Philippines business sentiment improved in Q3 2011, with the confidence index (CI) rising to 34.1 percent from 31.8 percent in Q2 2011, according to a poll conducted by the Philippine Central Bank.
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. This is the first quarter-on- quarter uptick in sentiment after two consecutive periods of decline in confidence readings since Q4 2010.
The higher CI in Q3 2011 indicates that more businesses are optimistic about the country's economic prospects and their own operations than in the previous quarter.
Respondents cited the following factors for their more buoyant outlook: (a) expectations of more robust demand, (b) implementation of government projects, including the Public-Private Partnership (PPP) program, (c) sound macroeconomic fundamentals, (d) business expansion arising from steady investment inflows, (e) recovery of markets in Japan, (f) introduction of new and enhanced business strategies, and (g) strong confidence in the government.
Their responses suggest that the challenges posed by the recent US credit rating downgrade and by sovereign debt crisis issues in some parts of Europe could be countered by stronger domestic demand, higher fiscal spending, and continued growth in the private sector.
The outlook of businesses turned more bullish in the quarter ahead (Q4 2011). The next quarter CI at 53.9 percent was a marked improvement over the 33.0 percent index recorded in Q2 2011. This suggests that the growth momentum could accelerate in the last quarter of 2011.
The outlook of businesses involved in international commodity trading was mixed. Importers and those engaged in dual activities were more bullish in Q3 and Q4 2011 as a result of the stable and strong peso and the uptick in domestic consumption.
Exporting firms however, were less optimistic due to anticipated weak demand in the world market, lack of raw materials and the occurrence of diseases in major banana-growing areas in the country.
By employment size, outlook of firms in Q3 2011 was mixed ? more optimistic for small firms, steady for medium firms, and less upbeat for large-sized firms. Going forward to Q4 2011, firms across all employment sizes were more upbeat in their outlook compared to the previous quarter survey.
Consistent with the overall optimistic outlook, business sentiment across sectors remained positive in Q3 2011 compared to those of a quarter ago. The business confidence of the services and wholesale and retail trade sectors improved while the construction and industry sectors' outlook remained broadly steady.
For the next quarter (Q4 2011), business confidence surged in all sectors compared to a quarter ago.The services sector was the most optimistic, followed by the construction sector.
The more favorable outlook of the services sector was largely driven by brighter prospects in the financial
intermediation, community and social services, and hotels and restaurants sub-sectors. Firms from this sector attributed their more confident outlook to the sound macroeconomic fundamentals, good governance as well as the expected business expansion arising from the surge of foreign investment inflows.
The wholesale and retail trade sector registered the biggest improvement in sentiment quarter-on quarter.
Respondents cited a more robust domestic demand, lower importation costs resulting from the peso appreciation, enhancement of firms' administrative and marketing strategies, and good cash flows as reasons behind their optimism.
The more favorable expectations of the construction sector drew support from the expected upsurge of infrastructure projects under the Public-Private Partnership (PPP) scheme, the large-scale investments by public utility companies, and continued demand by the private sector.
In the industry sector, respondent firms stated that broad expectations of rising demand, increasing export prices of commodities in the world market (particularly metal), improving business operations in Japan, and the introduction of new product lines were behind their improved business morale.
Businesses' outlook about their own operations were consistent with their views on the macroeconomy, as all sectors, except for the construction sector, turned more buoyant in Q3 2011 compared to the previous quarter's survey.
The services sector had the most upbeat sentiment boosted by the financial intermediation sub-sector's optimism on business conditions for the current and next quarters.
Easier Access to Credit
Firms that expected easier access to credit increased and continued to outnumber those that expected otherwise.
Meanwhile, firms that anticipated tight financial conditions dominated despite the increase in the number of firms with improving financial outlook.
Another indicator supporting expectations of higher growth in Q4 2011 was the increase in the employment outlook index across all sectors for the next quarter. By sector, construction and services were the most optimistic in their employment outlook.
About one in every four respondent firms in the industry sector (26.6 percent) indicated expansion plans for Q4 2011. The number of respondents that indicated expansion plans increased compared to a quarter ago.
Expansion plans were noted across all sub-sectors. Mining and quarrying continued to record the highest expansion plans for the third consecutive quarter. Meanwhile, the average capacity utilization in Q3 2011 rose to 76.1 percent, the highest reading since Q3 2008.
Major Risks to Business
The top three business constraints identified by respondents Q3 2011 were: competition, weak demand (leading to low sales volume), and unclear economic laws (such as double standard in implementation of laws, red tape, outdated labor laws, and unclear applications of tax laws, among others).
This is the first time since Q2 2008 that unclear economic laws was cited by the respondents as one of the top three factors that limited business activity.
Inflationary Expectations Drop
Respondents who expected inflation and interest rates to go up continued to outnumber those with opposite views, but the number that said so declined. This indicates that inflationary expectations have declined, reflecting in part the moderation of global commodity prices.
Meanwhile, more respondent firms expected the peso to appreciate in Q3 and Q4 2011 compared to the previous quarter's survey. Expectations of the peso's appreciation could be due to anticipated strong inflows of remittances and investments.
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