PH Business Outlook Remains Strong

Business optimism continued to be strong in the first quarter of the year (1Q), with the overall confidence index (CI) at  47.5%. 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.

The current quarter’s CI was slightly lower, however, compared to the 50.6% CI recorded in the Q4 2010 survey, as the number of optimists relative to pessimists declined. Respondents attributed the less upbeat quarter-on-quarter outlook to the following: (a) usual slowdown in business activity after the Christmas and harvest seasons, (b) rising prices of oil and other commodities, and (c) abnormal weather conditions in some parts of the country.

Respondents’ outlook for 2Q 2011 turned more buoyant as the next quarter index rose to an all-time high of 59.4%, the highest reading since the business expectations survey started in 2Q 2001. Sustained business optimism indicates that the growth momentum could continue in 2011. Respondents cited the following factors for their upbeat outlook: (a) the government’s plans to undertake big-ticket infrastructure projects under the public-private partnerships (PPP) program and to front-load infrastructure and social spending, (b) faster recovery in emerging and developing economies, (c) steady stream of overseas Filipinos’ (OFs) remittances and foreign capital, (d) continued recovery of merchandise exports, and (e) continued strong confidence in the new government.

Tracking the national trend, the sentiment of businesses from both the National Capital Region (NCR) and Areas Outside the NCR (AONCR) remained buoyant for the current quarter albeit less favorably so when compared to the previous quarter’s survey results. However, sentiment turned considerably more upbeat for the next quarter.

Except for importing firms which registered a decline in optimism quarter-on-quarter, the outlook of businesses involved in international commodity trading (i.e., exporters and those engaged in dual activities) continued to improve in 1Q 2011 as the recovery of global trade and a stable peso pumped up demand for Philippine exports. Importers cited the rising costs of commodities as the reason for their lower optimism. Looking ahead to the next quarter, all types of businesses involved in international trade became more bullish due to the expected rise in volume of orders and number of clients.

By employment size, all firms (small-, medium- and large-sized firms) posted positive but less favorable outlook quarter-on-quarter in 1Q 2011 but turned more bullish for 2Q 2011. Large-sized firms remained as the most optimistic for 1Q and 2Q 2011.

The construction and industry sectors are more upbeat

Consistent with the sustained overall optimism over macroeconomic prospects, business sentiment across sectors continued to be favorable in 1Q 2011. The construction and industry sectors registered a more buoyant outlook, while that of the wholesale and retail trade sector was broadly stable. On the other hand, optimism in the services sector declined compared to that in the previous quarter.

Respondents from the construction sector attributed their bullish outlook to the planned implementation of big-ticket infrastructure projects under the PPP scheme, as well as the increase in demand for residential and commercial buildings.

Firms in the industry and wholesale and retail trade sectors acknowledged the benefits that could be realized from the government’s initiatives to promote broad-based growth. This, together with the revitalized demand for exports and rising commodity prices in the world market, strong domestic demand, improvement in operations, a stable peso and the general perception of a better business environment, were reasons cited by the respondents for their sustained sanguine outlook.

The services sector was less optimistic on account of the seasonal slack in demand for hotels and restaurants, renting and business activities after the holidays, as well as the rising costs of operations and higher fuel prices (for the transportation sub-sector).
 
For the next quarter (2Q 2011), the outlook across all sectors turned more upbeat largely due to the anticipated implementation of government projects, particularly the PPP program and prospects of more favorable business conditions (i.e., steady stream of OF remittances, foreign capital, and merchandise exports). Business confidence remained highest in the construction sector.

Businesses’ outlook about their own operations improves

Led by the construction sector, businesses’ outlook about their own operations improved  quarter-on-quarter across all sectors, except for the services sector.

Firms’ access to credit improves while financial conditions remain tight

Although financial conditions remained tight, more firms reported easier access to credit relative to those that said otherwise. This suggested that firms’ anticipated needs for liquidity could be supported by available credit.

Employment outlook improves

Another indicator supporting expectations of sustained growth in 2011 was the employment outlook index for the next quarter, which improved further from the levels in the previous quarter and a year ago. Employment indices of the construction, services and industry sectors went up quarter-on-quarter and year-on-year.

More firms indicate expansion plans and higher capacity utilization

Consistent with the more positive outlook of the industry sector about their own operations, more firms (33.9% of respondents) indicated expansion plans for 2Q 2011. Mining and quarrying continued to record the highest expansion plans, followed by agriculture; electricity, gas and water; and manufacturing sub-sectors. Meanwhile, average capacity utilization in 1Q 2011 rose to 75.3%, the highest reading since Q3 2008.

Competition, weak demand, and financial problems remain major risks to business

Competition, weak demand (leading to low sales volume), and financial problems were the factors that limited business activity in 1Q 2011. The top three business constraints were the same risks identified by respondents since Q3 2009.

Higher interest rates and inflation, and a strong peso are expected in 1Q 2011

Respondent firms expected inflation and interest rates to go up in 1Q and 2Q 2011. Inflationary expectations are likely to be stronger this year compared to the previous quarter’s level as respondents having views of higher inflation and interest rates increased in both 1Q and 2Q of the year. These expectations were due in part to price pressures arising from the increasing costs of fuel and other commodities in the global market and the strong performance of the domestic economy. Meanwhile, respondents were of the view that the peso appreciation would continue in 1Q and 2Q 2011, but the number that said so declined from the previous quarter’s survey.

Survey response rate is 78.2%

The 1Q 2011 BES was conducted during the period January 6 to February 14, 2011. There were 1,630 firms surveyed nationwide. Respondents were drawn from the Securities and Exchange Commission’s Top 7,000 Corporations, as follows: 603 companies in NCR (37%) and 1,027 firms in AONCR (63%), covering all 17 regions nationwide. The survey response rate for this quarter was higher at 78.2% (from 75.4% in the previous quarter). The response rates were also higher for both the NCR and AONCR. For NCR, the response rate was 76.8% (from 73.3% in the previous quarter) and for AONCR, the response rate was 79.1% (from 76.7% in the previous quarter).

A breakdown of responses by type of business showed that 14.2% were importers, 6.7% were exporters, and 14% were both importers and exporters. About 65.1% of the respondents were neither importers nor exporters or did not specify their firm type.

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