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Business Confidence Rises in Q4 2014 On Expectations of Stronger Domestic Demand

11.21.2014

Business sentiment improves

Businesses’ outlook on the economy turned more upbeat in Q4 2014, with the overall confidence index (CI) rising markedly to 48.3 percent from 34.4 percent in Q3 2014.  This quarter-on-quarter uptick in the CI—the highest since Q1 2010—indicates that more businesses are optimistic about the country’s economic prospects in Q4 2014 compared to that of the previous quarter. 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 cited the following factors for their more optimistic outlook: (a) expected increase in consumer demand during the Christmas and main palay harvest seasons; (b) sustained increase in orders and projects leading to higher volume of production; (c) expansion of businesses and new product lines; and (d) introduction of new and enhanced business strategies and processes. Their more positive outlook was further driven by expectations of an acceleration in the roll-out of infrastructure and other development projects under the public-private partnership (PPP) program and the favorable macroeconomic conditions in the country, particularly stable inflation and low interest rates, sustained foreign investment inflows and the steady stream of overseas Filipinos’ (OFs) remittances.

The sentiment of businesses in the Philippines mirrored the more favorable outlook in Canada, New Zealand and Hong Kong SAR, but was in contrast to the weaker outlook of businesses in the US, UK, Germany, China, Singapore and India.

For the next quarter (Q1 2015), business outlook turned less optimistic, with the CI at 43.1 percent. The next quarter CI suggests that the optimists continued to outnumber the pessimists but the number of respondents with favorable views declined relative to the previous quarter’s survey results. Respondents attributed their less sanguine outlook for Q1 2015 to the typical downturn in demand after the holiday season. Other reasons cited by firms were concerns over the backlog in deliveries caused by the port congestion problem and a looming power crisis as well as uncertainties in the global economy, particularly emanating from Europe and Japan.

Optimism of international trading firms rises

The outlook of international trading firms was more upbeat in Q4 2014. Importers showed the biggest improvement in sentiment, with expectations of strong domestic demand. Importers also indicated that their improved outlook was due to continuous business expansion, new product launches and system upgrades. Dual-activity firms were likewise bullish as they anticipated an increase in volume of orders, continuing projects, more infrastructure development (i.e., power generation), declining oil prices and gains from their participation in international trade fairs and outbound and inbound trade missions. Exporters were more optimistic, as they cited abundant raw materials, increase in orders during the holiday season, transfer of production operations to the Philippines (i.e., from China and Thailand) and expectations of more projects to be awarded (for power generation) as reasons for their outlook.

For the next quarter (Q1 2015), the outlook of dual-activity firms was more buoyant. Meanwhile, importers and exporters’ outlook turned less sanguine.

Business confidence across sectors is more favorable

Confidence readings in Q4 2014 were higher across all sectors, indicating broad-based improvement in economic activities.

The wholesale and retail trade sector was the most bullish in the current quarter, driven by expectations of generally more robust domestic demand during the Christmas season.  The services sector likewise was more upbeat during the quarter. Among its sub-sectors, financial intermediation posted the highest confidence index, with respondents attributing their optimism to the opening of new bank branches due to the BSP’s recent liberalization of branching regulations, increase in demand for credit by consumers and higher remittances from overseas Filipinos during the holiday season. The sentiment of the hotels and restaurants sub-group was the most improved as firms anticipated brisker business in the last quarter of the year (known as the “convention season”). Construction firms’ outlook edged higher relative to that a quarter ago as respondent firms expected the acceleration of construction activities (both public and private) in the last quarter of the year. Industry firms’ outlook turned more upbeat across sub-sectors, citing the ongoing infrastructure projects/programs and continuation of existing projects/order bookings as reasons for their optimism.

The outlook on volume of business activity and total orders is bullish

The overall sentiment of firms on their own operations was favorable in the current quarter (Q4 2014) as indicated by the more positive outlook on the volume of business activity and total orders. Likewise, the outlook on volume of total orders was also more robust across sectors, except for the construction sector which remained steady. Looking ahead to Q1 2015, the outlook on the volume of business activity turned less upbeat relative to a quarter ago.

The number of firms with expansion plans decreases and capacity utilization remains steady

Investment intentions in the industry sector declined, with 32 percent of firms indicating expansion plans compared to 34.2 percent in the previous quarter. Among sub-sectors, only mining and quarrying recorded stronger expansion plans. Meanwhile, the average capacity utilization for the current quarter remained steady at 76.9 percent from 76.5 percent registered a quarter ago.

Firms expect less tight financial conditions and easy access to credit

Firms that expected tighter financial conditions continued to outnumber those that said otherwise. Businesses were also of the view that their financing requirements could be met through available credit as more respondents continued to report easy access to credit compared to those that said otherwise.

Inflation is expected to be within the 3-5 percent target range

Respondents who expected inflation to go up continued to outnumber those that held the opposite view in the current and next quarters, but the number that said so declined relative to the previous quarter. Businesses expected that the rate of increase in commodity prices is likely to remain well-anchored at 4.3 percent in both Q4 2014 and Q1 2015. This was, however, slightly higher than 4.2 percent in the previous quarter’s survey results. Nonetheless, these continue to be within the 3 to 5 percent target range in 2014.

Meanwhile, more respondents expected the peso to appreciate in Q4 2014 and Q1 2015. Interest rates were also expected to increase in the current and next quarters. 

About the Survey

The Q4 2014 BES was conducted during the period 1 October – 13 November 2014. There were 1,518 firms surveyed nationwide. Respondents were drawn from the combined list of the Securities and Exchange Commission’s Top 7,000 Corporations in 2010 and Business World’s Top 1000 Corporations in 2012, consisting of 604 companies in NCR and 914 firms in AONCR, covering all 17 regions nationwide. The survey response rate for this quarter was slightly lower at 84.1 percent (from 84.3 percent in the previous quarter). The response rate was slightly lower for both NCR and AONCR at 80.8 percent and 86.2 percent, respectively (from 80.9 percent and 86.6 percent, respectively, in the previous quarter).

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