Saudi Arabia's business confidence fell to 88.3 in the second quarter from 89.2 in the first quarter, a report from the Saudi British Bank showed Wednesday. However, the “pace of decline is slowing,” it said. The bank said business confidence is very much predicated on the government's ability to continue providing credible evidence that the money is being spent. So far, signals from the government have included: (a) contractors being paid on time; and (b) 20-30 percent advance payments becoming the norm since Q1 for those who work on government- related projects. The government has doubled its spending during the past year (in terms of the value of projects approved by the Ministry of Finance) from around SR20 billion to SR40.6 billion. This spending is a necessity as the private sector is largely frozen and considers expansion only with caution. Around 51 percent of respondents expect businesses to grow over the next two quarters. Fifty two percent expect oil prices to stay in the $50s range, while only 15 percent expect them to rise above $60s. The survey also found that businesses see inflation to fall further, which is helping increase confidence in the overall economy. The report said inflation will come down more substantially than the consensus view suggests. Inflation data shows that prices have been coming down by nearly 1 percent each month since January, and we forecast average inflation of 5.2 percent for 2009. “We don't think that inflation will reach deflationary proportions (annual inflation rate falling below zero percent). Deflation is linked more often with great economic output falls, which does not characterize the situation in Saudi Arabia, or across the region for that matter.” It stressed that fiscal and monetary easing in the US will lead to a weaker dollar. “We could end up with pressure on US yields due to an oversupply of treasuries, as well as the perceived inflation risks.” The bank said Saudi inflation is going to plateau on its way down, around summertime (prior to the start of Ramadan in the last week of August), just as it plateaued on the way up exactly a year ago. Businesses forecast bank lending to remain anemic with 48 percent predicting “severe” conditions. Government spending has offset the gap in investment from the private sector which, from Q4 to now, is estimated to have postponed or cancelled SR55 billion worth of projects. The latest data released by SAMA shows that bank lending to the private sector again contracted month-on-month in April. The fall is modest (-0.23 percent) but it is the fourth month since December ‘08 (excepting February ‘09) in which lending to the private sector has declined. As a result, such lending has fallen by more than 2 percent since its peak in November ‘08 at SR723.2 billion and, in April, total bank lending to the private sector had decreased to SR703.6 billion. Banks are now beginning to allocate more credit to the private sector, albeit still in negative territory month-on-month. “But requests for facilities during May, and bank allocation of facilities, should see a slight increase based on evidence we have gathered from the majority of other banks.” Credit allocation, however, could remain subdued especially for large corporates, as scrutiny and additional risk aversion adopted by the Executive Committees of the major lenders could unfold, the bank report said. Meanwhile, most companies are viewing the local stock market as their preferred investment outlet. Further, the report said most companies continue to have a hiring freeze. Nonetheles, the report said “there is no doubt that, at the macro level, Saudi Arabia is on a very healthy trajectory against those who were basing their macroeconomic outlook simply on a real GDP contraction, erroneously placing Saudi Arabia on par with the contracting world of the G7.” It said though the Kingdom's economy will witness a slowdown in both oil and non-oil, but the macro picture looks sounder than in most other economies. __
