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Business Sentiment Continues to be Positive in the Fourth Quarter

12.05.2002

Majority of the respondent firms in the Business Expectations Survey (BES) conducted in October by the BSP1 continued to expect positive prospects for business in the fourth quarter, as the Business Outlook Index settled at 16.2 percent.2 However, business sentiment turned more cautious for the first quarter of next year, as the index declined to 6.3 percent. 

Anticipating increased consumer demand during the Christmas holidays, majority of the respondents projected higher volume of business activity for the fourth quarter. However, the 16.2 percent diffusion index for the fourth quarter was lower than the 25.2 percent diffusion index in the third quarter. Most respondents noted that their expectation was affected by concerns over the tension in the Middle East, the Bali terrorist incident, the recent bombings in Metro Manila and Mindanao, rising oil prices, and the growing budget deficit. In addition to these factors, the slow recovery of the US economy could have continued to dampen demand in the international markets, affecting, in turn, local businesses.

Despite the generally cautious business outlook in the first quarter of 2003, the economy is still expected to grow during the period. For instance, the financial conditions index had been showing a trend improvement over the past four quarters, and 18.7 percent of respondent firms plan to expand their businesses in the first quarter, from 10.7 percent in the previous quarter. On the other hand, although some business expansion is expected, the employment outlook index decreased to negative 5.5 percent from 0.3 percent in the previous quarter, indicating that majority of respondent firms are not planning to hire additional staff in the first quarter of 2003.

Confidence indicators of business performance showed mixed trends. The confidence index for the industry sector declined but remained positive at 14.2 percent, from 22.0 percent in the previous quarter. Likewise the confidence index for services declined to 8.3 percent from 17.5 percent.  The confidence index for the wholesale and retail trade declined to –7.0 percent from 7.7 percent in the previous quarter. The construction confidence index, on the other hand, turned to positive 3.3 percent from negative 3.3 percent in the previous quarter, reflecting the upturn in the construction industry.

Stiff competition and insufficient demand remained the primary factors that limited production and business activity during the survey period, according to about 70 percent of the respondent firms. Other factors cited by around one-third of the sample firms were access to credit, financial problems and labor problems.

With the prospect of war between a US-led coalition and Iraq and the growing fiscal deficit, respondents are anticipating a higher peso borrowing rate, a higher inflation rate and a depreciation of the peso vis-à-vis the US dollar in the fourth quarter and in the first quarter of 2003.

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1 Starting the second quarter of 2001, the BSP has conducted the BES using the harmonized set of core questions for Asian countries suggested by ADB under its RETA 5938 program.  The survey covers 12 major industry groups (grouped into 4 major economic sectors), with firms drawn from the top 3,000 corporations in Metro Manila as listed by the Securities and Exchange Commission (SEC). The fourth quarter survey, which was conducted in October 2002 with 271 respondent firms, had a 45.2 percent response rate.

2 The Index is computed as follows: (1) for the “business outlook” variable: percentage share of firms that have an “improving” outlook less percentage share of firms that have a “deteriorating” outlook; (2) for the other business variables: percentage share of firms that answered that a given indicator would go “up” less percentage share of firms that answered that a given indicator would go “down”. With respect to these business variables, a positive index indicates a favorable view, except for the average inflation rate, the average peso-dollar rate and the average peso-borrowing rate, where a positive index indicates the opposite.

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