Business confidence drops in first 3 months of 2018

CLOUDY SKIES. Business confidence dipped at the beginning of a year which will see a big change in taxes as well as more infrastructure spending. File Photo of the Makati Central Business District Syline by AFP.

MANILA, Philippines – The Bangko Sentral ng Pilipinas (BSP) said on Friday, March 2, that overall confidence in the economy dropped for the first 3 months of 2018 due to the new tax law, the post-holiday hangover, rising fuel prices, and increased competition.

The BSP Q1 2018 Business Expectation Survey released on Friday showed that the overall confidence index, while remaining positive, dropped to 39.5% from 43.3% for Q4 2017.

“This indicates that the number of optimists declined but continued to be greater than the number of pessimists during the quarter,” the BSP said.

The central bank attributed the drop in confidence to the usual slowdown in business activity and moderation of consumer demand after the holiday and harvest seasons, along with rising fuel prices largely influenced by higher international prices of crude oil.

Business also cited the increase in excise tax on petroleum products due to the implementation of the tax reform law, and stiffer competition as additional factors that hit confidence.

The BSP also pointed out that “concern over Tax Reform for Acceleration and Inclusion (Train) impact may have contributed to the lower outlook”, even as a “significant number of businesses surveyed also mentioned about the positive impact of the tax reform.”

Implemented at the beginning of this year, phase 1 of the Train Law lowers income tax across all levels but balances this out with increased excise taxes on automobiles, sugar, and gasoline, among others.

The government expects the reform to generate around P90 billion more in revenues, the bulk of which is earmarked for infrastructure spending.  

Retailers less confident, construction firms buoyant

Indeed, the Train Law and government’s ramped up infrastructure campaign spending dubbed Build, Build, Build loomed large over business sentiment for Q1 of this year.

The National Economic and Development Authority said that 6 big-ticket projects are set to start this year with another 26 in the pipeline. The government is also set to raise its public spending from 5.2% of gross domestic product (GDP) to 6.2% next year.

Consistent with more construction projects being expected across the board, the survey showed that the outlook of the industry and construction sectors was more buoyant compared to that in the previous quarter.

The BSP noted that expectations of increasing demand, improvement in production capacity, new product lines, enhanced marketing strategies, and increase in households' disposable incomes attributable to the Train Law also contributed to a bullish outlook for industrial firms.

This however was outweighed by the drop in the wholesale and retail trade sector outlook which fell to 31% from last quarter's 50.1%.

The trade sector’s less favorable outlook “stemmed from expectations of a slack in consumer demand and business activities after the Christmas season, higher fuel costs, and initial increase in prices due to the implementation of the Train Law,” the BSP said.

Meanwhile, the services sector sentiment was steady for the current quarter.

More expansion, faster inflation

Despite the overall drop in confidence, the number of firms with hiring intentions increased relative to last quarter as indicated by the employment outlook index for the next quarter which rose to 29.9% from 24.7% in the last quarter's survey.

The number of firms planning to expand in the next 3 months also increased to 35.1% from 31.1% in the previous quarter. Meanwhile, the average capacity utilization of both the industry and construction sectors for Q1 2018 was lower at 74.3% compared to 76% in Q4 2017.

On the macro side, the latest survey showed that businesses anticipated inflation to increase but to remain within target. They also expect the peso to depreciate and interest rates to go up for the current and next quarters.

Businesses expected the inflation rate to settle within the government’s target of between 2% 4% at 3.4% for Q1 2018, and 3.5% for Q2 2018.

The BSP is also widely expected to raise key interest rates at its next board meeting in response to inflation, which hit a 3-year high of 4% in January of this year.

Consistent with this, firms across the board also indicated tighter financial environment as the financial conditions index remained in negative territory at -4.6 % for Q1 2018 from -0.9% in the previous quarter showing that

Brighter summer outlook

The central bank also pointed out that business sentiment improved for Q2 2018 with the confidence index rising to 47.8% from 39.7% in the last quarter's survey. This suggests that "economic growth could accelerate for the next quarter.”

The factors behind the optimism were the usual increase in demand during summer, the foreseen increase in the number of local and foreign tourists, enrollment, and harvest periods.

Businesses also anticipated higher levels of household disposable income as the Train Law takes effect and facilitates the Build Build, Build infrastructure program with higher tax revenues.

The Q1 2018 BES was conducted between January 8 to February 22 2018 with 1,469 firms surveyed nationwide.

Respondents were drawn from the combined list of the Securities and Exchange Commission's Top 7,000 Corporations in 2010 and Business World's Top 1,000 Corporations in 2015, consisting of 584 companies in the National Capital Region (NCR) and 885 firms outside the NCR, covering all 16 regions nationwide. – Rappler.com