July 2001 MBC Executive Outlook Survey
Deflated Enthusiasm

Economic outlook: from euphoria to "reality check"
What a difference six months makes! The initial euphoria and excitement for a new administration felt only last January has significantly subsided into a more somber outlook in July as reality sets in in the business community. Meanwhile, expectations for growth have been more modest as businesses buckle down to work and take the long view for growth prospects. This summarizes the results of the July 2001 Executive Outlook Survey conducted among members of the Makati Business Club from 3 - 17 July 2001.

Seventy-one percent of executives expect growth this year (in terms of GDP) to be lower than the 4% recorded in 2000. The mood was decidedly brighter last January. In a survey taken immediately after President Gloria Macapagal-Arroyo assumed office, majority of respondents (65.9%) anticipated growth in 2001 to be higher than last year's. Under former President Estrada, an overwhelming majority - 85.3% - said that growth would remain below year 2000 levels.

The somber outlook for this year was reflected in how survey respondents expect other indicators to perform this year. Majority (78.1%) foresee the inflation rate to be higher in 2001. Inflation averaged 4.4% in 2000 but has risen to 6.7% for the first half of this year. Almost 45% believe the 91-day T-bill rate will average at about the same level as last year's 9.9%.

There was broad consensus among executives regarding the foreign exchange rate, with 83.4% expecting a depreciation of 6.4% over the end-2000 rate of P50.01 per US dollar. The peso has been down by almost 8% since the beginning of the year.

The July 2001 survey also revealed that majority of executives expect investments, exports, and imports to be lower this year versus their 2000 records, a complete reversal of how they felt when the survey was conducted in January. Almost two-thirds felt investments would decline in 2001 as compared to 81.7% who felt it would bounce back and increase when they were asked the same question just six months ago.

Two-thirds of executives also feel that exports will be lower this year versus the same number who felt exports would rise when surveyed last January. In the past six months, export markets for the Philippines have weakened, particularly in the electronics sector and in the United States and Japan markets.

For the first time in the survey series, we asked executives if they were aware of the government's economic agenda and program and whether they agreed with it. The good news is that 92.9% percent of those of who were knowledgeable about the government's economic program said they agreed with it. The bad news is that only 27.8% of executives could say the economic agenda was clear to them. Over half - 54.3% - said the program was not clear to them while 17.9% did not even respond to the question.

View Economic Outlook Table

Corporate Outlook: modest returns
Notwithstanding the cloudy outlook for the economy, the corporate outlook displayed some hints of mild positivism. A plurality of respondents (48.3%) expect gross revenues to still grow this year while 39.7% expect net incomes to rise above their 2000 levels of performance. The findings suggest that companies have made the necessary adjustments to adapt operations to external conditions in order to allow them to survive and even grow. On the other hand, the projected increases are far more modest than we have seen in a while. Among those projecting growth in gross revenues, that growth will be 6.9% year-on-year versus earlier expectations of an average 12.5% increase. For those forecasting growth in net income, the average increase will be 8.9% versus original average projections of 29.6%.

On the labor front, the trend has held with two-thirds saying they will hold their workforce sizes steady this year. While 9.3% said they would be hiring, it must be pointed out that any increases would be strictly minimal - about 1% versus the reported average of 10% in January. Among those reporting layoffs (20.5%), the average downsizing would also be marginal - only 1.9% down versus 16% in January. The data suggests that all labor adjustments - upwards or downwards - have already taken place in the first half of the year with few or none expected in the back half of the year, barring any unforeseen circumstances.

The good news here is that on the investment front more respondents (39.7%) are reporting they will be making additional investments this year than we saw in the January 2001 survey. They are also reporting larger investments to be made, an average of P356 million versus only P182 million in the last survey. Still, it must be pointed out that these figures are off historical highs in the survey series.

The other bit of good news is that capacity utilization among manufacturing firms is slightly up to 70.6% from 65.5% at the beginning of the year. Inventories, for both raw materials and finished goods, were holding at two months' of stock on average.

View Corporate Outlook Table

Government Performance: More positive
Aside from the economic and corporate outlook, the survey also covers business perception of how government agencies have performed in the last six months preceding the survey period, in this case, January-June 2001.

Better governance has not gone unnoticed. But neither has non-performance of duties. Excellence thrives in a sea of mediocrity.

The key trend in the government ratings section was that the economic departments together with some of the basic social service departments like the Department of Education, Department of Social Welfare and Development, and Department of Health were rated quite highly by the business community. The agencies which were rated quite poorly by executives were those in charge of basic services (e.g., garbage collection, traffic management, mass housing), law enforcement and security (e.g., PNP, AFP, DND, DILG, and the lower court system), and the productive sectors (e.g., Department of Agriculture, Department of Agrarian Reform, Department of Transport and Communications, Department of Public Works, Department of Environment).

The Supreme Court topped the list of best performing government agencies for the period, followed by the Department of Trade and Industry (second), Department of Budget and Management (third), Department of Finance (fourth), and Department of Education, Culture and Sports (fifth).

Respondents rated the following as the worst performing government agencies or services in the last six months -- those in charge of garbage collection and traffic management, the Commission on Elections, the Philippine National Police, those in charge of mass housing, and the Department of Public Works and Highways.

One interesting highlight of the July survey is that more agencies received positive net ratings from respondents, with a total of 15 agencies with positive net scores in July under the Arroyo Administration compared to only six in the January survey under the Estrada Administration.

The most improved agencies were the departments of Budget, Education, Finance, Tourism, Justice, Securities and Exchange Commission, Trade, and Energy as reflected in the changes in their net ratings. Both the House and Senate also improved their net ratings following the passage of the Power Reform Act.

On the other hand, the Commission on Elections took the biggest hit in net ratings following its dismal performance in last May's Congressional and Local Elections.

View Government Performance Table

Developments and Issues for Resolution
Businessmen have already observed some important improvements since President Arroyo assumed office. They have noted the drive against corruption and for good governance, the restoration of business confidence and optimism, the leadership credibility of the Chief Executive, the competence and good work habits of newly appointed top government officials, the signing into law of the Electric Power Industry Reform Act (RA 9136), the arrest and arraignment of former President Joseph Estrada, and the May 14 elections as among the top developments of the last six months.

On the other hand, businessmen believe President Arroyo needs to resolve a number of key issues in the next six months. There is a unanimous call to decisively address the peace and order problem, the first time 100% of respondents has ever agreed on a single item. Next on their agenda is economic recovery, poverty and unemployment, and fiscal reforms to narrow the budget deficit. Businessmen also point to graft and corruption, restoring confidence of investors and tourists, and the sharp peso depreciation as the issues to tackle between now and December.

View Positive Developments and Issues

About the MBC Executive Outlook Survey
The MBC Executive Outlook Survey is normally conducted twice a year, every January and July, among MBC members. However, for 2001, because of the change in government in January, the survey was conducted from January 4-19 covering the Estrada Administration and from January 24-31 covering the first two weeks of the Arroyo Administration. Thus, the July 2001 survey allows us to compare the views of the business community against the last weeks of former President Estrada as well as the first weeks of President Arroyo.

With respect to the ratings of government agencies, readers should note that Alberto Romulo served as Secretary of Finance from 22 January 2001 to 31 May 2001 before his appointment as Executive Secretary. Jose Isidro Camacho succeeded him on 11 June as Secretary of Finance. Secretary Camacho, in turn, was Secretary of Energy from 1 March to 11 June and was succeeded at by Secretary Vince Perez.

This survey was conducted from July 3-17, 2001 with a respondent base of 151 executives or 20 percent of the MBC membership.