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Business Confidence Continues to Rise in Q1 and Q2 2012

02.23.2012

Business sentiment continues to improve in Q1 and Q2 2012

Business sentiment improved for the third consecutive quarter in Q1 2012, with the confidence index (CI) rising to 40.5 percent from 38.7 percent in Q4 2011. 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. 

The continuing uptrend in business confidence indicates that economic growth is likely to be sustained in 2012. Respondents cited the following factors for their continued optimism: (a) increase in orders; (b) new contracts and projects; (c) increase in government spending; (d) business expansion arising from steady investment inflows; (e) sound macroeconomic fundamentals and political stability; (f) possible further credit upgrades for the Philippines; and (g) introduction of new and enhanced business strategies and product lines. Business optimism in the Philippines mirrored the improved business outlook of firms in the US, Germany and India. This is in contrast to the less upbeat sentiment of firms in Korea, Singapore and Hong Kong.

Businesses turned even more bullish in the quarter ahead as the next quarter CI climbed to   55.4 percent from 36.1 percent in the previous quarter. This is due in part to the growth momentum in 2011, which is expected to be sustained on the back of the same factors that were behind the buoyant sentiment in Q1 2012. Moreover, respondents’ expectations of gradual recovery of global markets, particularly the US, and the dissipation of the effects of the natural disasters in Japan also contributed to the more bullish outlook next quarter.

Business confidence turns more upbeat in both NCR and AONCR in Q2 2012

Tracking the national trend, sentiments of businesses in Q1 2012 improved in the National Capital Region (NCR) but weakened in Areas Outside NCR (AONCR).   For Q2 2012, sentiment was more upbeat in both NCR and AONCR.

Firms engaged in international commodity trading are more optimistic

Firms engaged in international commodity trading were generally more optimistic in their outlook in Q1 2012. Business confidence of dual-activity  (or those that are both exporting and importing) and exporting firms improved due to increased orders and sales from abroad, high prices of metals in the world market, and business expansion. Meanwhile, importers’ outlook declined for the current quarter due to seasonality of demand for consumer goods. For the next quarter, the outlook of firms across all trade groups improved, with importing firms being the most optimistic.

Outlook of large-sized firms is most upbeat

The outlook of firms across employment size was broadly more favorable in Q1 and Q2 2012. Large-sized firms’ business confidence was the most buoyant, surging upwards for the current and next quarters.  Meanwhile, the sentiments of small and medium-sized firms, while remaining broadly steady in Q1 2012, turned more bullish for the next quarter.

Business outlook across sectors is mixed

Across sectors, the outlook of businesses was mixed in Q1 2012. Firms in the wholesale and retail trade and services sector were more optimistic while those in the construction and industry sectors were less upbeat. For the next quarter (Q2 2012), however, business confidence was more bullish across all sectors.

The services sector’s more favorable sentiment was driven by the more buoyant outlook of the financial intermediation, real estate, community and social services, and business activities. Firms from these sub-sectors cited growth in consumer demand, the acceleration in government spending, increased revenues generated from Business Process Outsourcing (BPOs) and remittances from overseas Filipinos, a favorable investment climate, minimal spillover effects of the global economic slowdown and possible further credit upgrades for the Philippines as reasons behind their optimism.

Similarly, the wholesale and retail trade sector attributed their more bullish outlook to increasing demand, business expansion, increased government spending, and the brighter growth prospects of emerging Asian economies.

Meanwhile, the sentiment of the construction sector dipped slightly in Q1 2012. Despite the government’s announcement of the release of funds for infrastructure projects in early January, respondents perceive that bidding for new infrastructure projects for 2012 are not expected to be completed immediately. This notwithstanding, business sentiment of the sector continued to be the most sanguine compared to the other sectors. On the other hand, industrial firms had a less positive outlook in Q1 2012 due to high prices of fuel and other commodities, concerns about raw materials and other supplies, and adverse effects of fungal plant diseases in banana plantations in Region XI.

Businesses’ outlook about their own operations is more favorable

Led by the services sector, expectations of businesses about their own operations were more favorable across all sectors compared to the last quarter and a year ago, due to the anticipated uptick in the volume of business activity in the coming quarter.

More firms expect easier access to credit and less tight financial conditions

Financial conditions improved from the previous quarter but remained tight. However, firms are of the view that their liquidity requirements could be met through available credit as more respondents continued to report easier access to credit relative to those who said otherwise compared to a quarter ago.

Employment outlook is more robust

Another indicator supporting sustained confidence in the economy is the employment outlook index for the next quarter, which matched the high of 24.0 percent registered in Q3 2010.

Number of firms with expansion plans increase

About three in every ten respondent firms in the industry sector (28.8 percent) indicated expansion plans for Q2 2012. Increased expansion plans in the mining and quarrying, and manufacturing sub-sectors offset the decline in the expansion plans in the agriculture, fishery and forestry, and electricity, gas and water supply sub-sectors. Meanwhile, the average capacity utilization in Q1 2012 rose slightly to 74.8 percent from 74.5 percent in Q4 2011.

Competition, weak demand, and unclear economic laws: major risks to business

The top three business constraints identified by respondents in Q1 2012 were: competition, insufficient demand (leading to low sales volume), and unclear economic laws (such as double standard in implementation of laws, red tape, outdated labor laws, and unclear applications of tax laws, among others).

A stronger peso, higher inflation and lower interest rates are expected

Respondents that expected inflation to go up continued to outnumber those with opposite views, but the number that said so declined in Q1 and Q2 2012. This indicates that inflationary expectations have declined, consistent with the expected easing of global commodity price pressures amid weaker global growth prospects.

On the other hand, fewer respondents expected the peso to appreciate in Q1 2012. However, more firms anticipated the peso to strengthen in Q2 2012. Expectations of the peso’s sustained appreciation could be due to anticipated strong inflows of overseas Filipinos’ remittances and foreign investments.  Meanwhile, interest rates were expected to decline in the current quarter, after the Monetary Board’s decision to cut policy rates by 25 basis points (bps) in January 2012, but to remain broadly steady in Q2 2012, as the index declined but remained positive at 1 percent.

Survey response rate at 78.6 percent

The Q1 2012 BES was conducted during the period 6 January–14 February 2012. There were 1,587 firms surveyed nationwide. Respondents were drawn from the Securities and Exchange Commission’s Top 7,000 Corporations, as follows:  607 companies in NCR and 980 firms in AONCR, covering all 17 regions nationwide. The survey response rate for this quarter was higher at  78.6 percent (from 76.4 percent in the previous quarter). The response rates were higher for NCR and AONCR, at 75.5 percent (from 75.4 percent in the previous quarter) and 80.6 percent (from  76.9 percent in Q4 2011), respectively.

A breakdown of responses by type of business showed that 17.5 percent were importers,  5.4 percent were exporters, and 16.5 percent were both importers and exporters. About  60.6 percent of the respondents were neither importers nor exporters, or did not specify their firm type.

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