By Katherine K. Chan, Reporter

Philippine business sentiment turned pessimistic in July as renewed tensions in the Middle East and persistent price pressures raised concerns among firms, according to the Bangko Sentral ng Pilipinas' (BSP) latest business expectations survey (BES). The quarterly survey is one of the central bank's key gauges of corporate sentiment and feeds into its assessment of economic conditions when setting monetary policy.

The survey showed that Philippine firms' current-month confidence index (CI) plunged to -20.3% in July, a sharp reversal from the neutral 0% reading in June and the lowest level since May's -25.2%. A negative CI indicates that more respondents are pessimistic than optimistic.

"Philippine business sentiment turned pessimistic in July 2026 amid renewed concerns over tensions in the Middle East, higher oil prices, and persistent inflationary pressures," the central bank said in a statement on Friday.

Businesses were also less upbeat about the coming months and the year ahead. The CI for October fell to 3.7% from 18.8% the prior month, as the prolonged conflict in the Middle East, rising fuel costs, and weak investor sentiment clouded the outlook. The one-year-ahead CI dropped to 29.4% in July from 42.4% in June, reflecting concerns over the Middle East war's economic drag, dismal growth prospects stemming from the energy shock, and governance issues weighing on investor confidence.

The Middle East war, which broke out more than six months ago, has shown no credible sign of resolution, as fresh attacks exchanged between the United States and Iran have shattered recent peace negotiations. War-driven energy shocks have hit net importers such as the Philippines — an economy that relies heavily on imported fuel and where oil prices feed directly into transport and utility costs — and growth has slumped to post-pandemic lows for consecutive quarters while inflation continues to run hot.

In the second quarter, Philippine gross domestic product (GDP) recorded its weakest performance since the pandemic, slowing to 2.3% from 2.8% in the first quarter and 5.4% a year earlier. This brought first-half growth to 2.6%, well below the government's 3.5%-4.5% full-year target.

Inflation, meanwhile, averaged 5.2% as of August, with the headline print remaining above the BSP's 3% target for six consecutive months — the period since the Middle East war erupted. The BSP targets inflation within a 2%-4% band, so expectations of a breach would keep pressure on the central bank to keep policy tight even as growth slows.

Against this macro backdrop and lingering uncertainty, local firms expect inflation to breach the BSP's 4% ceiling in the year ahead. They see inflation over the next 12 months at 5.6%, unchanged from June, as at least one in five businesses anticipate further oil price hikes and expressed concern over the uncertain resolution of the Middle East war.

Tighter Conditions Ahead

Local businesses are also bracing for tighter financial conditions and stricter credit access in the coming months. The BES showed firms' financial condition index — which reflects a firm's general cash position, including the level of cash and other cash items and repayment terms on loans — turned more negative at -31.4% in July from -26.8% in June.

The credit access index, which refers to the firm's external environment such as the availability of credit in the banking system and other financial institutions, also worsened to -7% from -5.7%.

Businesses' average capacity utilization in industry and construction likewise edged lower to 68.6% from 73.9% in June.

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

On hiring, firms showed more willingness to add workers over the near term but were downbeat about the year ahead. The employment outlook index improved for the next three months to 11% from 1.8% in June, but worsened for the next 12 months to 9% from 20.2%.

The survey also showed that 13.6% of local companies plan to expand in October, down from 20.4% a month earlier, while those open to expanding in the coming year rose to 20.8% from 18.7%.

"Over the next 12 months, fewer firms indicated plans to hire additional workers amid expectations of softer growth and elevated inflation," the BSP said. "Nevertheless, firms in the industry sector still reported plans to expand operations next year."

The central bank surveyed 506 firms nationwide from July 7-31, consisting of 193 firms from the National Capital Region (NCR) and 313 firms outside NCR.