LATEST BOI REPORT SHOWS OPTIMISM DIPPED SLIGHTLY FOR Q2 2011

According to the International Monetary Fund (IMF), the world economy is expected to grow at a slower rate of 4.4% in 2011 versus 5% in 2010. This slowdown was brought about by the Middle East and North African (MENA) crisis which exploded in the beginning of 2011, thereby sending the price of crude oil to sky-high levels.
 
The growth deceleration, however, is not as bad in the Philippines as in other emerging economies thanks to the robust growth in various sectors such as agriculture, manufacturing, mining and construction. In addition, inflation levels remained at manageable levels and the country’s budget deficit showed dramatic improvement in Q1 2011 compared to the same quarter in 2010. All these show that the economic fundamentals generally remain healthy and slowdown in growth is expected to be mild. Overall sentiment of the business community, as measured in the BOI Composite Index, reflects this scenario, showing only a slight drop to 48% in Q2 from 50% in Q1.
 
The BOI Composite Index is an aggregation of 6 different indices: Volume of Sales, Net Profits, Selling Prices, New Orders, Inventories, and Employment. For Q2 2011, only 3 out of the 6 indicators showed any gains in respondents’ perceptions. These are Selling Prices, New Orders, and Inventories. The general expectation of higher selling prices is likely due to planned passing of higher costs (due to petroleum and commodity prices) down the value chain. It should also be noted that while the Employment index showed a drop from Q1 levels, it is not as dramatic as the observed decline for Volume of Sales and Net Profits. The minimal expected drop in employment would seem to suggest that firms may be viewing the current slowdown as temporary.
 
Majority of industry sectors are less optimistic for Q2 2011
 
Looking at the various industry sectors surveyed, only 2 of the 8 expect positive gains in most or all of the 6 indicators. The Construction sector expects gains across all except Selling Price, while the Wholesale sector anticipates gains across all except in New Orders.
 
The Manufacturing-Durables sector expects a huge decline in Volume of Sales in Q2, likely as a consequence to expected higher inflation rates for Q2 as well as supply problems in Japan due to the devastating tsunami. Thus, it is likely that their expectation of increased selling prices stem from their need to offset their loss in sales volume. Meanwhile, the Retail sector is optimistic on New Orders, likely due to 2 reasons: the increase in tourism as Q2 coincides with the summer break, as well as the incoming school year starting in June. Likewise, the Construction sector is also optimistic on New Orders thanks to strong residential housing demand and infrastructure and energy projects getting off the ground.
 
PEZA firms also show a dip in BOI Composite Index
 
The overall index for PEZA firms, at 62% for Q2, dropped by 10% points from the Q1 level. However, this is a more significant decline compared to the 2% decline observed by all firms, as discussed above. This is likely due to the expected slowdown in growth globally, thus affecting the export sector in which most PEZA firms operate. The fall in the overall BOI Composite Index for PEZA firms is mostly attributed to expectations of substantially slower growth in Volume of Sales, Net Profits and Employment.