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Business Sentiment Soars to an All-Time High in Q2 2013

05.23.2013

Business confidence registers a record high

Businesses were bullish in their outlook on the economy in Q2 2013, with the overall confidence index (CI) rising to 54.9 percent. This is the highest reading since the start of the nationwide survey in Q4 2006. 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 record-high outlook to expectations of: (a) expansion of businesses, new product lines (for manufacturing and trade), and additional projects (particularly in construction and real estate), (b) brisker business due to election-related spending, and (c) seasonal uptick in demand during the summer and harvest/fishing seasons. They were also optimistic that their business operations would benefit from the country’s strong macroeconomic fundamentals and investment grade credit rating from three ratings agencies, namely, Fitch Ratings, Standard and Poor’s and Japan Credit Rating Agency.

The sentiment of businesses in the Philippines mirrored the bright business prospects in the US, UK, Singapore, Hong Kong SAR and South Korea, but was in contrast to the weaker outlook of those in Canada, Germany, New Zealand and India.

For the quarter ahead (Q3 2013), the business outlook continued to be favorable. However, the next quarter CI was lower at 46.2 percent compared to that of a quarter ago. According to respondents, their less optimistic views were due to seasonal factors, such as: (a) slowdown in demand (from a high base during election period) for those in the manufacturing and trade sectors, (b) interruption of regular business activities during the rainy season, (c) lower output (which leads to lower trade activities) during the planting season, and (d) expected slow month for businesses in August.

Outlook for both NCR and AONCR is upbeat

Tracking the national trend, the sentiment of businesses in both the National Capital Region (NCR) and Areas Outside the NCR (AONCR) was quite upbeat in Q2 2013 but turned less sanguine 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 had more favorable views in Q2 2013. Importers were the most optimistic. The outlook of dual-activity firms also improved appreciably during the quarter. However, the outlook of importing and dual-activity firms was less favorable although remaining positive in Q3 2013 due to expectations of lower consumer demand during the rainy and non-harvest seasons.

Exporters’ outlook was more buoyant in both Q2 and Q3 2013, with expectations of more projects and orders as a result of the continuing recovery in the US economy and stronger growth prospects in emerging market and developing economies.

Optimism is observed across employment size

Business sentiment was more upbeat across employment size in Q2 2013.  Large-sized firms’ business confidence was the most buoyant, with the CI reaching an all-time high. Medium- and small-sized firms posted near record-high confidence in the current quarter. However, the outlook of all firms was less positive for Q3 2013.

Business confidence is high across sectors

Across sectors, the outlook of businesses was more bullish in Q2 2013. The confidence of firms in the construction and wholesale and retail trade sectors were at their highest levels. Likewise, greater optimism was observed among firms in industry and services. For the next quarter (Q3 2013), business confidence was less upbeat but remained positive across sectors, with the exception of firms in the construction sector which continued to have a more buoyant outlook.

Construction firms expected that the expansion of construction services would be sustained as more favorable business conditions would encourage the influx of foreign investments, particularly in office and housing construction and the expansion of factories. Construction firms also expected more public infrastructure projects after the May elections.

The sanguine outlook of the wholesale and retail trade and industry sectors stemmed from respondents’ expectations of a surge in consumer demand and business activity due to election-related spending, the improvement/launch of new product lines and rise in investments.

The services sector recorded the most bullish outlook across sectors for Q2 and Q3 2013. Among its sub-sectors, financial services remained the most optimistic, with the CI registering a six-year high of 89.4 percent in Q2 2013. Likewise, the outlook of other sub-sectors rose, except for transportation which remained almost steady.

Businesses’ outlook about their own operations is more upbeat

With respect to their own operations in Q2 2013, the outlook of businesses across sectors was more upbeat, except for wholesale and retail trade which turned less optimistic. The index for the trade sector was lower on account of expectations of higher volume of inventory in the current quarter and less favorable business conditions for the next quarter.

Firms expect easier access to credit and better financial conditions

The financial conditions index reverted to positive territory at 1.3 percent in Q2 2013 from -1.5 percent in the previous quarter. Firms were also 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 that indicated the opposite a quarter ago. The credit access index rose to its highest level ever in Q2 2013.

Employment outlook improves

The employment outlook index for the next quarter increased to 24.1 percent from 23 percent last quarter. By sector, firms in the services sector were the most optimistic in their employment outlook in Q3 2013. The employment outlook of firms in the industry and construction sector was likewise upbeat, while that of the wholesale and retail trade declined slightly compared to that of the previous quarter.

Number of firms with expansion plans remains steady while average capacity utilization increases

In line with the favorable business sentiment for the next quarter, firms in the industry sector continued to have a favorable outlook on the economy. The percentage of businesses with expansion plans for the next quarter remained broadly steady at 28.7 percent. Meanwhile, the average capacity utilization for the current quarter slightly increased to 74 percent compared to 73 percent registered last quarter.

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

The top business constraints identified by respondents in Q2 2013 continued to be 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

Expectations on the direction of key economic indicators showed that strong macroeconomic fundamentals are expected to be sustained in the current and next quarters. Even as respondents who expected inflation to go up continued to outnumber those that held the opposite view, businesses anticipated that inflation would settle at the lower end of the inflation target—at  3.3 percent for both the current and next quarters. This is consistent with inflation expectations based on forecast surveys of private sector economists by the BSP and by Asia Pacific (AP) Consensus, indicating that inflation has remained well-anchored and within target for 2013-2014. Stronger inflationary pressures, however, could emanate from pending petitions for utility rate adjustments and the likelihood of higher electricity rates in Mindanao as a result of the current power supply shortfall. The possibility of a continued strong surge in liquidity arising from strong foreign exchange inflows on the back of favorable domestic growth prospects also constitutes an upside risk to inflation.

More respondents expected the peso to appreciate in Q2 and Q3 2013, although the number that said so declined compared to the previous quarter. Expectations of the peso’s sustained appreciation could be due to the 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, more respondents expected interest rates to decline in the current and next quarters, as the impact of the cumulative 100-basis point reduction in policy rates as well as SDA rate cuts in 2012 continue to work its way into the economy.

Survey response rate is higher at 83 percent

The Q2 2013 BES was conducted during the period 1 April–10 May 2013. There were 1,554 firms surveyed nationwide. Respondents were drawn from the Securities and Exchange Commission’s             Top 7,000 Corporations in 2010, as follows: 607 companies in NCR and 947 firms in AONCR, covering all 17 regions nationwide. The survey response rate for this quarter was higher at 83 percent (from  80.2 percent in the previous quarter). The response rate was higher for both NCR at 81.7 percent (from 76.8 percent in the previous quarter) and AONCR at 83.8 percent (from 82.4 percent in  Q1 2013).

A breakdown of responses by type of business showed that 14.9 percent were importers,  7.1 percent were exporters, and 17.6 percent were both importers and exporters. About  60.5 percent of the respondents were neither importers nor exporters, or did not specify their firm type.

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