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Business Confidence Remains Buoyant in Q1 2013; Outlook Turns More Bullish for the Next Quarter

02.22.2013

Business confidence remains buoyant

Businesses’ outlook on the economy continued to be favorable in Q1 2013, with the overall confidence index (CI) at 41.5 percent. 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 current quarter’s CI was lower, however, compared to the 49.5 percent CI recorded in the Q4 2012 survey. This is a typical downturn in business outlook during the first quarter of the year. The lower CI indicates that the number of optimists declined but continued to be greater than the number of pessimists during the quarter.

Respondents attributed the less upbeat quarter-on-quarter outlook to the following: (a) typical slowdown in business activity after the Christmas and main rice harvest seasons, (b) adverse effects of Typhoon Pablo on crop production and other businesses in Mindanao, and (c) strong market competition. The sentiment of businesses in the Philippines mirrored the less sanguine business outlook in the UK, France, Singapore and Hong Kong SAR, and was in contrast to the more buoyant views of those in South Korea, India and Germany.

For the quarter ahead (Q2 2013), business outlook turned more optimistic, with the next quarter CI rising to 56.4 percent. Respondents cited the following factors as reasons behind their bullish outlook: (a) brisker business due to election-related spending, (b) anticipated increase in demand during the secondary harvest season, graduation/enrollment periods as well as during the summer season due to the expected rise in tourism (both local and foreign), and (c) business expansion, new projects and new/improved product lines. Businesses were also of the view that the country’s strong macroeconomic fundamentals (such as stable prices and exchange rate), good governance and expectations of an investment grade credit rating for the Philippines augur well for their operations.

Outlook turns less upbeat in both NCR and AONCR but improves for the next quarter

Tracking the national trend, the sentiment of businesses in both the National Capital Region (NCR) and Areas Outside the NCR (AONCR) turned less sanguine in Q1 2013 but improved for the next quarter. For both the current and next quarters, NCR respondents remained more bullish in their outlook on the economy than those from AONCR. This indicated firms’ expectations that economic conditions would be more favorable in NCR than in AONCR.

Importers are most optimistic

Businesses involved in international commodity trading remained optimistic in Q1 and Q2 2013. Dual-activity and exporting firms were more bullish during the current quarter on account of additional projects, business expansion and continued investor confidence.  Importers were the most optimistic but their outlook was less buoyant in Q1 2013 compared to a quarter ago. For the quarter ahead, the outlook of firms across all trade groups improved, following the overall trend.

Business sentiment across employment size improves in the quarter ahead

Firms’ sentiments across employment size were less upbeat in Q1 2013 but more buoyant for  Q2 2013. Large-sized firms’ business confidence for both the current and next quarters was the most buoyant, followed by those of medium- and small-sized firms.

Business confidence across sectors remains positive

Across sectors, the outlook of businesses was less upbeat but remained positive in Q1 2013. For the next quarter (Q2 2013), business confidence turned buoyant across all sectors. This is with the exception of firms in the construction sector, which had a broadly steady outlook in the current quarter but turned less optimistic in the next.

The construction sector was the most bullish during the current quarter. Construction firms noted that favorable business conditions are expected to help sustain demand for construction services, with new projects in the pipeline. However, optimism in the construction sector went down slightly for the next quarter due to the election ban on government infrastructure projects.

In the services sector, the financial intermediation sub-sector remained the most optimistic in the current quarter. Meanwhile, the outlook of other sub-sectors reflected the slack in demand following the holiday season, particularly those in the hotels and restaurants and transportation sub-sectors. For Q2 2013, services recorded the most optimistic outlook across sectors as firms anticipate stronger business during the election and summer periods.

The less sanguine outlook of the wholesale and retail trade and industry sectors stemmed from expectations of a slack in consumer demand and business activities after the Christmas season and the expected impact of natural calamities, particularly on agriculture.

Businesses’ outlook about their own operations is broadly upbeat

With respect to their own operations in Q1 2013, the outlook of businesses across sectors was broadly upbeat, except for services which turned less optimistic in the current quarter. The outlook of the services sector was weighed down by the weaker sentiments of the hotels and restaurants and transportation sub-sectors that were most vulnerable to seasonal factors.

More firms expect easier access to credit but tighter financial conditions

After breaching positive territory in Q4 2012 for the first time since the start of the nationwide survey in Q4 2006, the financial conditions index reverted to -1.5 percent in Q1 2013. A number of respondents indicated that their financial conditions were affected by problems in the collection of accounts receivables. However, firms were of the view that their liquidity requirements could be met through available credit as more respondents continued to report easy access to credit.

Employment outlook improves

The employment outlook index for the next quarter increased to 23 percent. By sector, firms in the services sector were the most optimistic in their employment outlook, consistent with their bullish outlook in Q2 2013.

Number of firms with expansion plans is broadly steady while average capacity utilization declines

In line with the more optimistic business sentiment for the next quarter, firms in the industry sector continued to have a bullish outlook on the economy. The percentage of businesses with expansion plans for the next quarter stood at 29.6 percent, relatively steady compared to that of the previous quarter. Meanwhile, the average capacity utilization for the current quarter slightly decreased to  73 percent compared to 74.1 percent registered last quarter.

Competition and weak demand remain to be the major risks to business

The top business constraints identified by respondents in Q1 2013 were domestic competition (cited by about three-fifths of the total number of respondents) and insufficient demand (leading to low sales volume).

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

Respondents that expected inflation to go up continued to outnumber those that held the opposite view, but the number that said so declined during the quarter. This indicates that inflation expectations remained well-anchored and are consistent with the downward shift in the BSP’s forecasted inflation path. The ample supply of major food products, including rice, could have contributed to the lower inflation outlook. However, more firms expected inflation to go up in  Q2 2013. Inflationary pressures could emanate from pending petitions for utility rate adjustments and a stronger-than-expected surge in liquidity arising from strong foreign exchange inflows on the back of favorable domestic growth prospects.

More respondents also expected the peso to appreciate in Q1 and Q2 2013. Expectations of the peso’s sustained appreciation could be driven by continued foreign exchange inflows coming from overseas Filipinos’ remittances, business process outsourcing (BPO) services receipts, foreign investments as well as the positive market reaction to the country’s favorable macroeconomic fundamentals.  Meanwhile, interest rates are expected to decline in the current and next quarters, as the cumulative 100-basis points reduction in policy rates in 2012 continue to work its way into the economy.

Survey response rate is higher at 80.2 percent

The Q1 2013 BES was conducted during the period 3 January–8 February 2013. There were 1,555 firms surveyed nationwide. Respondents were drawn from the Securities and Exchange Commission’s Top 7,000 Corporations, as follows: 607 companies in NCR and 948 firms in AONCR, covering all 17 regions nationwide. The survey response rate for this quarter was higher at   80.2 percent (from 75.1 percent in the previous quarter). The response rate was higher for both NCR at 76.8 percent (from 74.1 percent in the previous quarter) and also for AONCR at 82.4 percent (from 75.6 percent in Q4 2012).

A breakdown of responses by type of business showed that 15.2 percent were importers, 7.5 percent were exporters, and 17.2 percent were both importers and exporters. About   60.1 percent of the respondents were neither importers nor exporters, or did not specify their firm type.

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