Confidence index at two-year low

MANILA, Philippines – Business sentiment fell to its lowest level in two and a half years as the business sector braced for a looming recession in the United States and soaring oil prices.

The Bangko Sentral ng Pilipinas (BSP) said that based on its second quarter Business Expectations Survey (BES), the confidence index dropped by 17 points when executives were asked about their expected prospects in the second and third quarter of the year.

The BES indicated that the overall confidence index for the second quarter dropped from 29.9 points in the previous quarter and 46.4 points in the same quarter last year to only 12.6 points this year. 

BSP deputy governor Diwa Guinigundo admitted the drop was significant but, overall, optimism still prevailed in the business sector since the index still remained in the positive.

“This reflects the underlying resilience of the economy in the face of these challenges that businesses have to face,” Guinigundo said. “The lower index is consistent with the broadly more cautious sentiment of businesses and consumers in many developed economies.”

According to Guinigundo, business executives expect the peso to weaken further, the inflation rate to go up and interest rates to also go up in the next two quarters.

Guinigundo said the BES results showed that businesses were wary of the risks related to the US recession, volatile and high crude oil prices, rising prices of goods (including food and especially rice) and services  (transportation and communication); high input costs, petitions for wage hikes, and local political noise.

According to the BES results, the business outlook for the third quarter of the year was also less optimistic, with the confidence index at 16.6 points, which is 24.4 points and 28.1 points down compared to the levels posted last quarter and last year.

Guinigundo said importers were by far the most optimistic sector while exporters were the most grim in their outlook for the next two quarters.

According to BES results, there is also an increasing perception of tighter access to credit in the next two quarters, with the confidence index at its lowest level since 2007.

The BES also showed that the financial condition index – an indicator of the internal liquidity situation of firms – continued to decline. The index was down to -17.8 percent from -11.6 percent last quarter and -11.0 percent a year ago.

Guinigundo said the drop in the index could be partly attributed to expectations of less favorable financing conditions in the second and third quarter of the year and this could adversely affect their cash position.

Although optimism level is declining, Guinigundo said the planned expansion in some businesses, particularly construction, would still result in a net increase in job creation in the next two quarters.

The employment index of 11.4 percent (though lower than last quarter and last year) indicated an anticipated continued hiring of additional employees in the third quarter.

The BES showed that the employment outlook continued to be favorable for the construction and services sectors (specifically hotels and restaurants, renting and business activities, transportation and financial intermediation sub-sectors), consistent with their more positive macroeconomic outlook.

The BES indicated that business executives considered the high level of competition, both from domestic and foreign firms, and insufficient demand leading to low volume of sales as the key risks to business activity.