses’ perception of an improvement in the access to credit.  Financial conditions improved but nonetheless remained tight as the index stayed in the negative territory at -1.1 percent.

Employment outlook declines but remains positive

Firms anticipated less favorable employment conditions in Q1 2011 compared to the previous quarter due largely to the lower employment outlook of the industry and wholesale and retail trade sectors. In contrast, the construction and services sectors anticipated better employment conditions during the period.
 
Fewer firms indicate expansion plans

With the less upbeat business outlook of the industry sector on the economy, fewer firms (25.7 percent) indicated expansion plans for Q1 2011 compared to the last quarter’s survey (27.0 percent).

Competition, weak demand, and financial problems are still the major risks to business

Competition, weak demand (leading to low sales volume), and financial problems were the factors that limits the business activity in Q4 2010. These three business constraints were the same factors identified by the respondents since Q1 2009.

Lower interest rates, higher inflation and a stronger peso are expected in Q4 2010

Businesses have a generally favorable perception on the direction of selected economic indicators for the current and the next quarters. Majority of the respondents expected inflation to increase in the current and next quarters. However, those who have this view was fewer in number despite demand-based price pressures arising from the stronger-than-expected domestic economic recovery, the impact of weather conditions on agricultural production, and petitions for electricity rate adjustments, as these factors could be mitigated by a tepid global economic recovery and the peso appreciation.  This suggests that inflation expectations remain well-contained. 

Respondents also expected interest rates to go down in the current quarter but they expect interest rates to go up in the next quarter.  Meanwhile, the continued strengthening of the peso against the US dollar was anticipated for both quarters given sustained foreign exchange inflows from OF remittances, merchandise exports, business process outsourcing services and foreign direct and portfolio investments.

Survey response rate is 75.4 percent

The Q4 2010 BES was conducted during the period 1 October – 9 November 2010. There were 1,624 firms surveyed nationwide. Respondents were drawn from the Securities and Exchange Commission’s Top 7,000 Corporations, as follows:  600 companies in NCR     (37.0 percent) and 1,024 firms in AONCR (63.0 percent), covering all 16 regions nationwide. The survey response rate for this quarter was 75.4 percent (from 74.7 percent in the previous quarter). For NCR, the response rate was 73.3 percent (from 74.0 percent in the previous quarter), and for AONCR, the response rate was 76.7 percent (from 75.2 percent in the previous quarter). 

A breakdown of responses received by type of business showed that 12.7 percent were importers, 7.8 percent were exporters, and 14.4 percent were both importers and exporters. About 65.0 percent of the respondents were neither importers nor exporters or did not specify their firm type.

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