Bank lending activity in Saudi Arabia is forecast to return to normal in the next two quarters as their companies' improve sales and resume hiring, Banque Saudi Fransi (BSF) said in its second-quarter (Q2) business confidence survey released on Monday. The latest survey noted a considerable shift from the first quarter index, with almost 60 percent of the 781 company managers surveyed said the lending attitude of banks had returned to normal or improved, compared with 41 percent who gave the same response last quarter. Dr. John Sfakianakis, BSF chief economist, said the banks, which have adopted greater prudence in new loan extensions, appear to be turning the page on the slowdown that spread across business sectors last year. Of the polled business leaders, 41.5 percent of respondents described banks' lending attitude as “not good”, down from the 58.6 percent who said bank lending fell short of their expectations in the first quarter. The survey noted that macro-economic conditions on the ground are looking up amid firm oil prices. All respondents foresee improvements in the Saudi economy over the next two quarters - up from 76 percent who held the view at the end of last year. The vast majority expect economic conditions will be “much better” in the forecast period and 25.5 percent said circumstances would be “better”. BSF forecast that credit to the private sector will grow 8 percent this year after stagnating in 2009, with most of the loan expansion happening in the second half of the year. The loan growth will result from both a measured rise in private sector demand for credit and banks' desire to improve profitability during a period of low interest rates. There are early signs that loan growth is turning - in February, bank claims on the private sector grew 0.9 percent month on month, the fastest pace in six months. Still, banks are implementing stricter rules for giving loans, respondents said. A majority of 61 percent said banks had tightened standard requirements for loan approvals by at least a small degree since last year, with 35 percent saying they had done so considerably. Some 18 percent of respondents saw no change in lending requirements applied on businesses and individuals, while 21 percent noticed only slight changes. Expecting higher credit growth, many business leaders are not ruling out an increase in interest rates in the next two quarters, with 24.7 percent (against 15.9 percent in Q1) expecting rates to rise more than 10 basis points and 13.7 percent (against 10.2 percent in Q1) foreseeing rate hikes of more than 20 basis points. A third of respondents, however, expect rates to stay the same, down from 59 percent in Q1. Last year, the Saudi Arabian Monetary Agency (SAMA) reduced the benchmark repurchase rate to 2 percent and the reverse repurchase rate to 0.25 percent. The latest survey showed “overwhelmingly” that there will be no change in the fixed exchange rate regime. Inflation rates in Saudi Arabia, meanwhile, are not on the radar screen of business leaders for the immediate future. The survey further said companies plan production hikes and new hiring encouraged by the broad pick up in the economy. “Businesses are beginning to abandon the reticence they exhibited in the past year, although they are still wary.” The BSF forecast that economic growth should accelerate to 3.9 percent this year from 0.2 percent in 2009, including non-oil sector expansion of 3.7 percent. “Improvements would come together toward the latter part of 2010 as it will take time for consumer demand to accelerate, banks to lend more and companies to abandon risk-aversion policies,” Sfakianakis said. To meet growing consumer and industrial demand, businesses are looking to boost production, the survey showed. Most business leaders - 51.6 percent - expect to raise production capacity in the next two quarters, against 38.2 percent who replied the same in the first quarter and 31 percent in the fourth quarter. But a good number of companies are still wary - 37.6 percent are keeping production levels steady and 10.8 percent plan to reduce them. Asked about what they planned to do with inventories in the coming two quarters, 49.8 percent of businesses said they would boost inventories (against 33.7 percent in Q1), while a fewer number, 22.2 percent, expect inventories to fall. Still, a firm 28 percent of businesses (against 37.5 percent in Q1) said they would replenish inventories such that they remain at current levels over the period, reflecting the continued caution that prevails in the business community. On sales outlook, an overwhelming majority of company executives are confident that their organization's sales will improve in the next two quarters. A robust 88.6 percent of businesses assume revenues will rise, up from 69.3 percent in the first quarter. Only 5 percent of businesses, meanwhile, foresee sales declining in the forecast period, down from almost a third in the first quarter The biggest proportion of respondents - 44.9 percent - said they would keep prices the same, while 16.8 percent plan to lower them. “Fewer businesses expect to raise prices for their goods and services in the coming six months, with 28.7 percent indicating they would raise prices, down from 33.9 percent in Q1,” the survey said. On the stock market outlook, company leaders are favoring equity investments much more than they were in the first quarter, with 41.7 percent of respondents saying they expect the stock market would turn positive in the next two quarters, up from 22.7 percent who expressed the same view in Q1. Equities were cited by 41 percent of business leaders as the most-appealing investment prospect, just behind real estate, up from 21 percent in Q1.
