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Business and consumer uncertainty: ‘Somebody dropped the ball’

Last Monday, the press covered the Bangko Sentral ng Pilipinas’ report on business expectations for the last quarter of 2020. It’s a relief seeing the headline numbers showing that firms in the survey “have revived plans to pursue expansion programs and hire more workers next year in anticipation of a strong economic rebound from the pandemic-induced recession.”

A strong statement of confidence and hope in the future, no doubt.

From the Bangko Sentral ng Pilipinas (BSP) website, details of the actual report provide us a better sense of the emerging business sentiment. The big picture was indeed encouraging. The overall confidence index (CI) reverted from -5.3% in quarter 3 to positive 10.6%, which means optimism is beginning to creep in.

The BSP report cited that business optimism for the last quarter may be attributed to the expected increase in domestic demand arising from reopening of businesses and adapting to the “new normal.” Business respondents were also positive about the easing of community quarantines nationwide. Much was also expected from seasonal factors like the uptick in demand during the holidays and start of milling season. Finally, they were encouraged by the perceived increase in sales.

Equally crucial in this survey is the business sentiment for the first quarter of 2021 and the next 12 months.

The next quarter’s CI climbed from 16.8% in the previous quarter’s result to 37.4%, more than twice. All the reasons for a more optimistic stance are related to the ability of the Philippines to mitigate the pandemic, relax the quarantine restrictions and re-open economic activities to allow a pick-up in transactions.

This improvement in sentiment for quarter 1 next year is mirrored in the entire year, as CI rose from 37.5% to 57.7%.

Lest we miss the potential risk to economic revival, the headline business response and some of the key components of those headline numbers should be squared.

Three risk areas were cited by the business respondents. Insufficient demand has always figured even in previous surveys, something they should expect under pandemic conditions. Nothing they can do about it except to keep their workers healthy and compliant with health protocols. What is surprising is their second response about the problem with stiff competition. Competition is almost irrelevant. It’s a bust for nearly all businesses. The third was very logical and this is the adverse impact of COVID-19 on their operations.

Pandemic-related factors like lower demand go hand in hand in explaining the relative uncertainty surrounding the more optimistic response of Philippine business. Perhaps this would explain the specific business responses that did not exactly dovetail with the headline numbers.

With overall optimism about their own operations, firms intended to expand their average capacity utilization for quarter 4. Firms were also optimistic about employment for quarter 1 and the next 12 months.

Such optimism was rather heroic because their financial conditions — or the firms’ general cash position including their loan repayments — remained negative. Their perception about their access to credit was also negative. They felt credit-constrained. Results of quarter 4 Senior Bank Loan Officers Survey validate this constraint because the banks continued to tighten their lending standards. As proof, actual bank loans sharply slowed down in October 2020.

The firms’ prognosis of the economy also needs some reconciliation.

While they continued to expect lower interest rates on account of accommodative monetary policy, firms expected the peso to appreciate and inflation to increase. Lower interest rates and higher inflation are not quite consistent with a strong peso, unless the BSP is not very confident the bounce back would hold. Hence, the Bangko Sentral might continue to reduce the policy rate until inflation starts rising. A strong peso in that set-up could only happen if dollar demand remained tepid. A higher FX reserves level than what was reported the other day at $104.5 billion is not implausible.

Alongside the business expectations report, the BSP also released the results of its consumer expectations survey for the last quarter of 2020.

This is also sobering.

Consumer sentiment remained pessimistic even as the CI rose from -54.5% in quarter 3 to -47.9%. Consumers turned optimistic for quarter 1 of 2021 but less optimistic for the next 12 months. Their CIs recovered from -4.1% to 4.3% and 25.5% down to 23.6%, respectively.

What made consumers less pessimistic in quarter 4?

They expected more and more permanent jobs. For this reason, the prospect of more and higher income made them less pessimistic. They were also positive about public policy on cash transfer and agriculture. They anticipated some lifting of community restrictions. Obviously, the possibility of a viral resurgence was outside the consumers’ scope.

Drilling down the data on consumer spending would help us ascertain the implications on the national income. Their sentiment remained unchanged for quarter 1 of 2021 at 26.4%. For the current quarter, the percentage of households who would spend on big-ticket items fell to a record low in 13 years. No wonder manufacturers and dealers of durable consumer goods and motor vehicles reported extremely weak sales. The spending patterns of households appeared to have shifted more to food and other basic goods.

It would also be useful to check the ability of consumers to smoothen their consumption patterns given the uncertainty of the pandemic and the availability of the vaccines to achieve herd immunity. For quarter 4, the percentage of households with savings slightly rose from 24.7% to 25%. More consumer respondents in the higher-income group were behind this as a result of the economic lockdown. Unable to spend, more must have decided to save instead. They would rather prepare for emergencies, health and hospitalization, education and retirement. Some intended to do business when things become more normal.

Unlike their business counterparts, consumers believed interest rates would increase in the current quarter, next quarter, and the next 12 months. This is more consistent with a stronger peso even as it was expected to depreciate next year as domestic demand bounces back. Job prospects were considered dim in the next six months but some improvements were expected for the next 12 months. Consumers expected inflation would remain within the government target.

But the reported drop in overseas cash remittances suggests weak prospects of consumption expenditure. For the first 10 months of 2020, their level at $24.6 billion was down by 0.9% from year-ago level of $24.9 billion. True, the two-month gains in cash remittances are encouraging but we have to be cautious because four-fifths of the total derived from only nine nations, of which Saudi Arabia, United Arab Emirates, Japan, and the UK all recorded lower remittances. Thousands of Filipino workers were repatriated due to the pandemic. Future flows will certainly suffer.

The problem, as pointed out by a blog from the London School of Economics on Oct. 8, is that these repatriated workers have few options in the Philippines. The October labor force data shows unemployment remained high at nearly 9% or about 4 million jobless Filipinos.

Are there signs of consumer life in the mall, or in eating places, or even on the streets?

We consulted three high-frequency data providers on mobility in the Philippines which would suggest some vacillation in business activity.

From October through Dec. 4, Google shows there was a sustained even if gradual rise in mobility. But between November and December, some dip was most noticeable, most probably on account of Typhoon Ulysses.

The same uptrend is shown as of Dec. 6 by Apple mobility trends. But the trend was very volatile though, with an upward bias but double dips between November and December.

As much was also reflected in the Waze mobility report in terms of the kilometers driven as of Dec. 5. Two sharp declines were also noted. But lower mobility was recorded for all the first five days of December.

We are afraid that what could tie up all these loose ends of business and consumer uncertainty in the run-up to 2021 and 2022 is only the strategic cooperation between Government and the private sector to vanquish COVID-19.

But if this portends things to come, Foreign Affairs Secretary Locsin’s disclosure that “somebody dropped the ball” in our bid to secure Pfizer vaccines to be funded by the World Bank and ADB is not exactly reassuring.


Diwa C. Guinigundo is the former Deputy Governor for the Monetary and Economics Sector, the Bangko Sentral ng Pilipinas (BSP). He served the BSP for 41 years. In 2001-2003, he was Alternate Executive Director at the International Monetary Fund in Washington, DC. He is the senior pastor of the Fullness of Christ International Ministries in Mandaluyong.

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