Business confidence dips for Q4 2016, start of 2017

Concerns over the direction of the Duterte administration’s foreign policy and reforms and the weak peso outweigh expectations of a Christmas boost, according to the Q4 Business Expectations Survey

By Rappler.com, Nov 25, 2016

MANILA, Philippines – Despite stronger than expected 3rd quarter economic growth, businesses have dampened expectations for the final quarter of the year and the start of 2017, according to the latest survey of the Bangko Sentral ng Pilipinas (BSP).

The Q4 Business Expectations Survey (BES) released on Friday, November 25, showed that business confidence for the 4th quarter of 2016 dipped, with the overall consumer index (CI) declining to 39.8% compared to the 45.4% seen in the Q3 survey.

The drop, the BSP said, indicates that the number of pessimists increased for the quarter though optimists still outnumbered them.

The central bank noted that despite the usual uptick in demand due to the Christmas season, firms were less upbeat due to concerns over the direction of the Duterte administration’s foreign policy and economic reforms, a weak global economy, foreign exchange losses due to a weak peso, and lack of raw materials.

President Rodrigo Duterte has made it clear that his administration intends to move away from the Philippines’ traditional allies like the United States in favor of strengthening economic and political ties with China and Russia – a move that has raised concerns among certain industries, including the business process outsourcing (BPO) industry.

The peso also hit an 8-year low against the US dollar this week amid more concrete indications of a US Federal Reserve interest rate hike in December, and the stronger dollar following Donald Trump’s surprise presidential victory.

The BSP said business confidence also weakened for the 1st quarter of 2017, although it remains positive, with the CI for next quarter declining to 34.5% from 56.8%.

The BSP attributed the drop to the usual slowdown in consumer demand after the holiday season, foreign policy concerns, stiffer competition with the entry of new players in the market, and the wait-and-see attitude of investors after the US elections, which could affect the interest rate movements in the country.

Broadly dim across sectors

Concerns about the country’s foreign policy and a weak peso dampened expectations among firms in the wholesale and retail/trade sectors.

The majority of firms in the service sector, particularly those involved in business activities, social services, financial, and real estate saw their confidence dip on the same concerns, as well as the shift to the K to 12 program which reduced the usual number of college enrollees in the second semester.

The Christmas season boosted the optimism of transportation and tourism firms as they forecast higher demand during the period.

Mining, quarrying, and manufacturing firms were also broadly less optimistic for Q4 2016 mainly for the same reasons – the new government’s foreign policy and economic agenda – and the typical slack in demand for industrial services and equipment such as steel products and fabricators during the holiday season.

Also notable is that despite the administration’s plan to boost infrastructure spending, construction firms were less upbeat about their prospects. The survey attributed this to lower income and unclear government policies on the awarding of new construction projects.

Overall, the outlook of businesses involved in international commodity trading was less upbeat for Q4 2016, which the BSP said outweighed the more bullish sentiment of domestic-oriented firms.

Dip in employment, steady business activity

The Q4 BES also showed that the employment index was lower, although still positive, compared to last quarter’s survey.

This, the BSP said, suggests that more firms will continue to hire new employees than those that indicated otherwise, although the number of new hires could decrease.

Despite the lower employment index, the number of firms with expansion plans increased to 31.7% from 28.1% last quarter. Capacity utilization remains unchanged from last quarter’s survey of 74.9% which, the BSP said, indicates a sustained volume of business activity for the current quarter.

The BSP noted that the number of firms that expected easy access to credit declined to 0.1% compared to the 1.5% from Q3. This indicates that firms that expect better financial conditions continued to outnumber those that did not, though there are less optimists in this regard compared to a quarter ago.

Respondents who expected inflation to rise also continued to outnumber those that believed it would not for the current and next quarters, although firms anticipated the rate of increase in commodity prices to stay within the 2% to 4% BSP inflation target range for 2016 and 2017. They anticipated inflation to be at 2% for Q4 2016 and 2.1% for Q1 2017.

The BSP also said that more respondents anticipated the peso to depreciate in the 4th quarter of the year and next year.

Firms also expected higher interest rates for Q4 2016 and Q1 2017, while the number of businesses that anticipated higher interest rates remained broadly steady for Q4 2016, compared to the previous quarter.

The Q4 BES, conducted between October 3 and November 17, surveyed 1,470 firms nationwide. – Rappler.com