Assessing business confidence  

The HSBC Business Confidence survey report released recently no doubt reflects a rosy picture of the state of businesses in Bangladesh in the days ahead. An overwhelming 97 per cent of business enterprises under the survey were optimistic of expanding their operations next year, backed by a strong economy and positive international trade prospects. This is higher than the global average of 79 per cent and the Asian average of 77 per cent.

Business confidence index is an economic indicator that measures the extent of optimism or pessimism that business owners/managers feel about the prospects of their companies/ organisations. It also provides an overview of the state of the economy. The business confidence indicator provides information on future developments based on opinion surveys on production, procurement of raw materials, orders and stocks of finished goods in the industry sector, political situation, investment opportunities, government policies, prospects of business expansion and so on - dependent on country-specific circumstances. It can be used to monitor output growth and to anticipate turning points in economic activity.

The survey referred to above was conducted between August and September 2019. Compiled on the basis of responses from 9,131 businesses - from small and mid-size to large corporations across a broad range of industry sectors -- the key areas on which responses were sought included business outlook, international trade, geopolitics, sustainability, technology, investment priorities, decision-making drivers, and plans to implement change and growth expectations. Clearly, responses based on experiences of recent past and the present state of business environment are the main grounds for mulling on near to mid-term planning and business prospects. What has transpired from this is that 74 per cent of the businesses covered under the survey expressed their optimism about better prospects than a year ago.

Now, given the situation in which businesses are in Bangladesh, one has reasons to argue whether there is a bias (political?) in the way the opinions were expressed about brighter prospects in areas like expansion of business, investment, manufacturing and exports. One may also ask-how seriously the respondents took the survey or how does the survey findings help the stakeholders including the government to look at things in awaiting? In this regard what the CEO of HSBC Bangladesh Francois de Maricourt has said does not quite explain the situation. "Bangladesh is at the heart of Asia's emerging growth, so it's only fitting that its businesses are among the most bullish globally," said he in a statement adding, "What we are seeing is Bangladeshi businesses proactively adapting to the pace of global change, with expansion into new markets, investments in innovation, and upskilling their workforce as key ways to boost growth."

These are statements that inspire business morale, but to what extent will such expectations be materialised remains largely on the margins of reality. True, the country is doing well in terms of GDP growth which is largely reliant on business performance, particularly manufacturing and exports. Still pursuing a smooth path in the days ahead depends on hosts of factors and their inter-relationships. It is here that the responses seem rather unidimensional while the reality is multidimensional.

In a commonly applied approach to confidence measurement, indices are calculated every period for every sector as a simple (or weighted) average of balances calculated for each of the predetermined questions. Balances, in turn, represent differences between the share of "positive" and "negative" answers for each question. Thus, the aggregate information is obtained without investigating interactions between answers to questions on an individual (household, company) level. With such an approach, a few questions concerning validity and reliability of business confidence are:

1. a) Is it possible, with the chosen set of questions, to capture a concept that can be associated with confidence?
2. b) Is the set of confidence indicators (questions) coherent in each period of analysis?
3. c) How should we measure the concept of confidence-is it formative or reflective?
4. d) Does the understanding of questions and the mode of answering in different time periods remain constant?

Coming to the HSBC survey, there are some issues that seem to have been well reflected in the responses but not clearly spelt out. One such is about overseas market access. Respondents have mentioned protectionist policies of some key importing countries as major impeding factors in accessing those markets -- although they have viewed the problem as substantially less than what was felt last year. Forty-two per cent of Bangladeshi businesses believe that their key trading markets are becoming more protectionist, down from 93 per cent in the previous year. The issue is not so much about being protectionist than being increasingly rigid in following various non-tariff measures (NTMs), especially the protocols relating to compliance in standards, lab testing, pre-shipment inspection, proper certification by designated agencies in respect of some of the major export products. The government is trying to put in place measures and facilities to address the compliance requirements, but unless these are successfully tested while exporting, the threat remains and hence being optimistic about market access may not be entirely realistic.

No doubt, business confidence survey has become an important indicator globally in that it reflects prospects of an economy or a particular business sector and at the same time is able to articulate from the operators' point of view a clear picture of the good and the bad, and how best to grab the good and avoid the bad. It is expected that sooner than later, this important business indicator will find a more influential role in Bangladeshi businesses.

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