Business Outlook Improves for Q2 2017

Manila—(PHStocks)—Bangko Sentral ng Pilipinas (BSP)—Business outlook on the economy turned more favorable for Q2 2017, with the overall confidence index (CI) rising to 43 percent from 39.4 percent for Q1 2017. This means that more businesses are optimistic about the country’s economic prospects for the second quarter of the year compared to that a quarter ago. 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) anticipated increase in demand during summer (due to the expected arrival of local and foreign tourists), enrolment and harvest periods,  (b) increase in orders and production volume, (c) expansion of businesses and new product lines,  (d) introduction of new and enhanced business strategies and processes, and (e) inflows of investments with the continuing trust in government leadership. Their more positive outlook was also driven by expectations of higher disbursements by the government on infrastructure and other development projects, and brisker business due to the Philippines’ hosting of the 30th Association of Southeast Asian Nations (ASEAN) Leaders’ Summit.

The sentiment of businesses in the Philippines mirrored the improved business confidence in Hong Kong, South Korea, Canada, France, Germany, and Netherlands but was in contrast to the weaker outlook of those in the US, UK, Thailand, and New Zealand.

For the quarter ahead (Q3 2017), business outlook was less optimistic. The next quarter CI at 42.7 percent was lower than the 47.2 percent in the previous survey. According to respondents, seasonal factors were behind their less upbeat outlook, given the expected interruption of business activities during the rainy season, and lower consumer demand as households prioritize enrolment expenses over other expenditures.

Both domestic-oriented and international trading firms are more optimistic

Business confidence increased across business types (i.e., domestic-oriented, importing, exporting and  importing-exporting firms) for Q2 2017. For the quarter ahead (Q3 2017), the sentiment of dual-activity firms improved. However, outlook was slightly less positive for exporters, importers and domestic-oriented firms.

Business confidence across sectors is broadly optimistic

Consistent with the overall outlook on the macroeconomy, business sentiment was more positive across sectors for Q2 2017. This is with the exception of the manufacturing and electricity, gas and water sub-sectors, whose views turned less favorable. For the next quarter (Q3 2017), the outlook across sectors was less buoyant due to the expected slack in demand during the rainy season.

Firms in the services sector were the most optimistic for Q2 2017. Financial intermediation posted the highest confidence index given the expected increase in bank transactions due to robust domestic demand, surge in purchasing power of agricultural households during the harvest season, expected interest income from additional consumer loans as well as better business prospects given the positive impact on the economy of the Philippines’ hosting of the ASEAN Leaders’ Summit in April 2017. The transport, storage and communications sub-sector was also bullish due to expectations of brisker business during the summer season as well as lower fuel costs, purchase of additional vehicles (i.e., aircraft, cargo vessels, and buses), telecommunication network improvement plans in Metro Manila, improved marketing strategies, and initiatives on the development of system processes. The outlook of firms in the other sub-sectors (i.e., renting and business activities, hotels and restaurants and real estate, likewise) improved. Only firms in the community, social and personal services sub-sector registered a lower outlook for Q2 2017.

Construction firms’ outlook for Q2 2017 was likewise more positive in view of the start of implementation of the 2017 construction projects (both public and private), and better business environment.

The outlook of firms in the wholesale and retail trade sector was also more upbeat for Q2 2017. Respondents attributed their optimism to expectations of more robust demand, business expansion and improvement in business processes and product lines.

Meanwhile, industry firms’ outlook declined but remained positive for Q2 2017 over expectations of lower production volume and demand (e.g., furniture, and packaging products and services). Moreover, damages caused by typhoons continued to affect energy production. By contrast, the confidence index of firms in the mining and quarrying sub-sector was the highest for the last ten quarters, on account of the expected increase in demand for metal (e.g., nickel) and quarry products. The optimism of the agriculture, fishery and forestry sub-sector also stood at an all-time high on account of improved weather conditions and increase in fishing stock.

Firms are more upbeat about their own business operations

The outlook of firms about their own business operations improved for Q2 2017 compared to that a quarter ago. Notably, the outlook of firms on the volume of business activity and total orders booked was broadly more buoyant across sectors.

Employment outlook remains positive

The employment outlook index for the next quarter remained positive across sectors although lower compared to the last quarter’s survey. This suggests that more firms will continue to hire new employees than those that indicated otherwise, although the number of new hires could be lower compared to the previous quarter’s survey.

Expansion plans are almost unchanged while capacity utilization increases

The percentage of businesses with expansion plans in the industry sector for Q2 2017 was almost unchanged at 34.6 percent (from 34.9 in the previous quarter). Meanwhile, the average capacity utilization for Q2 2017 was slightly higher at 75.8 percent (from 75 percent in Q1 2017), indicating sustained volume of business activity for the current quarter.

Firms expect tighter financial conditions but easier access to credit

The financial conditions index continued to slip into negative territory at -2 percent for Q2 2017. This means that firms that expected tighter financial conditions outnumbered those that said otherwise during the quarter. Nonetheless, firms were of the view that their financing requirements could be met through available credit as respondents reported easier access to credit.

Domestic competition and insufficient demand are the major risks to business

The major business constraints identified by respondents for Q2 2017 were domestic competition and insufficient demand leading to low sales volume (indicated by 56 percent and 25 percent of the total number of respondents, respectively). However, the percentage of businesses whose operations were affected by business constraints showed a broadly declining trend since the start of the nationwide survey in Q4 2006. The easing of these business constraints could indicate that business conditions are improving. In particular, the percentage of firms that indicated high interest rates (at 7.7 percent), access to credit (at 3.9 percent), and lack of materials input (at 6.6 percent) as top business constraints has declined compared to their levels in Q1 2017 (at 8 percent, 4.4 percent and 8.1 percent, respectively). The decline was considerable when compared with the results in Q4 2006 when the nationwide survey was first conducted  (at 27.6 percent, 23.4 percent, and 21.2 percent, respectively).

Inflation is expected to remain within-target

More respondents expected inflation to increase for the current quarter compared to those who said otherwise. However, inflationary expectations have slightly eased as the number that said so decreased from a quarter ago. Businesses anticipated the rate of increase in commodity prices to stay within the government’s 2 to 4 percent inflation target range for 2017 and 2018, at 2.9 percent for Q2 2017 and 3 percent for Q3 2017 (from 2.3 percent and 2.4 percent in the previous quarter’s survey results, respectively).

More respondents also anticipated the peso to depreciate for Q2 2017 and Q3 2017. Expectations of a weaker peso could be due to global developments, such as the US Fed rate hike in March 2017 and expectations of more and faster rate increases in 2017. The percentage of respondents that expected higher interest rates increased compared to those in the previous quarter’s survey.

About the Survey

The Q2 2017 BES was conducted during the period 3 April – 16 May 2017. There were 1,485 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 1,000 Corporations in 2015, consisting of  588 companies in NCR and 897 firms in AONCR, covering all 17 regions nationwide.  The survey response rate for this quarter was higher at 83.4 percent (from 82.9 percent in the previous quarter). The response rate was higher for NCR at 81.5 percent (from 80.1 percent in the previous quarter) and lower for AONCR at 84.7 percent (from 84.8 percent in Q1 2017).

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