Business Confidence for 4Q Up on Strong Domestic Demand

Manila—(PHStocks)—Bangko Sentral ng Pilipinas (BSP)—Business outlook on the economy turned more upbeat for Q4 2015, with the overall confidence index (CI) rising to 51.3 percent from 41.4 percent in 3Q 2015. This CI—the highest in two years—indicates that more businesses are optimistic about the country’s economic prospects for the last quarter of the year.

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, main palay harvest and milling seasons; (b) sustained increase in sales, orders and projects leading to higher volume of production; (c) expansion of businesses and new product lines; (d) introduction of new and enhanced business strategies and processes; (e) steady flow of overseas Filipinos’ (OFs) remittances, especially during the holiday season; and (f) election-related spending in the run-up to the 2016 national elections. Their more positive outlook was further driven by expectations of brisker business due to the Philippines’ hosting of the Asia-Pacific Economic Cooperation (APEC) Leadership Summit, higher disbursements for the government’s infrastructure and other development projects, and the favorable macroeconomic conditions in the country, particularly manageable inflation, low interest rates, and a stable peso.

The sentiment of businesses in the Philippines mirrored the buoyant business outlook in Australia, Japan and the Euro Area, but was in contrast to the weaker sentiment of businesses in the United States, UK, China, Hong Kong, Germany, Russia, Indonesia, Singapore and India.

For the next quarter (1Q 2016), business outlook turned less optimistic, with the CI at 43.9 percent from 53.1 percent in the last quarter’s survey. 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 1Q 2016 to the typical slowdown in demand after the holiday season. Other reasons cited by firms were stiffer competition, concerns over the adverse effects of El Niño, and uncertainties in the global economy.

Outlook of importers and domestic-oriented firms turns more bullish

The increased optimism for 4Q 2015 is driven by demand in the domestic market as importers and  domestic-oriented firms turned more bullish. However, exporters and dual-activity firms’ sentiments were less optimistic for the current quarter. For the quarter ahead (1Q 2016), importers, domestic-oriented and   dual-activity firms turned less optimistic, while exporters’ outlook turned more upbeat.

Business outlook is more favorable across sectors

Across sectors, the outlook of businesses was more sanguine for 4Q 2015. Business confidence in the wholesale and retail trade, services and industry sectors improved while that in the construction sector remained steady. For the next quarter (1Q 2016), business confidence turned less optimistic across sectors, except for industry which remained steady.

The wholesale and retail trade sector was the most bullish during the quarter. Respondents’ views were driven by expectations of generally more robust demand during the Christmas, main harvest and milling seasons. Consumption is anticipated to be propped up by a favorable business environment (e.g., lower interest rates and a stable exchange rate) and the steady inflow of OF remittances. Likewise, the surge in campaign-related spending with the upcoming elections, business expansion and product improvements were also cited as reasons for their improved outlook.

The services sector was also more upbeat during the quarter. Among its sub-sectors, hotels and restaurants posted the highest confidence index, with respondents attributing their optimism to expectations of more business opportunities in the last quarter of the year (known as the “convention season”) as well as increase in tourism activities with the holding of the APEC Leadership Summit in the Philippines in November. Financial services remained buoyant as well, with respondents attributing their optimism to an increase in demand for credit by consumers and higher remittances from overseas Filipinos during the holiday season, and brisker business due to election-related spending.

Industry firms’ outlook turned more buoyant for manufacturing, electricity, gas and water and agriculture sub-sectors. Electricity, gas and power supply firms were more bullish in their outlook with the increased utilization of power plants, high electricity spot prices, improved incentive program for distributors and more projects in the pipeline for power generation and water and waste treatment services. Manufacturing firms cited the ongoing infrastructure projects/programs, continuation of existing projects/order bookings, and sound macroeconomic fundamentals (particularly low inflation and stable exchange rate) as reasons for their optimism. Moreover, firms in the agriculture, fishing and forestry sub-sector were more optimistic due to the anticipated increase in production volume of broiler chicks, and new and improved procedures/methods that increase production in agriculture (e.g., banana). However, mining and quarrying firms were bearish in their outlook on account of declining metal prices in the world market.

Meanwhile, construction firms’ outlook remained steady as respondent firms expected construction activities (both public and private) to continue in the last quarter of the year.

Firms are upbeat about business operations

Consistent with the favorable overall outlook on the macroeconomy, the outlook of firms on their business operations improved for 4Q 2015. Businesses engaged in wholesale and retail trade were the most bullish about their business activities, followed by those in the services, construction and industry sectors. For the quarter ahead (1Q 2016), business sentiment was less upbeat due largely to the decline in the outlook across all sub-sectors, except for the mining and quarrying sub-sector which turned more bullish.

Employment outlook index declines

The employment outlook index for the next quarter decreased to 19.5 percent from 22.3 percent in the last quarter’s survey. This indicates that more firms will continue to hire new employees than those that said otherwise, although the number of new hires could decrease compared to the previous quarter’s survey.

The number of firms with expansion plans decreases while capacity utilization improves

The percentage of businesses with expansion plans in the industry sector for 1Q 2016 was broadly unchanged at 31.9 percent. Meanwhile, average capacity utilization for the current quarter was higher at 77 percent from  76.2 percent a quarter ago.

Firms expect tighter financial conditions but easy access to credit

The financial conditions index reverted to negative territory at -0.7 percent for 4Q 2015 from 1.1 percent in the previous quarter. This means that firms were more cautious regarding their financial conditions in the current quarter. Nonetheless, firms were of the view that their financing requirements could be met through available credit as respondents who reported easy access to credit exceeded those that said otherwise, even as the number that said so declined compared to that a quarter ago.

Inflation is expected to remain low

More respondents expected inflation to increase for the current quarter compared to those who said otherwise. For the next quarter, respondents who expected inflation to go up outnumbered those that held the opposite view 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 low at 2.1 percent for 4Q 2015 and 2.3 percent for 1Q 2016. Meanwhile, more respondents expected the peso to appreciate and interest rates to increase for 4Q 2015 and 1Q 2016.

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