Philippine Markets Newsletter

MONDAY MACRO: Business confidence waned as the pandemic disrupts economic activity. Is it as bad as we think it is?

May 4, 2020

There’s usually a decline in consumer spending during the first quarter of the calendar year compared with the fourth quarter. It’s not surprising then that businesses aren’t confident about their profitability during this time.

The last time this metric dropped this much together with a steep stock market decline was during the Great Recession.

Can Philippine business confidence persevere during the pandemic impact? Or will pessimism show negative levels for the first time since 2008?

Philippine Markets Daily:
The Monday Macro Report
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The Business Expectations Survey has been conducted by the Bangko Sentral ng Pilipinas (BSP) since 2003, covering the top 7,000 corporations by total assets. The survey aims to show indications of overall business sentiment and outlook of the country with this survey.

Business confidence has trended the same direction as the Philippine Stock Exchange Index (PSEi). The survey measures firms’ expectations on financing conditions, volume of business activity, employment, and expansion plans.

The PSEi, on the other hand, reflects investor expectations on the economy as this index constitutes the top 30 publicly listed companies with varying industries. Its movement or trend sometimes aligns with the aggregate survey sample of management teams’ own expectations for their own businesses.

Looking at the chart above, we can see two major points in history where there is a steep decline in business confidence, together with a sharp fall in the PSEi. One is during the 2008 Great Recession, and the other is just this Q1 2020.

Prior to the 2008-2009 Great Recession, business confidence had been volatile yet generally positive in the Philippines. Business confidence fell to negative levels once in Q3 2005 and another time during 2008-2009.

These have generally improved due to the relative stability of the Philippine peso against the US dollar and rising OFW remittances which have proven vital for the economy.

Historically, the business confidence level during the fourth quarter of the year is higher than previous quarters due to the seasonal holiday demand. This is usually followed by a decline in the next quarter as the seasonality effect wears off.

However, the recent decline from 40% in Q4 2019 to 22% in Q1 2020 is much steeper than what we have seen historically, which is indicative of how much more concerned businesses are this year.

A mixture of the negative effects of virus outbreaks such as the coronavirus disease (COVID-19) pandemic and African swine fever (ASF), the Taal volcano eruption, and government policies such as termination of Visiting Forces have been factored in for the Q1 2020 survey.

While stock prices have recovered a little from the massive selloff over a month ago, Uniform Accounting still shows P/E levels that are still below the 24x recorded in March 2020. Currently at 22x level, Uniform P/E is still higher than the as-reported P/E of 13x.

Even when Uniform P/E declined to 17x in April 2020, the multiple has yet to reach its 15-year low of 13x, as what as-reported P/E is showing.

With concerns about low to negative earnings growth because of the coronavirus pandemic, It is understandable why businesses have become wary.

Despite the country’s current predicaments, we mention in our previous Monday Macro Report that the government has been active in providing economic assistance through aggressive fiscal policy plans. Their spending programs are meant to help the poorest families, small and medium enterprises (SME), and larger companies arranged in order of priority recipients.

Recently, the government launched a PHP 1.17 trillion socioeconomic strategy in order to minimize the pandemic’s impact to the economy, and to help it recover. Agriculture and healthcare sectors were listed as priorities to increase productivity, and to provide necessary assistance to the country during the pandemic.

Meanwhile, tax reliefs are being proposed to congress for small businesses by extending the net operating loss carry-over (NOLCO) from three years to five years. The objective is to help small businesses by giving them more time to manage their fixed costs and recover from operating losses due to the ECQ.

The Build Build Build (BBB) Project is expected to be a confidence booster for many investors once the quarantine period is over. Improvements in infrastructure will ideally lead to higher efficiency, which will in turn produce more growth opportunities for businesses.

With weaker economic income generated so far this year and likely continued slowdown for the remainder of the year, business confidence will likely stay low.

The Philippine government has a fiscal capacity to finance more debt provided by their recent tax reform laws. With efficient implementation of fiscal policies, the Philippines should be able to recover from this economic slowdown sooner rather than later.

About the Philippine Markets Daily
“The Monday Macro Report”

When just about anyone can post just about anything online, it gets increasingly difficult for an individual investor to sift through the plethora of information available.

Investors need a tool that will help them cut through any biased or misleading information and dive straight into reliable and useful data.

Every Monday, we publish an interesting chart on the Philippine economy and stock market. We highlight data that investors would normally look at, but through the lens of Uniform Accounting, a powerful tool that gets investors closer to understanding the economic reality of firms.

Understanding what kind of market we are in, what leading indicators we should be looking at, and what market expectations are, will make investing a less monumental task than finding a needle in a haystack.

Hope you’ve found this week’s macro chart interesting and insightful.

Stay tuned for next week’s Monday Macro report!


Angelica Lim
Research Director
Philippine Markets Daily
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