Saudi Arabia's business confidence in the fourth quarter of 2008 has declined again, signaling that businesses are bracing for a slowdown. SABB, in its latest report on the Kingdom's economy, noted that “business confidence in Saudi Arabia is weakening only gradually.” But while 54 percent of respondents still expect stronger growth over the next two quarters, that is a much lower figure than in previous surveys, it added. From the bank's survey of 623 companies (previously 537) across diverse industry sectors, 54 percent of respondents expect business growth in Q1 and Q2 ‘09, but noted that it was down from the 89 percent reported in Q3. In production capacity, 53 percent expected a rise (compared to 74 percent in Q3), though the change did not mark a noticeable fall in anticipated production - and some specific industries have seen production cuts. The steel industry, for example, has implemented output reductions on the back of a steel price decline of more than 70 percent in the domestic market over the past few months, the report said. On the contrary, 35 percent of respondents expected production capacity to fall in 2009. However, overall, the business environment will remain strong during the first half of 2009, but clouds are forming in terms of lower growth expectations going forward. In contrast to the bank's Q2 and Q3 surveys, some businesses (8.5 percent of respondents) expected a slower business cycle for their organizations. The most telling responses in the survey denoted the impact of the global economic crisis on Saudi Arabia's economy. Only 14 percent of those surveyed did not expect the Saudi economy to be affected, while 17 percent believed that it will indeed be affected and another 58 percent said it might. The last group could very well take a more negative view, as the global economy enters deeper into recession and the region feels the impact, the bank report added. “By Q1 ‘09, we should have a better picture of how consumers are behaving in the current economic climate. We are still receiving mixed signals about business vulnerability in certain sectors (the auto industry, for example) and a slowdown in others (consumer electronics and white goods). “Seasonal factors could account for the lack of clarity, since September was the month of Ramadan and October saw the end of the holiday season, as well as the start of the new school year,” the survey added. Good times do not last forever - and the downturn has brought about a fall in the overall SABB Index ?gure. SABB's ?ndings revealed that business confidence was down to 96.4 (from 100.2) - a 3.8 percent decline, the second sharpest decline since the launch of the Index. The survey attributed this to a number of factors, including: 1. The slowdown in growth now expected by businesses; 2. Tighter funding conditions and the higher cost of credit within the local banking system; 3. A ‘double whammy' of sliding oil prices and its psychological impact and the negative wealth effect of the stock market. However, the Index could have been more depressed had it not been for: 1. The positive impact on businesses of falling real estate prices; 2. Reduced concern over inflation for the coming year. The bank's final tally for real GDP in 2008 is 5 percent, due to a healthy non-oil private-sector growth of 5.9 percent and oil sector growth of 3.8 percent. It noted that oil price fluctuations up to $147 and down to below $50 per barrel within a few months make a nonsense of economic predictions. The oil price fluctuations were simply “speculative.” Commodity futures make money for the investor, on both the ascent and the descent, it added. Our year-end estimate for 2008, oil export revenues has been revised downwards from $350 billion to $287 billion (an 18 percent decrease). However, Saudi Arabia will experience record high oil export revenues, up by 40 percent from the $205.5 billion recorded in 2007, and that should give an additional revenue cushion for the future. Inflation is one of the key factors to have negatively affected business confidence over the past few quarters, SABB report said. But price rises are now a concern for only 30 percent of businesses surveyed, compared to almost 64 percent in Q3. Of those companies, only 42 percent expect inflation to have a negative impact their business, against 71 percent in Q3. Certainly, the concern has switched dramatically from one of inflation to one of growth and deflation. The bank noted in the past that inflation in Saudi Arabia (as well as in the rest of the GCC) has peaked. On the impact of inflation on business in the next two quarters, the bank said “for this year, (it will) reach 9.7 percent. Our preliminary estimate for next year puts it at 5.6 percent on the back of lower domestic demand. The baseline effect will push average inflation down in 2009, particularly in the ?rst half of the year, but we should also monitor the degree to which the real cost of living adjusts to slower economic output and lower demand.” Importers and traders should be able to pass on lower import costs to the consumer, especially in the food sector. As food commodities bought at a high price are replenished with lower-cost stocks, it will be important to see commensurate price reductions on supermarket shelves. On the prospect of a GCC currency union by 2012, most of the respondents (73 percent) said they do not expect the union to take place by that date. Real estate prices continue to worry companies across the Kingdom. In the survey, 46 percent of respondents (68 percent in Q3) said they expect the cost of real estate to have a negative impact on their business in the next two quarters. On the course of the Saudi riyal, the survey showed that most businesses found the currency issue far less worrying than it was prior to the summer. Some 86 percent of the respondents did not expect the riyal to be revalued, and only 10 respondents expected a change in the next two quarters, hence the bank concluded that the revaluation debate “is of little concern to the business community.” On the real estate, the survey showed that 31 percent of companies expect that real estate prices would begin to fall in the next two quarters - and such a fall would be a positive thing not only for business costs, but also for the housing sector as a whole. And as construction costs decline, house buyers will increasingly benefit from lower real estate prices, the survey noted. The above indications could signal a structural shift in the real estate market, which could translate into lower business rents and an overall correction in real estate prices. “We also take the view that movements in the regional real estate markets will impact on Saudi Arabia and bring down property prices in 2009,” the report said. Furthermore, the availability of human resources is an added concern for businesses, as labor supply constraints can limit expansion in the non-oil private sector. But among the survey respondents, only 26 percent (49 percent in Q3) report that their organizations do not have all the required staff and just 10 percent (20 percent in Q3) expected to be “very insufficiently” staffed in the next few quarters. __
