Business sentiment is less favorable in Q3 2012
Businesses’ outlook on the economy was less optimistic in Q3 2012, as the overall confidence index (CI) declined to 42.5 percent from 44.5 percent in Q2 2012. 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.
Respondents attributed the decline in optimism to (a) lower seasonal demand during the quarter; (b) weather disturbances; (c) global developments such as the risk of a China slowdown, slow recovery in the US and the protracted sovereign debt and banking crises in the Eurozone; (d) volatile commodity prices; (e) expectations of oil price hike; and (f) continuous spread of banana diseases affecting the harvest (intended largely for exports) as well as other related business activities (e.g., transportation, storage and communication) in Region XI. The sentiment of businesses in the Philippines mirrored the weaker business outlook globally, particularly in the US, Germany, Hong Kong, Korea and Singapore.
Optimism hits record high in the next quarter
Going forward, respondents’ outlook for the next quarter (Q4 2012) turned more buoyant as the next quarter index rose to an all-time high of 59.6 percent since the nationwide survey started in Q4 2006. This reading suggests that the growth momentum could accelerate in the last quarter of 2012. Respondents’ more positive outlook in Q4 2012 was due to expectations of (a) continued increase in orders and projects leading to higher volume of production; (b) expansion of businesses and new product lines; (c) increased government infrastructure spending; and (d) brisker business during the Christmas season and the run-up towards the 2013 elections. The prevailing favorable macroeconomic conditions such as low interest rates, manageable inflation, and steady growth of overseas Filipinos’ (OFs) remittances, as well as the recent positive credit rating action by Moody’s also boosted business confidence for the next quarter.
Outlook improves in both NCR and AONCR for Q4 2012
The sentiment of businesses in the National Capital Region (NCR) remained broadly steady while those in Areas Outside the NCR (AONCR) turned less sanguine for the current quarter. For Q4 2012, the outlook improved in both NCR and AONCR. In particular, the next quarter CI of respondents in the NCR reached a record high of 64.5 percent. Moreover, NCR respondents remained more optimistic in their outlook on the economy than those from AONCR for both the current and next quarters.
Exporters are less optimistic
Businesses involved in international commodity trading (i.e., exporters and importers) have a positive but less favorable outlook in Q3 2012. Exporters were the least optimistic, largely as a result of rising oil prices, volatile metal prices, lack of raw materials and uncertainty in world markets. Respondents in Region XI particularly cited the slack in demand due to low volume of fish catch, the rainy season, and the proliferation of banana diseases in the region as reasons for their lower outlook. However, dual-activity firms, i.e., firms involved in both exporting and importing activities, had a broadly steady outlook.
For Q4 2012, importers recorded the highest level of optimism since Q1 2007. Likewise, the outlook of dual-activity firms improved compared to their quarter-ago level, similar to the national trend. By contrast, exporters were less optimistic for the next quarter.
Outlook of firms across employment size declines
Firms’ sentiments across employment size were less favorable in Q3 2012 but turned more upbeat for Q4 2012. Small-sized firms registered an all-time high next-quarter-outlook since Q1 2007. Meanwhile, large-sized firms’ business confidence was the most buoyant in both the current and next quarters.
Business confidence across sectors is mixed
Business outlook was mixed across sectors in Q3 2012. The business confidence of the wholesale and retail trade sector improved while that of services was broadly steady relative to a quarter ago. On the other hand, the sentiment of firms in the construction and industry sectors declined but remained positive compared to that in the previous quarter.
Despite the seasonal slack in demand in the third quarter, the outlook of the wholesale and retail trade sector was more bullish from a quarter ago. The wholesale and retail trade sector’s positive sentiments drew support from a sound investment climate, relatively stable prices, new and improved products, and expectations of a more robust demand, including early orders for the Christmas season.
In the services sector, businesses in the financial intermediation, real estate and community and social services sub-sectors remained upbeat in view of favorable business conditions, an upsurge in investment (both public and private), increasing bank loan portfolio, the recent positive credit rating action by Moody’s, and robust consumer demand owing in part to a widening customer base. Meanwhile, firms from the hotels and restaurants, business activities and transportation sub-sectors were less bullish during the quarter as consumer demand usually slackens after its usual peak during the summer season.
Construction firms’ outlook in the current quarter was less sanguine due largely to the moderation of construction activities during the rainy season. However, firms were of the view that bidding for and implementation of the planned Public-Private Partnership (PPP) projects as well as other public infrastructure projects (augmented by the coming elections in 2013) and expansion plans of the private sector to accelerate construction activities will continue in the next quarter.
Meanwhile, the outlook of industry firms declined as business prospects of some firms were constrained by stiff domestic competition, weather disturbances, expectations of rising oil prices, and the lingering sovereign debt and banking crises in the Eurozone.
For the next quarter (Q4 2012), the business sentiment of firms across sectors turned more bullish, except those in the construction sector. Businesses in the trade sector posted an all-time high CI on account of the expected increase in consumer demand during the holidays.
Businesses have different views about their own operations
With respect to the outlook about their own operations during the current quarter, businesses across sectors were of different views. The sentiment of firms turned more bullish in the services and wholesale and retail trade sectors, remained broadly steady in industry, and was less optimistic in construction.
More firms expect easier access to credit but tighter financial conditions
Firms were of the view that financial conditions were tighter in Q3 2012 compared to that in the previous quarter. However, firms’ liquidity requirements could be met through available financing as more firms expected easy access to credit.
Employment outlook remains positive
Another indicator supporting expectations of sustained growth momentum in 2012 was the employment outlook index for the next quarter, which rose to 27.4 percent, the highest reading since the start of the nationwide survey in Q4 2006.
Firms with expansion plans decrease
The percentage of respondent firms in the industry sector which indicated expansion plans for the next quarter (at 27.8 percent) declined slightly from last quarter’s survey. Lower expansion plans were noted across sub-sectors, except in mining and quarrying. The average capacity utilization for the current quarter declined to 74.4 percent, compared to a record high of 76.2 percent registered last quarter.
Competition, weak demand, and unclear economic laws: major risks to business
The top three business constraints identified by respondents in Q3 2012 were: competition (cited by about three-fifths of the total number of respondents), followed by insufficient demand (leading to low sales volume), and unclear economic laws (such as inconsistent applications of tax laws, red tape, delays in approval of government licenses and permits, and vague labor laws).
A stronger peso, higher inflation and lower interest rates are expected
Respondents that expected inflation to go up continued to outnumber those with the opposite view, but the number that said so declined in Q3 and Q4 2012. This indicates that inflation expectations remained well anchored, consistent with the BSP’s assessment of a manageable inflation environment.
On the other hand, more respondents expected the peso to appreciate in Q3 and Q4 2012. Expectations of the peso’s sustained appreciation could be due to anticipated strong inflows of overseas Filipinos’ remittances, business process outsourcing (BPO) services receipts, and foreign investments as well as the recovery of export demand. Meanwhile, interest rates were expected to decline in the current and next quarters, after the Monetary Board’s decision to cut policy rates by another 25 basis points (bps) in July 2012 following the rate cuts in January and March 2012.
Survey response rate at 74.3 percent
The Q3 2012 BES was conducted during the period 2 July–13 August 2012. There were 1,581 firms surveyed nationwide. Respondents were drawn from the Securities and Exchange Commission’s Top 7,000 Corporations, as follows: 607 companies in NCR and 974 firms in AONCR, covering all 17 regions nationwide. The survey response rate for this quarter was lower at 74.3 percent (from 79.6 percent in the previous quarter) partly due to weather disturbances in the second week of August 2012 that could have affected the normal business operations of firms. The response rates were lower for both NCR at 74 percent (from 79.6 percent in the previous quarter) and AONCR at 74.5 percent (from 79.7 percent in Q2 2012).
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