How's business in 2016

FROM FAR AND NEAR - Ruben Almendras - The Freeman

The title should really be "How business will be in 2016." As it is only January this article is about what we believe the business conditions, prospects, and performance in 2016. The ideal business planning horizon is between three to five years, but since we have to have annual budgets, we have to make assumptions of the economic and political conditions for the year to be able to make our financial projections of the income statement and the balance sheet to achieve our targets.

There are also so many significant events that are happening and are expected to happen; such as the China economic recession, the collapse of oil prices to less than $28 a barrel, the US economic recovery, the European economic stagnation, the Syrian war, the IS threats, and the Philippine elections, that it requires of us to evaluate the impact of these events economically, socially, and politically on Philippine businesses.

The Philippine government have made a Gross Domestic Product growth forecast for 2016 at 6.5 percent to 7 percent. The major Philippine banks and other independent think tanks have projected it in the 6 percent to 6.5 percent range. Two banks and two large stock brokers have also predicted that the Philippine Stock Exchange Index will get back to the 7000 to 7500 range. These predictions are backed up with solid assumptions on consumer spending, private and government investments, and trade and payments balances. The results of the presidential elections at this time are uncertain, but there is a growing consensus that a Roxas, Poe, or Duterte presidency will not really alter the economic landscape much. A Binay presidency is slightly problematic due to the corruption issues hounding him, which could delay potential foreign and domestic private investments until they are sure of his policies and management. While the country has shown progress in economic and political reforms, it is an unfinished business and a work in progress, so that businesses want the current reforms to continue.

Important factors that will affect business and the economy are the OFW remittances which relates to the slide in oil prices. The worry is that the Middle East, which employs a lot of Filipinos and is the source of remittance might slow down the hiring and may even lay off some OFWs, thereby reducing the $25 billion annual OFW remittance to the Philippines. The economic slowdown in the middle eastern countries, China, and Europe may also mean a reduction in our exports to these countries contracting our export receipts. Then there is also the worry, if the Business Processes Outsourcing sector will continue to grow, as this is also one of the consumption drivers of economy.

These are all valid concerns that have to be evaluated. Fortunately, as of January 2016, the hiring in the middle east is maintaining, as the Arab countries are bent on constructing downstream processing facilities for their oil, to increase the value of their exports, and are diversifying their economies. So they need for more foreign skilled workers. And a large part of our OFW remittances are already coming from North America, i.e. US and Canada, Europe and Asia, so that we can expect OFW remittance to continue to grow, at maybe a slower growth rate.

The BPO sector clients are mostly the English-speaking countries like the US, Canada and Australia so we can also expect this sector to continue to grow, especially with the US economic recovery. Our exports of goods may suffer as the countries with slow economic growth will be buying less of our products. But the US imports could offset this loss and the value added of our electronic exports (imported components deducted from the export price) decrease due to technology.

China's recession would affect our exports of minerals and intermediate manufacturing products, but we have a negative trade balance with China, (we buy more than we sell to them), so we have and can survive with lesser exports to them.

What then is our prognosis for business in 2016? There is an 80 pewrcent probability that it will be more like 2015. The economy or Gross Domestic Product will grow between 5.5 percent to 6 percent in 2016. The negative factors cited above will surely affect the economy but there are other countervailing forces over and above those already pointed out above. The May election will inject P25 billion to the economy which will translate to at least a 1 percent addition to GDP. The good fiscal and financial standing of the government and their objective of spending 5 percent of GDP for infrastructures will mean more government investment and expenditures. Private investments in office and condominium buildings which are slowing down, will continue the projects already started but delay those that not have started. Manufacturing and factory capacity utilization is high, so manufacturing plant expansion will proceed.  On the demand side of the GDP, the 70 percent consumption component will likely hold as the economic growth will keep the purchasing power of the people intact. Ample liquidity and low interest rates will have to be maintained by the Banko Sentral ng Pilipinas, given the low inflation rates and the interest rates in other countries. Consumer spending will be as robust as in 2015. While a higher GDP growth rate would have been ideal to achieve a more inclusive growth and lower further the proportion of the people below the poverty level, we have to be contented as we are already more linked to the global economy and therefore more affected.

I always state prognosis in terms of probability as there are always events that are unforeseen that will affect any prediction. I am however comfortable with an 80 percent probability to make business decisions on this basis.

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