Philippine businesses turned slightly less upbeat about the outlook for the remainder of the year as economic conditions remained challenging, despite expectations of stronger demand during the holiday and rice harvest seasons, according to a survey conducted by the country's central bank.

The three-month-ahead confidence index (CI) of businesses fell to 20.9% in September, based on the Bangko Sentral ng Pilipinas' (BSP) latest Business Expectations Survey (BES). That was down from the 24.6% CI in August and represented the lowest reading since July's 3.7%.

"Optimism three months from now was driven by the expected higher business activity during the holidays and the rice harvest seasons," the central bank said in a statement.

A positive CI indicates that more respondents are optimistic than pessimistic, while a negative CI signals the opposite. Because the BES measures expectations rather than realized results, it serves as an early gauge of how firms see conditions shaping up over the months ahead.

Weaker Near-Term Indicators

The survey results showed that the outlook for companies' own operations worsened for the next three months. Firms' three-month-ahead volume of business activity index slid month on month to 31.9% in September from 42% in the prior month, while their employment outlook index declined to 10% from 13.4%.

However, the share of firms planning to expand their operations in the fourth quarter rose to 23.1% in September from 12.4% in August. Meanwhile, current-month pessimism eased, with the CI at -8.4% in September from -10.9% in August.

"Business sentiment in the Philippines remained pessimistic in September 2026, based on the results of the latest Business Expectations Survey," the BSP said.

"Firms attributed this pessimism mainly to elevated fuel and energy costs and rising prices," it added. "Other concerns included Middle East tensions, peso depreciation, and weather-related disruptions."

In September, headline inflation accelerated to an over three-year high of 7.2%, with high prices of oil, food, and other commodities continuing to weigh heavily on consumers. This brought the country's nine-month inflation average to 5.4%, marking the seventh consecutive month — or the period since the Middle East war erupted — that the headline print was above the BSP's 3% target.

Financing Conditions and Capacity

On the other hand, businesses in the country are anticipating better financial conditions but expect credit access to remain tight in the coming months.

Based on the BES, firms' financial condition index turned less negative at -19.8% in September from -24.9% in August. This indicator refers to a firm's general cash position, taking into account the level of cash and other cash items and repayment terms on loans.

However, their credit access index steadied month on month at -7.2%. This measures the firm's external environment, such as the availability of credit in the banking system and other financial institutions.

Meanwhile, businesses' average capacity utilization in industry and construction edged higher to 73.5% from 69% in August.

"The top business constraints were stiff domestic competition, insufficient demand, (and) high interest rates," the central bank said.

Last month, the Monetary Board hiked rates for a fourth straight meeting amid stubborn oil-driven price pressures and intensifying risks from a strong El Niño. The BSP raised its key policy rate by a larger-than-usual 50 basis points (bps) to a nearly two-year high of 5.5%, bringing cumulative increases to 125 bps since it first tightened in April.

The survey's citation of high interest rates as a top constraint comes against this backdrop of successive policy increases.

Less Optimistic on the Year Ahead

Philippine businesses also became less upbeat about the coming year as higher inflation expectations dimmed their outlook. Their CI for the next 12 months, or through September 2027, slipped to 26.5% from 36.4% in the prior month.

"Year-ahead optimism, on the other hand, reflected growth opportunities in selected sectors, particularly healthcare, education, tourism, financial services, real estate development, and trade-related activities," the BSP noted.

Firms were also less willing to hire over the next year as they turned more cautious. Their employment outlook index for the next 12 months plunged to 14.4% in September from 30.7% in August.

"Employment prospects became more cautious as the share of businesses planning to hire more workers over the next 12 months declined," the central bank said.

Still, more businesses were open to expanding in 2027 as they eye growth opportunities across certain sectors. About 22.8% of businesses in the Philippine industry sector plan to expand in the coming year, up from the 17.1% recorded in the prior month.

"More industry firms planned to expand operations," the BSP said. "Firms also continued to see growth opportunities across selected sectors, supported by lower inflation, streamlined business procedures, a possible resolution of the Middle East conflict, and improved investor confidence."

Inflation and Peso Expectations

However, local firms still expect inflation to breach the BSP's 4% ceiling in the year ahead, with their projection for 2027 climbing to 5.7% from 5.4% previously.

Based on the BES, 43.9% of the businesses anticipating faster inflation next year cited continued oil price hikes, 24.2% flagged concerns over the uncertain resolution of the Middle East war, while 19.7% were worried about price pressures from the weak peso.

From the P58- to P59-per-dollar level before the war, the local unit breached the P64 handle last month after breaking multiple all-time lows. It hit a historic trough of P64.17 against the greenback on Oct. 27, which marked the seventh straight trading day that it finished at a record low. Year to date, the peso has declined by P4.950, or 7.77%, from its P58.79 finish on Dec. 29, 2025.

The central bank forecasts inflation to end at an average of 6.1% this year, easing only slightly to 6% next year. It only projects inflation to return near its target by 2028, at a full-year average of 3.3%. Firms' 5.7% projection for 2027 sits just below that official 6% estimate for next year, leaving both sets of expectations above the BSP's 3% target.

The latest BES was conducted from Sept. 4 to 30, covering 515 firms nationwide, with 193 from the National Capital Region (NCR) and 322 from areas outside NCR.

Those three pressures — continued oil price hikes, the uncertain Middle East conflict, and the weak peso — are the factors respondents themselves flagged behind their higher inflation projections, making them the reference points to watch in upcoming inflation data and the next round of survey results.

This article was originally reported by Katherine K. Chan for BusinessWorld.