Business sentiment in Philippines bullish in 2nd Quarter

May. 25, 2007

MANILA — The confidence index (CI) for the second quarter remained strong at 46.4 percent, higher relative to comparable levels year-on-year (by 14.8 points) and quarter-on-quarter (by 1.5 points).

Business executives also remained confident about the next quarter as the index (at 44.7 percent) rose by almost 12.0 points year-on-year. Quarter-on-quarter, however, the index fell by 4.7 points.

Both respondents from the NCR (National Capital Region) and AONCR (Areas Outside the NCR) were upbeat in their current and next quarter outlook.

Positive outlook in the second quarter is sector-wide

Respondents in all sectors expected the economy in the second quarter to be better compared to the year ago as shown by uptrend in their indices. The industry sector peaked to an all-time high of 45.7 percent, which was due in large part to greater production operations of firms to meet election- and school opening-related demand in the second quarter.

The services sector index, the highest at 61.6 percent, was up year-on-year but down quarter-on-quarter. The index for the renting and business activities sub-sector, which was abnormally high in the first quarter on the back of surge in election-related projects, was lower quarter-on-quarter as these projects were expected to culminate after the election. On the other hand, the CI of the hotels and restaurants sub-sector exhibited a downtrend in the second quarter in tandem with the slowdown in tourism-related activities following the end of the school break and onset of the rainy season in June.

The business outlook of the wholesale and retail trade sector as well as the construction sector at 36.5 percent and 35.9 percent, respectively, were higher than their comparable levels last year but lower quarter-on-quarter.

Business expectations in the third quarter tracked those in the second quarter. That is, all sectoral indices, except for construction, were on the uptrend year-on-year but lower quarter-on-quarter. Executives in the construction sector expected that the economy would be even stronger in the third quarter with the index at 59.0 percent climbing year-on-year and quarter-on-quarter, as developers take advantage of the heightened demand in the property market.

Reasons for the rise in optimism

Respondents attributed their expectation of a better economic outlook to the following factors: 1) a generally stable macroeconomic environment (as reflected in the strengthening peso, low inflation and stable interest rate, improved investment conditions); 2) economic expansion in Asian economies; 3) greater business opportunities during the election period; 4) brisker business during the dry/summer season; 5) increased consumer spending due to the opening of classes in June; and 6) new and enhanced business strategies.

Businesses have a favorable view regarding their own operations

The services sector has been the most optimistic, with its index at 43.8 percent, rising consistently since the fourth quarter of 2005. Similarly, construction sector continued to be upbeat as its index (at 34.3 percent) was up by 2.6 points year-on-year and rising by almost threefold quarter-on-quarter.

Factors lifting the business outlook included expected higher volume of business activity (at 35.7 percent), total order book (at 27.7 percent), and an increase in the average capacity utilization (at 83.4 percent).

Access to credit remains favorable; employment and expansion plan indexes rise

For the fourth consecutive quarter in a row, access to credit index continued to be positive at 9.0 percent. The employment outlook index for the next quarter also increased at 17.3 percent. The employment outlook index was particularly strong for the construction sector and real estate sub-sector. Meanwhile, 31.1 percent of respondent industry firms indicated plans to expand operations in the next quarter.

Business constraints

Competition, particularly emanating from local firms, and insufficient demand leading to low volume of sales, were the most commonly identified as the major constraints to stronger business activity.

Expectations on selected economic indicators

Views on selected economic indicators were also positive. Majority of the respondents anticipated that the peso would remain strong and that interest rates would continue to decelerate in the current quarter and the next quarter. However, inflation while trending down in the current quarter was expected to move up in the third quarter, consistent with the BSPs forecast that inflation has already bottomed out.

Response rate

The second quarter 2007 BES was conducted from 10 April to 8 May 2007. A total of 1,076 firms nationwide were surveyed based on the Securities and Exchange Commission 2005 Top 5,000 Corporations as follows: 477 companies are located in NCR and 599 firms in areas outside NCR. Starting the fourth quarter of 2006, the BES covers all 17 regions nationwide. The combined survey response rate for this quarter is 71.0 percent (similar to that of last quarter). For NCR, the response rate was 78.4 percent (72.5 percent last quarter); and for AONCR, the response rate was 65.0 percent (from 69.7 percent).

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